AMLO’s game and the future of energy in Mexico
Expert weighs in as López Obrador talks, pushes for a reversal of constitutional reforms opening sector
Since coming into office in 2018, Andrés Manuel López Obrador has shaken up the Mexican political scene in a way not seen in decades. Gone is the neoliberalism that drove the opening up of Mexico’s economy in the 2000s and 2010s. Instead AMLO, as he is known, has promoted a new populism focused on bringing up the nation’s poor and creating a more self-sustaining Mexico.
Nowhere is that more apparent than Mexico’s energy sector, where the historic reforms undertaken by former President Enrique Peña Nieto have been stopped dead in their tracks, with a massive oil discovery made by Houston-based Talos Energy handed over to the state-owned and heavily indebted oil company Pemex.
We sat down with Tony Payan, director of the Baker Institute’s Mexico Center at Rice University, to talk about what the future holds for foreign energy companies in Mexico. The 54-year-old professor, who holds a joint appointment at Universidad Autónoma de Ciudad Juárez in Mexico, studies immigration along the U.S.-Mexico border, with a focus on the impact of the Mexican drug cartels.
The interview is edited and condensed.
Q: AMLO has talked about reversing the constitutional reforms that opened the Mexican energy sector to foreign companies eight years ago. What do you think are his chances of getting that done?
A: Since the midterm elections earlier this year, the president is in many ways weaker. He doesn’t have the two-thirds majority he needs for constitutional reform.
So, he’s changed tactics, and instead of trying to work with Congress, he’s trying to mobilize public opinion and he’s very good at that. He’s creating a lot of confusion in Mexican society and thrown a lot of red herrings. His hope is to weaken the PRI (Institutional Revolutionary Party) and pressure them into joining him to give him the majority in Congress he needs. For now, we’re safe, but who knows?
Q: So, where does that leave foreign energy companies operating in Mexico? What are the chances this anti-energy reform stance comes to an end when López Obrador leaves office in 2024?
A: Right now, the opposition parties, PAN (National Action
“Instead of trying to work with Congress, he’s trying to mobilize public opinion.” Tony Payan, director of the Baker Institute’s Mexico Center
Party) and PRI, which support the energy reforms, each have about 20 percent of the vote. The president’s party, Morena (which means brown-skinned in Spanish), has about 45 percent when you include the two other parties in their coalition. Those numbers are pretty frozen, and that’s going to be the challenge.
There are a few potential candidates within the president’s party fighting it out to be the presidential candidate, and I don’t expect any of them would shift from the president’s position on energy. We haven’t seen opposition figures emerge yet. They’re
“My prediction is the López Obrador administration is going to do everything possible to stay in power, short of anything illegal.”
Tony Payan, director of the Baker Institute’s Mexico Center at Rice University
keeping their intentions close to their vest because the president is very good at undermining the reputation of anyone who challenges him. He is very Trumpian in that respect, and most people would rather not open themselves.
Q: It sounds like whomever AMLO chooses as his successor is a lock to win the next election. Is that right?
A: My prediction is the López Obrador administration is going to do everything possible to stay in power, short of anything illegal. In the midterms this year, we saw active intervention by organized crime — kidnapping opposition activists and killing opposition candidates. They did it all along the Pacific coast and managed to get 11 of 15 governorships.
They understand having Morena in power means a break for them because the president has chosen not to police organized crime. The key is what the MC (Citizen’s Movement) political party does. They won the governorship of Nuevo Leon, which is a very important state. They already said they have no intention of joining the opposition coalition, but at the same time they’ve been consistently voting with the opposition on some issues, like energy. So even if the opposition parties lose the presidency, they may, in coalition, deny the next president the majority in congress.
Q: López Obrador has been spending a lot on building up Mexico’s refining sector. He is buying the controlling interest in the Deer Park Refinery on the Texas Gulf Coast from Royal Dutch Shell. And he is spending billions on building
a new refinery in his home state of Tabasco. You don’t see much of this happening elsewhere in the world. What’s his game plan here?
A: This is not the time to build a refinery. Everyone knows it. But López Obrador thinks it will propel development in southern Mexico, which he genuinely believes was cheated out of development by northern and central Mexico. Construction on the Dos Bacos refinery is well under way, and he wants to inaugurate it before the end of his term in 2024. But the paradox is he is going to invest $15 billion in building this refinery and of course he is also trying to buy the Deer Park refinery for about one-tenth of that. The issue for him is Mexico depends heavily on gasoline imports from United States. And he believes the Mexican state has to control its energy sector. It’s a nationalist thing.
Q: Talos Energy is now challenging López Obrador’s decision to hand their discovery in the Gulf of Mexico to Pemex under the United States-Mexico-Canada Free Trade agreement. What do you think their chances are of getting the oil back?
A: They discovered this major field and then the Mexican government denied the contract, saying we got this from here, when the agreement was to explore and extract. But at the end of the day Talos is not going to win. They’re not going to recover the field, though they may gain some compensation for their work.
But these things take years, and then they have to collect the money. Clearly, Pemex doesn’t have the money to exploit that field. It’s a heavily indebted company, with debt and pension obligations over $120 billion. But López Obrador is intent on keeping
Pemex afloat and that’s why he’s pouring so much money into the company.
Q: How is AMLO’s paying for all this? Is Mexico headed toward the sorts of fiscal crises it suffered in the 1970s and ’80s, when inflation skyrocketed and investors fled the country?
A: There’s a couple surprising things about López Obrador we didn’t expect. Everyone thought he was going to be a tax-andspend, 1970s-style leftist, but he’s come to value the structural restraints put in place by the neoliberals (PRI and PAN) beginning in the 1990s. At the end of the day, I think it’s given him some economic stability. He doesn’t want to end up in those terrible financial crises of the 1970s and ’80s, so he’s maintaining some fiscal discipline.
The downside is in order to pay for his projects, like the
Mayan train (on the Yucatan peninsula) and the new airport in Mexico City, he is taking money away from infrastructure, health care and education. Mexico’s infrastructure is deteriorating very rapidly. That’s going to be his legacy. He didn’t mess up the value of the peso, but Mexico will be a more difficult country to fix.
Q: There was a lot of excitement when Mexico’s Congress passed the energy reforms in 2014, that Mexico was turning a page and ending its decadeslong commitment to developing its oil and gas fields itself. Do you think that hope is effectively dead now? Even were AMLO’s party to lose the next election, who’s to say they or another party won’t come in four years later and do it all again? Oil and gas companies might think twice about investing.
A: My guess is they’d go. It’s too tempting. The suspected reserves are there. Back in 2013 and 2014 people were calling me asking whether they should go, and while some decided it was too risky, others made the calculation it was worth it.
Upstream is where the nationalist sentiment in Mexico is. Almost all these large corporations decided to focus downstream and only explore opportunities upstream. All that was stopped fairly quickly when López Obrador won the election, but for them the investment was small.
It was all about brand positioning and chipping away a little of the old nationalism. Get Mexicans used to seeing gas stations that didn’t have the Pemex logo. So far, the strategy has paid off.