Making Pemex great again is risky for exporters, investors
ANALYSIS:
Exporters, investors, and energy policy analysts in Houston and elsewhere are increasingly concerned about what they regard as magical thinking in Mexico about the oil and electric power industries.
President Andrés Manuel López Obrador is moving to repeal energy market reforms and return control to the state-owned oil companies Petróleos Mexicanos, or Pemex, and Federal Electricity Commission, or CFE.
If López Obrador succeeds, it would damage opportunities for trade and investment on both sides of the border, especially for Texas energy suppliers, shippers and service companies. Mexican consumers and businesses would lose out on new brands and sources of supply, which, before the reforms, were limited to those of Pemex.
Today, some filling stations in Mexico’s northern states proudly advertise “100 percent American gasoline.”
Pemex could lose out, too. For the first time,
Pemex was allowed have partners. It made deals with the Australian mining company BHP, the U.S. oil major Chevron and European major Royal Dutch Shell to develop deepwater blocks, tapping into the know-how of some of world’s biggest and successful companies.
On the power side, the energy reform created a wholesale market overnight with new generation from wind and solar plants.
The reforms promised to increase supplies and consumption of both petroleum and power while lowering prices. It also promised to expand the distribution network for both refined petroleum products and electricity to rural areas.
Looking inward
But López Obrador is disparaging the reforms, invoking an inward-looking, national narrative that critics regard as anachronistic.
In August, two documents leaked to the press in Mexico portend darker days ahead for energy market reform — and consumers. The documents call for self-sufficiency in refined products, but Mexico imports 65 percent of its gasoline, making that goal unrealistic.
Likewise, the proposal to limit private electricity generation to 46 percent of the total and market rules favoring power generated by CFE—regardless of marginal cost— jeopardizes the future of investors in renewable energy and combined-cycle natural gas plants. Mexico is the major market for Texas natural gas.
Meanwhile, proponents of free markets and competition have mounted only a limited defense of the reforms. In June, the American Petroleum Institute expressed concern about the discriminatory treatment received by members making pipeline and refining investments in Mexico. API, however, chooses not to initiate a policy statement regarding discriminatory treatment in exploration and production, explaining that its members have made no such request to push back.
Not everyone, though, is keeping quiet. On September 9, a federal judge in Mexico City, ruling on a petition by Greenpeace, issued a temporary injunction blocking the implementation of the Energy Ministry’s program for 2020 to 2024, which would undermine renewable power markets and give CFE unfair advantages. Greenpeace cheered the ruling as a warning to the government not to delay the transition to renewable energy.
For some Houston oil companies, the 20-year horizon is less worrisome than the 365-day outlook. Under rules adopted in 2018, when an oil reservoir extends into lease holdings of one or more parties, the Energy Ministry has a year to decide the claims of and impose terms on how the resources will be shared and managed.
Cold front
Energy Minister Rocío Nahle, however, has an inherent conflict of interest. She serves both as chair of the Pemex board and as the official responsible for the fair treatment of international investors and Pemex and CFE competitors. Investor protection under the US-Mexico-Canada trade agreement, which went into force on July 1, 2020, is less than under NAFTA, so recourse to international arbitration is likely to be ineffective.
López Obrador has said that a new energy regime would be deferred to the second half of his six-year term and would depend on his expanding power in the midterm elections of 2021. Meanwhile, Texas companies are already feeling the cold front.