At Stake In Mexican Mid-Term Elections Is Foreign Energy Investment

Emily Pickrell, UH Energy Scholar

In less than two weeks, Mexico will hold its mid-term elections. 

While on paper voters will select their new representatives in Congress, this will also gauge support of the current administration’s efforts to reassert control over energy, especially the oil sector. 

President Andres Manuel Lopez Obrador, both populist and left-leaning in practice, made clear early on that a central goals of his and that of his Morena party is to reassert state control over the oil and gas and power sectors. His justification is that Mexico needs to be energy self-sufficient for reliability and economic success. 

“The President’s aim is to turn Pemex into a national entity in charge of supplying Mexico’s domestic needs,” said Derek Woodhouse, an energy partner at global law firm CMS, who started his career at the Mexican Energy Ministry. “Instead of having Pemex as a way of getting income for the country, as it did in the past, his vision is for Pemex to stop losing money and self-produce for Mexican consumption.”

It’s a sharp reversal of the 2013 opening of Mexico’s energy sector by the previous Pena Nieto administration. 

The Energy Reform, as it is known in Mexico, changed the country’s constitution to remove barriers to international investment in every area of the sector, from oil to natural gas pipelines to gas station chains. The changes led to several offshore and onshore bidding rounds, and billions of dollars of investment commitments.

This constitutional change allowed international and integrated and non-integrated energy companies, among them ExxonMobil

XOM
, BP, Royal Dutch Shell to invest billions of dollars into Mexico. The desire to invest in Mexico by energy majors and minors was always there, but constitutional restrictions kept outside investors out of the playing field.

By contrast, over the last three years Lopez Obrador has focused on national pride and a long-standing suspicion of a global economy to argue that investment in the country’s energy sector is a problem, rather than an opportunity for Mexico. 

“For him, this is all part of the fourth revolution of the transformation of Mexico’s institutions to eliminate, to reduce what he calls the mafia of power, the institutional economic political establishment and to empower poorer sectors of society,” said Vanda Felbab-Brown, a senior fellow at the Brookings Institution, in a May 24 webinar on the Mexican elections. 

His plan included building a new $14 billion refinery to reduce gasoline imports and increasing Pemex’s domestic production rates.

Yet his message overlooks reasons for falling rates of oil production in Mexico – that is, Pemex’s struggling financial state, which creates a roadblock for further production investment. It also sidesteps Mexico’s need for competitive power rates to support industry and the economy. 

In the 2018 election, his populist message resonated with a public frustrated with corruption and low economic growth. Subsequently, Lopez Obrador and his party were elected with an unprecedented majority.

“This is something that the President has been very shrewd about making a political issue – this idea that ‘they lied to you’,” said Lourdes Melgar, the former undersecretary for oil and gas in the Energy Ministry in the Pena Nieto administration. “He keeps telling the public that ‘the only ones who benefitted are these corrupt companies, you have not seen any benefit from it’. Most people don’t see what the benefits from the reform are.”

Now it’s time to see how much support he can get, and if it will be enough to re-steer Mexico back to a state-controlled energy sector – and if so, how permanent he could make this change. For this goal, changing the constitution would be key. 

On June 6, Mexico will hold a national election for its entire House of Deputies (the lower chamber of Congress) and 15 of its 32 state governorships. The election will determine whether Lopez Obrador and his Morena party will be able to retain an absolute majority in the House. 

An absolute majority is important when thinking about oil and gas in Mexico because in order to change the Constitution, a two-thirds (or absolute authority in the Mexican system) vote of support is required. Yet both the Senate and the House would have to give this support for Lopez Obrador to change the Mexican constitution, and these changes would in turn need to be supported by a majority of state houses. 

The June 2021 election will not be the door that makes this possible, as no seats in the Mexican Senate are up for election – and gaining some Senate seats is still required to push through a constitutional law change.

Still, the scenario is fostering apprehension in the international energy community. This stands as a test of how much domestic political support Lopez Obrador has obtained on his quest to reassert more and more control. 

His strategy so far has been to push for legislation that can be passed in Congress, combined with reasserting state-owned Pemex and CFE, Mexico’s main power company, where possible. He has pushed hard to install regulators supportive of his changes, and those committed to the current energy reform laws and to competition in the market said they felt pressured to leave. 

In 2020, his Energy Ministry began creating regulations that gave priority to CFE for power dispatch, which flies in the face of the competitive market established in 2013. Companies immediately complained, saying it undermined the ability of private renewable power companies to compete. 

They turned to the courts in response, calling for – and receiving – temporary injunctions that make these laws invalid until a final court decision is made, which in Mexico can take years. 

Texas’ winter storm and power outage, left Mexico cut off from its natural gas supply from Texas for several days. Lopez Obrador successfully used the crisis to push through laws that prioritize state-owned natural gas, fuel oil and diesel generation. This effectively robbed private sector renewable energy companies of the clients and income they could have competitively earned. In April of this year, he went further, pushing through a law that allows pulling permits for those already invested in oil and gas in Mexico. The justification given was national security concerns. 

“We are suffering from a perverse energy reform, which was approved for looting, for theft, for the benefit of a minority at the expense of the suffering of Mexicans who must now pay more for energy,” Lopez Obrador said in a March 22 press conference, explaining the need for the change. “We have to repair the damage in whatever way possible.”

These law changes were blocked successfully for now by a temporary injunction. 

The question for Mexico – and for energy investors – is whether Lopez Obrador’s administration will challenge these injunctions that have frozen his proposed changes, potentially kicking this to the Supreme Court, which would render a decision final and could not be further challenged by companies. 

A wide debate within Mexico as to whether Lopez Obrador’s end game is actually changing the constitution, or simply asserting power over Mexico’s energy production to gain further political control has surfaced. Again, upcoming elections gauge how his moves play with the public to date. 

Should he be looking for a constitution change, the next question is whether Mexico’s Supreme Court will take up the cases and possibly overturn laws created in the spirit of the 2013 energy reform legislation. A critical seat will be open on the court in November, and some observers believe that Lopez Obrador will have the opportunity to turn the court to one favorable to him with his next appointment. 

All of this leaves the spirit of those dramatic law changes designed to encourage foreign investment, and its technology and investment potential, in a precarious situation.

“The energy reform is not dead, but it is heavily damaged,” said Miriam Grunstein, an energy lawyer in Mexico City who has provided legal counsel to Mexico’s Senate and to Pemex. 

In practice, energy companies can still carry out much of their day-to-day business in Mexico, but simultaneously must invest in expensive legal battles to stave off these new laws.

Even if constitutional laws created by the 2013 energy reform remain after Lopez Obrador leaves office in 2024, energy investors are not likely to forget this chapter. 

“When the sector first opened and we were talking to companies about investment in Mexico, one of the key elements was that they were looking for legal certainty, for the right laws and the right regulators and the right contracts,” Melgar said. “They really needed the security of the long-term certainty – and this is something that the government has really undermined.” 

Emily Pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy to the latest on Mexican climate change laws. Emily has reported on energy issues from around the U.S., Mexico and the United Kingdom. Prior to journalism, Emily worked as a policy analyst for the U.S. Government Accountability Office and as an auditor for the international aid organization, CARE. 

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.