New leader shifts U.S.-Mexico relations
With populists on either side of border, Texas economy has much on the line
The popular groundswell that put a leftist presidential candidate and his party in control of Mexico’s government is expected to shift the dynamics of the country’s relations with the United States, with implications for trade, the energy industry and the Texas economy.
Sunday’s election leaves two fiery, populist leaders on either side of the border in Andrés Manuel López Obrador and Donald Trump, setting the stage for a standoff on a host of contentious issues as each tries to guard the interests of his political base. López Obrador’s overwhelming victory, built in part on his vow to oppose Trump, threatens to further undermine the relations between the two countries — relations that are vital to Texas, which last year shipped nearly $100 billion in goods to Mexico, more than one-third of all the state’s exports.
The election comes during a pivotal time for both North American trade negotiations and the U.S. oil and gas industry, which has looked south to Mexico following the 2013 reforms that opened the country’s energy sector to foreign investment for the
first time in decades. Texas companies in particular have benefited from the reforms there, bidding to develop offshore reserves in the Gulf of Mexico and expanding refineries and pipeline networks to export more natural gas and fuel under the North American Free Trade Agreement.
López Obrador, who commanded more than half of the vote, will take office in December with one of the strongest electoral mandates in recent Mexican history. He campaigned on promises to root out corruption, reduce economic inequality and protect Mexico’s sovereign interests by taking a harder look at the need for foreign investment, including that of energy companies.
His inauguration will come around the time Trump is expected to resume NAFTA negotiations, which he will put on hold until after the midterm elections in November. López Obrador, who recently struck a conciliatory tone toward the United States after bitter campaign rhetoric, is nonetheless expected to counter Trump’s America-first strategy with an equally nationalistic stance and push harder on negotiations than his predecessor, President Enrique Peña Nieto, whose popularity plummeted amid revelations of corruption within his administration.
“It’s tough to imagine President Trump and President López Obrador coming to a conclusion that changes to NAFTA are mutually beneficial to both countries,” said Mark Jones, a professor of Latin American Studies at Rice University. “The best we can probably hope for is a maintenance of the status quo.”
The Trump administration already upended trade balances between the U.S. and Mexico last month when it levied import taxes on steel and aluminum manufactured there and elsewhere. The move provoked retaliation from Mexico, which swiftly imposed $3 billion in tariffs on a range of U.S. imports, including steel, pork and bourbon.
Changing or dismantling NAFTA would have an outsize impact on a range of Texas industries already fearing the impact steel and aluminum tariffs will have on the cost of oil and gas production, manufacturing and construction. Mexico is by far the state’s largest export market, nearly four times larger than the state’s second-biggest foreign market, Canada ($23 billion in 2017), and six times bigger than the third, China ($16 billion).
Softer tone
The future of Mexico’s energy reform is similarly uncertain. López Obrador, tapping into widespread distrust of foreign energy companies amid surging prices for gasoline and electricity, has in the past threatened to suspend new foreign investments in the country’s oil and gas resources and essentially resume state control of their development. He has since softened that stance, promising to review the reforms within the current legal framework for doing so.
“His rhetoric did evolve over the course of the campaign,” said David Goldwyn, chairman of the Atlantic Council’s Global Energy Center advisory group. “He has moderated quite a bit.”
Now, with the elections decided, analysts and experts don’t expect a wholesale overhaul of the nation’s energy policies, noting that the reforms were written into the Mexican Constitution and would therefore be difficult to reverse.
Rather, they anticipate incremental changes as López Obrador determines how to strengthen Petróleos Mexicanos, or Pemex, Mexico’s state-owned energy company, without jeopardizing the country’s ability to effectively develop its energy resources or its access to lowcost natural gas from U.S. producers.
Pemex has for years lacked the technology and the capital necessary to tap reserves locked in deepwater formations or onshore shale deposits, leading to a steady decline in Mexican oil and gas production. The reforms aimed in part to make Pemex more efficient and competitive with help from companies with experience drilling the Gulf of Mexico or U.S. shale fields in West Texas and elsewhere.
Recent assurance
Houston’s Talos Energy joined oil majors Shell, Chevron, BP and others, winning contracts to develop Mexico’s offshore reserves under Peña Nieto’s administration. Talos last year made the first significant discovery in Mexican waters since the reforms were enacted.
López Obrador recently offered assurance that he will honor existing contracts, making foreign energy companies cautiously optimistic that some $200 billion in new investments will proceed as planned. The country has awarded 110 development blocks to 70 companies, according to data from S&P Global Platts, and it plans to award roughly 400 more as part of its five-year auction plan.
Ixchel Castro, manager of Latin American oils and refining markets research with consultancy firm Wood Mackenzie, said López Obrador’s seeming willingness to offer more foreign investment opportunities while expanding Pemex’s production capacity has mostly allayed fears that he will once again nationalize the country’s energy sector.
“I wouldn’t expect the big drastic changes the market was scared of in the beginning,” she said. “We have heard confirmation now that he is not against private investment.”
Relationship with Texas
More than 25 cross-border pipeline projects, headed by major companies including Dallasbased Energy Transfer Partners and Houston-based Kinder Morgan, are also underway as Mexico has emerged as one of Texas’ largest natural gas customers. Mexico, which has shifted its power generation from fuel oil, nearly tripled its natural gas imports between 2010 and 2017 as its domestic production declined by more than onethird.
Despite the country’s growing reliance for foreign energy sources, López Obrador has promised to uphold a campaign pledge to review contracts in search of corruption, which was rampant under Peña Nieto’s administration. Experts expect the process will put the auction program on hold and potentially bolster his populist image, particularly if he sanctions companies found to have engaged in bribery.
“He needs to be seen as an economic nationalist doing everything possible to promote development within Mexico,” said Rice’s Jones. “Foreign companies can come in, but there’s going to be a great deal of restrictions and a high amount of monitoring.”