Energy Counter Reform in Mexico
7 March 2022
After 75 years in the exclusive hands of the State, the Mexico’s 2013 energy reform marked the opening of the Mexican energy sector to private investment. Faced with accelerating drops in oil production, growing dependence on fuel imports, a declining electrical system, and a lethargic natural gas market, the reform sought to attract investment throughout the entire value chain, increase productivity and, ultimately, trigger greater economic growth. This progress, however, was overshadowed by the drop in oil prices, which delayed the materialization of results. In addition, the reform took place in a context of low public approval, where short-term benefits had been oversold.
The 2018 election of Andrés Manuel López Obrador marked a new phase in the still young reform. Almost immediately, AMLO’s government pursued the cancellation of farm-outs, delays and/or cancellations of auctions and tenders in the hydrocarbon and electricity sectors, and political capture of the sector's regulatory bodies. Since 2021, the government has pursued actual changes to the law itself. As these proposed changes have been challenged for being unconstitutional, the courts have suspended their application, leading to the Constitutional Reform Initiative on energy matters that the Executive sent to Congress last September and whose approval is currently being discussed. Thus, through a discourse that the benefits promised to the population had not been achieved along with new promises of achieving energy sovereignty, the energy counter-reform arrived.
Broadly speaking, the changes seek to give priority to Pemex and the CFE over private companies. The proposed measures expand discretion and eliminate market mechanisms to set prices and quantities, thus inhibiting competition, increasing entry costs for new participants, and ultimately discouraging investment in the sector. This, in turn, implies cost increases that translate into greater pressure on the public finances of the federal government – by financing state companies whose operational and administrative deficiencies are known. The end result will be higher prices for the consumer. Furthermore, its implementation threatens to break the rules of various international trade treaties ratified by Mexico, increasing the risk that the State will embark on long international disputes that could end in multimillion-dollar fines. Furthermore, the economic consequences of delaying the energy transition can exacerbate the effects.
Although the almost unrestricted support for Pemex and the CFE has contributed to the continued appetite for the financial assets of these companies, advancing in the opposite direction to the needs of such a fundamental sector for the economy runs the risk of negatively influencing the profitability of other sectors which, added to the already eroded investment environment, constitutes a significant risk for the real sector and the country's growth potential in the medium term.