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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Mexico’s 2018 Election Could Derail Its Oil Boom

Mexico Flag

Three years ago, Mexico opened its energy sector to private investments in a landmark energy reform that ended more than seven decades of monopoly of its state firm, Pemex. Now Mexico has begun liberalizing gasoline prices as well.

After an initially slow start to attracting foreign investment, Mexico’s offshore oil auctions have recently started paying off, after an alliance (including foreign firms) announced a “world class discovery” estimated to hold more than 1 billion barrels of oil in place—one of the major global discoveries in the past five years.

In addition, supermajors Exxon, Chevron, and BP are opening or plan to open their first service stations to tap into the Mexican refined products market. Shell is the latest of Big Oil that entered the retail market, pledging US$1 billion in investment over the next 10 years.

Things are currently looking up for foreign investments in Mexico’s energy sector, but there’s one local political development that could scare investments off…

Mexican President Enrique Pena Nieto—the architect of the energy reform—is completing his last term in office, and the front-runner for the 2018 presidential election is a leftist populist candidate, Andres Manuel Lopez Obrador, who has pledged to hold a referendum on the reform.

Although it’s far from certain that even if Obrador wins the election, he would indeed backtrack on his predecessor’s reforms, there is concern in the U.S. industry that the Mexican market could present some difficulties for foreign investors, or that an Obrador presidency could create uncertainties in the regulatory landscape. That’s why the oil industry is aligning with the current Mexican administration in seeking protections in a renegotiated North American Free Trade Agreement (NAFTA) that would enshrine the energy reform in NAFTA and make it much harder to be reversed. Related: Supermajors Prepare For A Permian Bidding War

“If someone wants to get nasty, this could go wrong a lot of different ways,” David Goldwyn, a former State Department special envoy during the Obama administration, who now heads think thank Atlantic Council’s Energy Advisory Group, told Houston Chronicle’s James Osborne.

Obrador is an outspoken critic of U.S. President Donald Trump and has vowed to take a harder stance in the bilateral trade negotiations.

In recent years, the U.S. energy trade in Mexico has greatly changed the direction of flows. Until 2014, the energy trade was driven by Mexican sales of crude oil to the U.S. But due to Mexico’s declining production and booming U.S. natural gas and refined petroleum product sales, the value of U.S. energy exports to Mexico last year were more than twice the value of the U.S. energy imports from its southern neighbor.

In this context, the U.S. industry seeks to keep the Mexican market open to investments, and hopes the energy reform will be irreversible.

Last month, the American Petroleum Institute (API), Canadian Association of Petroleum Producers (CAPP), and the Mexican Association of Hydrocarbon Companies (AMEXHI) urged NAFTA negotiators to keep many of the agreement’s provisions, including the preservation of NAFTA’s elimination of tariffs in the trade of crude oil and natural gas, refined products, and other goods supporting exploration, production, and refining. The three organizations also support non-discriminatory treatment for foreign investors in domestic markets, as well as the preservation of the “provisions for strong investment protections and Investor-State Dispute Settlement (ISDS), including rules that restrict expropriation of investments and that provide for prompt, adequate and effective compensation if expropriation does occur.” Related: Electric Vehicles: The High Cost Of Going Green

On this issue, President Trump has supported workers’ unions who claim that the ISDS provisions allow companies to challenge policies for employee and environmental protection, if they find them harmful to their profits. But there isn’t a unified stance on such provisions in Washington.

“They’re still arguing over it,” Goldwyn told Houston Chronicle.

“It’s an odd situation where you have the U.S. industry aligned with the Mexican government,” he noted.

The Mexican government’s energy reform has attracted many foreign firms lately. Making that reform very hard to reverse would increase the regulatory certainty that will prove essential for luring more oil firms and further boosting the U.S. energy exports to Mexico.

By Tsvetana Paraskova for Oilprice.com

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