Efforts by Mexico’s president and allies to remove the commercial shackles imposed by the country’s 2014 reform on state-owned energy companies have again stalled – for now – just one step short of the country’s constitution.
President Andres Manuel Lopez Obrador wants to save state-owned oil company Pemex and power company CFE from competition unleashed by the historic reform after decades of monopolies. He has chastised regulatory agencies created to ensure a fair market as useless cost centers, and encouraged moves to overrule decisions by the agencies that limit state company power.
So a recent legislative proposal from Lopez Obrador’s Morena party to change the constitution and meld the energy regulatory commission (CRE) with telecommunications and competition regulators into one downsized agency won the president’s support. Regulated companies complained the change would create further uncertainty, move key investment permits into potentially less-specialized hands, and create an agency less independent of shifting political aims.
The idea was put on hold, but the warning shot was clear.
Energy ministry (Sener) pushed the Pemex/CFE rescue plan further with its 2020-2024 development plan released last week, which said it would work to “align” CRE and the national hydrocarbons commission (CNH). The Sener plan puts on paper what private-companies have complained about: priority treatment for Pemex and CFE over other investors instead of a level playing field.
In the early days of his presidency AMLO cancelled planned upstream auction rounds, strong-armed natural gas pipeline companies into renegotiating contracts, picked public fights with independent regulators and filled the agencies with administration allies. These steps created significant uncertainty for investors, augmented now by a global pandemic.
Yet the barrier for change appears to be the Mexican constitution — which enshrines the tenet of breaking the monopolies of state energy companies — and AMLO’s Morena party lacking the two-thirds majority needed in the lower house to pass constitutional reforms. The opportunity to change the legislative equation does not present itself for another year — the 6 June 2021 elections.
The main risk of Lopez Obrador breaking his vow not to dismantle the energy reform is not to foreign investors, but to Mexico itself. Both Pemex and the country could lose their investment-grade rating by 2022 on the current path, JP Morgan has warned.
Pemex improved some operational indicators such as output of refined products – part of a pledge to wean Mexico off of imports – but it faces huge debts, has taken on the president’s quixotic project to build a greenfield refinery and in the last quarter recorded its biggest financial loss ever.
Trying to return Pemex and other state companies to an imagined former glory could shift the sands in a way that risks the foundation of the rest of Mexico’s economy.