With midterms looming, leader sees chance to repeal reforms

POLICY:

Mexican President Andres Manuel Lopez Obrador spent his first two years in office promising to maintain reforms that opened Mexico’s energy markets to competition and foreign investment even as his administration took steps to undermine those changes.

Now, as Lopez Obrador and his Morena party prepare for congressional and legislative elections next year, the left-leaning populist is openly talking about repealing the market reforms approved as constitutional amendments in 2013 and restore the monopolies of the government-owned oil and power companies. Congressional elections, scheduled for July 2021, could test whether Lopez Obrador has the popular support to amend Mexico’s Constitution for the second time in less than a decade.

“It is all about the election and democracy and a big fight for the energy sector,” said Lourdes Melgar, an undersecretary in the En

ergy Ministry under Lopez Obrador’s predecessor, Enrique Peña Nieto. “If the president wins enough states and enough legislatures, they will have the constitutional majority to change the Constitution.”

If Lopez Obrador succeeds, the impact would be felt on both sides of the border, analysts said. The reforms were hailed as a great opportunity for energy companies in Houston and Texas by opening one of the world’s biggest energy markets. Texas petroleum exports to Mexico, for example, have jumped nearly 50 percent since 2013 to nearly $25 billion, according to the Commerce Department.

Texas companies — from Exxon Mobil to the oil-field services firm Halliburton to pipeline company Kinder Morgan — have contributed to the more than $150 billion of investment by foreign companies in pipelines, storage and other infrastructure since the opening of Mexico’s energy sector. The Houston company Talos made a major discovery in Mexico’s portion the Gulf of Mexico in 2017.

The cost of undoing the reforms could also have a profound effect in Mexico, analysts said, slowing a much-needed modernization of an energy sector beset by falling production, high debt and chronic shortages.

“Mexico is missing incredible opportunities to attract investment and make its energy industry much more efficient, to supply its own markets and become a major exporter of all kinds of energy,” said Tony Payan, director of the Mexico Center at the James Baker Institute at Rice University. “It is not going to happen. Lopez Obrador wants the government to do it — be the operator, investor, exporter importer, producer — that is, the bottleneck through which all energy sector activity flows.”

The 2013 legislation that created the energy reforms ended the 75-year monopoly of the national oil company and Petroleos Mexicanos, or Pemex, and power company, Federal Electricity Commission, or

CFE. The idea was to modernize both companies by attracting international investment, creating competition, expanding renewable power, and introducing new technologies, with the hope that Pemex and CFE could tap into the knowhow of international companies.

Action vs. words

Lopez Obrador, despite his opposition to the reforms, pledged to keep them in place when he ran for president. He reiterated that pledge after his election in 2018 to assure financial markets.

But his administration, while paying lip service to the constitutional reforms, has made several moves to reassert the dominance of Pemex and CFE, including canceling auctions to develop new oil fields and power plants. The administration also has committed billions of dollars to build a new Pemex refinery and pushed through new rules that gut competitive wholesale power markets.

In July, Lopez Obrador dropped any pretense of wanting to maintain the market reforms, speaking openly for the first time about the possibility of repealing the energy laws by amending the Constitution — again.

“If a change to the law is required to restore Pemex and the CFE to their role as strategic companies for Mexico's development and its ability to control its natural resources,” he said a press conference in Mexico City ,“then we’ll see if a constitutional reform initiative can be presented.”

Most recently, an eight-page memo summarizing a speech Lopez Obrador gave to energy regulators in July has surfaced. In the speech, the president discussed his belief that the

2013 energy reform laws had been terrible for Mexico, and desperately needed changing.

“The previous government tried to give full legal coverage to its policy of pillaging with the so-called energy reform,” said Lopez Obrador, according to the memo.

The upcoming corruption trial of former Pemex CEO Emilio Lozoya, who ran Pemex from 2012 to 2016, is providing Lopez Obrador with more ammunition to return energy markets to the control of the state. Lozoya, extradited from Spain in July, is accused of taking millions of dollars in bribes from the Brazilian construction company, Odebrecht, which was involved in corruption cases throughout Latin America.

In turn, Lozoya has implicated Pena Nieto in the bribery scheme as well as dozens of members of Congress in the two other main parties: Pena Nieto’s party Institutional Revolutionary Party, or PRI, and the National Action Party, or PAN, the party of Pena Nieto’s predecessor, Felipe Calderon. Lopez Obrador has charged that the energy reforms enabled massive corruption by permitting foreign companies to conduct business without any meaningful oversight.

“The Lozoya case, the way they are framing it, it helps them to delegitimize the reform itself,” said Maria Fernanda Ballesteros, an analyst with Mexico Evalua, a think tank in Mexico City.

Massive debt

Analysts say that Pemex’s problems — which include a staggering $107 billion in debt — are driven by its bloated size and inefficiency. Those problems have only been made worse by continuing to operate in areas, such as refining, where its technology is outdated. The result: huge losses and more debt.

Pemex and its finances would do better over the long term to focus on areas, such as onshore and shallow water offshore plays, where it can compete, rather than eliminating the competition, according to Ana Lilia Moreno, a Pemex analyst with Mexico Evalua.

To change the constitution, Lopez Obrador faces a difficult task. He needs the approval of two-thirds of both houses of Congress and 17 of 32 states. That would require a big win in next year’s elections — against the backdrop of a struggling economy and one of the world’s highest coronavirus infection rates.

But such a sweep is not inconceivable. Morena and its allied parties hold majorities in both the Chamber of Deputies, the lower house of Mexico’s Congress, and the Senate, although they are short of the required two-thirds. They also hold majorities in 17 of the 32 legislatures and six governorships, with another 15 up for grabs in the 2021 election.

In addition, Lopez Obrador’s approval rating, despite falling over his handling of the coronavirus, remains at 60 percent, according to recent polls.

Analysts say that Lopez Obrador has used the energy reforms to deflect attention from his handling of the economy, which is forecast to shrink by about 10 percent in 2020, compared to a 4.6 percent contraction in the United States. National control of energy resources is a point of pride in Mexico, which celebrates the 1938 government takeover of the oil industry from foreign companies as a holiday.

Four more years

Whether the 2021 elections give Lopez Obrador the majorities and momentum he would need to amend the Constitution is anyone’s guess, analysts said. But ultimately, it may not matter.

Lopez Obrador, whose sixyear term runs for another four years, continues to use the power of the presidency to chip away at the market reforms and reassert the preeminence of state-owned energy companies.

“His administration,” said Melgar, the former energy official, “has severely undermined the energy reform to the point where it is almost not operating any longer.”