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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Can NAFTA Protect Big Oil From Mexico’s Populist Movement?

The second round of NAFTA negotiations that concluded yesterday in Mexico City sought ways to enshrine the 2014 energy sector reforms that the Enrique Pena-Nieto government had launched to overhaul an oil and gas industry monopolized by state-major, Pemex.

This monopoly had all the consequences that were to be expected, including underinvestment in new oil and gas discoveries, falling output, and ultimately, a threat to the country’s energy security with increased reliance on imports, especially of fuels and natural gas, from the U.S.

The reforms that Pena-Nieto’s government effected involved opening up the Mexican energy market to private participants, with a series of oil and gas auctions conducted in relatively quick succession in a bid to address a situation where energy demand at home is growing but production of energy sources is falling.

Yet, this is Pena-Nieto’s last term as president, and the frontrunner for the 2018 election is a leftist candidate, Andres Manuel Lopez Obrador. Obrador, founder and leader of the Morena political party, recently said he will review the current oil contracts that Mexico awards its foreign partners if he wins the vote next year.

“We will intervene because we don’t want to end up not producing petroleum. The fall in production must be stopped – if not, we will end up buying crude oil, and we can’t have that. We are going to intervene quickly and we are going to review the contracts,” Reuters quoted Obrador as saying during a speech in Washington. Related: The Next Step In Mexico’s Oil & Gas Privatization Push

Obrador believes that the 2014 reforms have not had the desired effect. His focus for the energy sector is on increasing Mexico’s refining capacity in order to reduce the amount of fuels the country now has to import. The current government says the results from the reforms will begin to be felt in a few years, as development at new fields start yielding crude and gas.

Mexico’s northern neighbor is its biggest supplier of gasoline and natural gas. Against the background of the United States’ US$64-billion trade deficit with Mexico, the energy reforms from 2014 are an important tool in the NAFTA negotiations. Besides direct participation in oil and gas tenders for U.S. companies and besides fuel and natural gas exports to the south, the U.S. would benefit from exporting oil- and gas-field development equipment to its neighbor.

Enshrining the reforms in the free trade agreement would benefit both sides, protecting foreign participants in the Mexican oil and gas industry from a radical change in the government’s approach to their activities, and stimulating further investments in said sector.

Of course, the danger of such a radical change in approach may well be overblown, and Obrador’s comments regarding the reform may just be an example of what politicians usually say on the campaign trail. Reviewing the oil contracts does not necessarily mean canceling them, after all, and a focus on expanding local refining capacity makes perfect sense. Besides, the Morena candidate is certainly aware that Mexico can’t handle its growing energy demand on its own.

In short, foreign oil companies operating or planning to start operating Mexican oil and gas fields have little to be concerned about at the moment. Those worried about the fate of the reforms under a leftist Mexican government, however, are probably keeping their fingers crossed for the NAFTA negotiations to end with an agreement – a prospect still distant after the second round of talks ended with no major breakthrough.

By Irina Slav for Oilprice.com

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