Mexico is considering a dramatic policy shift, inserting the state into the energy sector in a major way while also flirting with the idea of moving closer to OPEC.
A document seen by Reuters, drafted by advisors to incoming Mexican president Andres Manuel Lopez Obrador (AMLO), proposes withdrawing Mexico from the International Energy Agency (IEA) and moving closer to OPEC.
The proposal also calls for scrapping future oil and gas auctions, which would close off Mexico’s oil and gas reserves to international companies beyond what was already awarded. Unlike previous reports, which suggested that AMLO’s government might suspend auctions for two years, the document seen by Reuters calls for an indefinite suspension of new auctions.
The move would be a nearly 180-degree turn from the current government of President Enrique Pena Nieto, whose legacy will be defined at least in part by the reforms and partial privatization of Mexico’s energy sector, while stopping short of complete reversal, which would require constitutional changes. Over 100 contracts were inked with international oil and gas companies, and Pena Nieto’s government has said those will pave the way for tens of billions of dollars’ worth of investment.
Instead of greater involvement from oil and gas multinationals, Pemex would return to its former role as the central pillar in Mexico’s energy industry. The state-owned oil company held a monopoly over the country’s oil and gas reserves for seven decades, but has been bogged down under a massive pile of debt. AMLO wants to inject new life into the company and elevate it back into a powerful position, acting somewhat as a gatekeeper for the country’s energy sector by having the ability to make its own decisions about joint venture partners. Related: Mexico’s New President To Deal Blow To Oil Industry
“The terms for formalizing partnerships or associations will be established by Pemex’s board of directors, according to the law,” the 33-page document written by AMLO’s advisors says. The initiative would elevate Pemex while watering down restrictions currently placed on the state-owned company. Also, the document calls for the “indefinite suspension of international exploration and production auctions.”
It is unclear at this moment how much sway the document will have over AMLO, or to what degree the document will be translated into official policy. As Reuters notes, AMLO has assembled a team with a wide range of opinions and philosophies. On the one hand, his head of transition is Alfonso Romo, a financier and business titan from Mexico’s industrial north, who has preached orthodox economic policies and has tried to reassure investors that AMLO presents no threat to their interests.
“I don’t see changes” to the 2013-2014 energy reforms, Romo said a few days after AMLO’s historic election victory in July. “If anything happens, it would be done without hurting private investment.” He noted that Mexico is aiming to revive oil production and that the private sector will be leading the way. "Mexico has a necessity for lots of money for offshore drilling,” Romo said, according to Bloomberg. If production rebounds “no one will fight success.”
On the other hand, AMLO’s incoming energy minister, Rocio Nahle, supports a stronger role for the state. “We will be assessing if any legislative changes (to the oil opening) are necessary,” she said in July. Nahle is known to have decorated her office with pictures of AMLO and former Mexican president Lazaro Cardenas, who nationalized the oil industry in 1938. She has also voiced support for stricter local content rules in an effort to capture more of the benefits of oil and gas investment for Mexican companies, requirements that foreign oil companies would oppose.
Romo and Nahle, representing two ends of a spectrum regarding state intervention in the economy, are working in the same administration. There seems to be a gulf between them, ideologically speaking, which has led to uncertainty about the administration’s intentions.
Still, U.S. Secretary of Energy Rick Perry did not seem concerned after meeting both Romo and Nahle after visiting Mexico City earlier this month. “What I heard today was a bit of realism from both Nahle and Romo,” Perry said, without going into detail, according to Reuters.
If the document seen by Reuters is anything to go by, Nahle would presumably have the upper hand on energy policy, as it would mark the most dramatic policy shift proposed by the AMLO team to date.
Previously, AMLO proposed a revitalization of the downstream sector, rehabbing old refineries and building at least one new facility, with the aim of ending gasoline imports. Related: IEA: Oil Market To Tighten Toward Year-End
This new document goes further, ending auctions to the private sector and strengthening Pemex’s authority.
Perhaps most intriguing is the proposal to withdraw from the IEA and explore “the possibility of a closer approach and better coordination” with OPEC. The IEA is a group of industrialized countries, mostly from North America and Western Europe, that coordinate energy policy. The IEA was setup after the Arab oil embargo in 1973 with the intention of preventing a supply crunch, and each member country pledges to hold strategic oil stockpiles that can be used in the event of an unforeseen outage.
As for OPEC, it isn’t clear what the policy document would mean in practice. Mexico is participating in the OPEC/non-OPEC (or OPEC+) production cut deal, which began at the start of 2017. The production curbs from Mexico have been nominal and symbolic, since output has been in decline anyway, but Mexico’s involvement means that it is already coordinating with OPEC to some degree. Deepening involvement would, in theory, mean that the administration would be open to exploring the possibility of membership in the oil cartel.
A lot remains to be seen, and the document may not form the basis of AMLO’s energy policy. But if it does, a move away from the IEA, away from private sector involvement, and toward OPEC would represent a significant policy shift.
By Nick Cunningham of Oilprice.com
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