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Mexico’s Government Is Suffocating Its Energy Sector

  • Mexico’s nationalization drive has done little good for its already struggling energy industry
  • President Lopez Obrador’s latest constitutional reform to transform electricity markets could diminish private investment

Mexico, once a major oil producer, is facing mounting challenges as President Andrés Manuel López Obrador (AMLO) makes it increasingly difficult for private companies to continue energy operations in favour of greater state ownership of the industry. 

AMLO looks to be pushing out private energy companies in a bid to make Mexico’s electricity and fuel market wholly state-owned. At the beginning of October, the Mexican government proposed a constitutional reform that would increase state control of the electricity market, overturning efforts by the previous administration to welcome private investors. If the reform goes ahead, the Federal Electricity Commission (CFE) will gain control over half of Mexico’s electricity market and will set terms for private operators, with ALMO citing lower electricity costs for consumers as an objective.

If the reform gains political support, it will see the scrapping of the National Hydrocarbons Commission (CNH), as well as the Energy Regulatory Commission (CRE), the principal energy industry regulators. Targeting Mexican oil regulators that have propped the sector up for years has not surprisingly met criticism from opposing political parties as well as ALMO supporters.  

Until recently, the CNH has reinforced AMLO’s aims of weeding out corruption and illegal behaviour in the energy industry, shutting down three privately-owned fuel storage terminals in August, allegedly for the distribution and selling of illegal fuel. 

However, media sources suggest that AMLO’s proposed reforms and recent actions on energy are pushing Mexico’s oil and gas industry into the dark. So far, the Mexican President has stopped new licencing rounds and cancelled joint ventures between state-run oil company Pemex and deep-water operators. Now he looks to be battling against private operators across the industry as well as the long-standing regulators in a bid to establish a state-run oil and gas monopoly.  

Experts argue that Pemex’ joint venture ambitions were necessary for deep-water operations, as the company does not currently have the expertise needed to develop in this area, with current ventures spanning shallow water operations and oil refining. 

This is just the latest of a number of controversies surrounding the Mexican energy industry as attention has recently been drawn to the closure of a 315,000-bpd oil refinery in the Mexico State town of Tula, which shut its doors in September following the blocking of roads to the refinery by protesting teachers. Despite being closed for several weeks, it seems that no one knew about the closure until just recently when oil inventories at the refinery reached full capacity. 

Elsewhere, at the Dos Bocas refinery in the state of Tabasco, employees went on strike over working conditions and better pay. The $7.7 billion Dos Bocas refinery development was initiated by the AMLO government in 2019 to build upon his aim to make Mexico self-sufficient in its energy production, decreasing the country’s reliance on foreign imports. 

AMLO’s ambitions for a state-run energy industry and the development of the Dos Bocas refinery have just recently been criticised by the IMF, which urged Mexico to reconsider its strategy for Pemex and to postpone the Dos Bocas development as the country is still recovering from the deepest downturn in decades. 

IMF economists stated this month, “Pemex’s losses are placing a burden on taxpayers and crowding out other more productive uses of fiscal resources.” Furthermore, “Past corruption scandals underline the critical importance of strengthening governance and procurement processes within the company,” they explained. 

The recent controversies surrounding Mexico’s energy industry come just shortly after oil production was halted due to the impact of Hurricane Ida, which took most of the country’s oil offline. In late September, weeks after the storm hit, only 16 percent of crude oil production in the Gulf of Mexico was back online.

In addition to the extreme challenges faced due to tropical storms, strikes, and AMLO’s ambitions for a state-run energy industry, Pemex has repeatedly come under fire for its poor safety record. In August, five people were killed and six injured following a fire at an offshore Pemex platform, which also halted production in the region. This tragedy came just six weeks after a gas leak in an underwater Pemex pipeline caused a major fire in the ocean referred to as the “eye of fire”.

Pemex has faced significant scrutiny over its performance, safety measures, and environmental practices for years. Despite repeatedly promising to be more transparent about its carbon emissions, the company failed to explain why greenhouse gas emissions between April and June this year rose to double digits. Further, Pemex has already been downgraded by Natural Gas Intelligence for its poor environmental practices. 

The idea that a large proportion of control and management of the oil and gas industry could end up in Pemex’s hands, with little foreign expertise or involvement, is frankly extremely worrying. It seems to be something that even Pemex is less than happy about, as the company has long pursued joint ventures with oil supermajors such as Royal Dutch Shell, as well as smaller private companies. 

At a time when Mexico should be looking to boost oil supplies following the disruption of Hurricane Ida; when it should be investing in improving the performance and reputation of state-run Pemex; when it should be encouraging foreign and private investment to battle the poor economic state of the country following more than a year of pandemic, it seems that the AMLO administration is doing just the opposite in the President’s bid to create a state-run energy monopoly for better or for worse. 

By Felicity Bradstock for Oilprice.com

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