Investors wary as AMLO slowly dismantles Mexican energy reforms

Mexico City (Bloomberg) - Andres Manuel Lopez Obrador, who swept into power in Mexico after promising big changes in the country’s energy markets, has been careful not to spook investors by canceling past reforms outright.

Instead, the Mexican president spent his first full year in office chipping away at them one piece at a time, slowing private investment but not bringing it to a halt.

While the left-wing firebrand known as AMLO has suspended the country’s oil and gas auctions, he’s left existing contracts with global companies intact. More recently, he’s voided rules that would have made the fuel market more competitive, even as he’s let private fuel imports flourish. Now, he’s in the process of reviewing electricity contracts, but promising not to cancel them.

It’s a mixed message that’s kept private investors from panicking, though they remain wary, according to Carlos Petersen, an analyst at Eurasia Group Ltd.

“Lopez Obrador has been very strategic about not going after contracts that have already been awarded because he understands the repercussions that could have for Mexico’s reputation and investment,” Petersen said by telephone from New York. “That’s helped reduce some uncertainties. But the problem for the industry is what comes next.”

Born in an oil town in the southeastern state of Tabasco, Lopez Obrador won the presidency in July 2018 vowing to strengthen Petroleos Mexicanos, Mexico’s debt-laden state oil company, as well as the beleaguered Federal Electricity Commission, known as CFE, by reversing the liberalizing reforms of his predecessor. But rather than trying to quickly ram through a huge new set of regulations, he’s moving cautiously toward his goal.

The administration “understands that they don’t need to make a major legal overhaul of the energy sector to really achieve their goals, which are to strengthen and increase the role of the state-owned companies at the expense of private sector participation,” Petersen said.

One of Lopez Obrador’s first moves as president was to call for a hiatus on Mexico’s competitive oil and gas auctions, the centerpiece of the 2014 legislative changes that ended Mexico’s eight-decade-long-state oil monopoly.

Lopez Obrador said that the foreign firms that had won contracts -- including Royal Dutch Shell Plc, BP Plc, Exxon Mobil Corp. and Chevron Corp. -- must show results before new bidding rounds take place. It’s a move that comes in spite of the fact that many deep-water fields won’t start producing until after his presidential term ends in 2024.

Tenders for joint-venture agreements between Pemex and private companies were also suspended, with the new administration opting for drilling service contracts awarded through a closed bidding process that favored local contractors.

Lopez Obrador has replaced energy regulators aligned to the previous administration with his own team, helping to smooth the way for the government to strengthen Pemex and CFE by eliminating asymmetric fuel regulations and subsidies for private electricity companies.

In December, the CRE granted Pemex a five-year extension on a clean fuel requirement that has enabled it to continue to sell polluting diesel in parts of the country. It also voided an agreement establishing price controls on fuels that Pemex sells to wholesalers, effectively allowing Pemex to price out the competition.

Infrastructure Sharing. A rule requiring Pemex to share fuel infrastructure with private companies was also canceled. And now Lopez Obrador has promised to review electricity contracts that provide subsidies for private companies to generate renewable energy. That could see Mexico increase transmission costs for private companies and give the CFE preference over private generation when electricity is dispatched into the national grid.

While there is a budding renewables market in Mexico, the sector took a hit after the government canceled the fourth long-term power auction early last year, with no plans to reschedule the bidding process until existing contract holders meet their commitments on power generation.

“They have a lot of room to maneuver,” Petersen said. “Especially with the control they now have over not only the energy agencies and the executive power, but also over the regulators in the energy sector.”

While many of those measures are likely to slow private investment, they won’t stop it entirely. Mexico’s needs are simply too big.

Public-Private Partnership. The government recognizes that private investment is important at the minimum for infrastructure development, and Lopez Obrador has said that new public-private partnership projects in the energy sector will be announced in February as part of a national infrastructure plan. These are expected to include pipelines, terminals, transmission lines and power plants.

In the fuels market, private retailers are expanding their share of imports and investing in storage terminals. In November, companies other than Pemex imported around 107,000 barrels of gasoline a day into Mexico, almost three times as much as they did a year ago, accounting for 18% of total fuel imports.

In the oil sector, there is a growing secondary market for the sale and purchase of privately-owned oil blocks, spurred in part by Lopez Obrador’s pledge to respect existing contracts. The U.K.’s Premier Oil Plc could sell its share of the world class Zama discovery. In October, Chevron purchased a 40% stake in three deep-water blocks in Mexico from Shell.

“We are seeing a lot of activity on the secondary market, sales of stakes, swaps, and the arrival of new players,” said Alejandra Leon, an oil analyst at IHS Markit Ltd, speaking over the phone from Mexico City. “But the risk is that there are limited opportunities.”

The challenge, she added, is to “maintain the dynamism of the industry when you don’t have new blocks being offered, when the climate is anti-reform, and when companies fear contradicting the president.”