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Rajan Vig

Rajan Vig

Rajan is a trader in Mexico City and works across the fuels, gas and electricity space. He is currently a Board Member of ACE (Asociación…

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Will Mexico’s Next President Kill Its Oil Sector?


Here we are, almost eighty years after Cardenismo – Lázaro Cárdenas’ presidential rule – which extinguished foreign oil companies in Mexico with the objective of hoisting the nation to self-sufficiency. Cárdenas established a period of economic prowess and a movement to ensure the economic reforms battled over during the revolutionary period were executed, but this time for the sake of the nation and not the elite. The Mexican Revolution was a fantastic period of Mexico’s history: a truly wide-spanning internal conflict touching on all aspects and actors of the nation that stemmed from a period of one-party rule. It was an anarchistic response to the Porfiriato – the extended rule of Porfirio Díaz - and the bias of the Mexican elites against indigenous and rural families, who were provided large areas of land to commoditize. You will never encounter a period in any Latin American nation that does not have its basis in the importance of land since it represents the common denominator for access to all types of commodities. This continent is rife with commodities; just ask the Spanish.

In theory, the plan made sense and was a salvation period for national identity after a ten-year revolution that fragmented society. Unfortunately, Mexico has suffered deeply since, especially within the realms of energy. In 2014, President Enrique Peña Nieto finally saw through the Energy Reform, an idea cultivated by many of his predecessors in government. It was a cry for innovation and transparency, or so the government claims. The fruits of the PRI party’s labor are finally being reaped, but slowly, given the sheer depth and complexity of the Energy Reform. We have seen progress, mostly in fuels across the upstream sector with deep and shallow water auctions being popular and in the opening up of the fuels market downstream with PEMEX being deregulated.

So, 2018 - what a time to be in Mexico. We have had three real years of reform implementation and masses of interest from foreign investors. However, this excitement has been deliquesced by vast political changes globally, its northern neighbor appointing an antagonistic leader in President Donald Trump, and the average Mexican tired of a two-party system that supposedly reeks of corruption and elitism, with the PAN and the PRI. There is something to be said about a two-party system; it displays some level of consolidation of democracy. But is it true democracy? Mexicans would argue not. They are tired of the political rhetoric; the same embarrassing stories in which members tend to be embroiled. President Peña Nieto has a whole host of terrible scandals attached to his tenure: buying luxury homes with government money; not being able to give pellucid explanations for his ex-wife’s suspicious death, as exposed by Univision’s Jorge Ramos in this interview (never shown in Mexico); and his dwindling popularity further damaged by the response of Mexicans to his decision to invite Donald Trump to meet, even though he referred to Mexico as the U.S.’ enemy. Related: Mexico’s Oil Dilemma Continues In 2018

Lo and behold, the Mexican people have had enough. Of all the front-runners representing four political parties, it is actually the PRI’s chosen candidate that has managed to avoid scandalous headlines but, by default of the fact he represents the PRI, José Antonio Meade is not seen as a favorite in the preliminary polls.

So who are the Mexicans pining for? His name is Andrés Manuel Lopez Obrador, representing the MORENA party, and fondly referred to as AMLO, or “Mexican messiah” as described during his 2006 bid for president by the influential and esteemed historian, Enrique Krauze. This is AMLO’s third attempt at becoming president, but it seems that the third’s a charm for this individual. He promises a complete revamp of Mexican politics: a stern approach to crime, cartels and corruption. He has even gone so far as to say that he will end corruption. These are highly ambitious claims from a seemingly determined man.

Nowhere has corruption been more prominently documented than in the energy sector. Consequently, what will happen to the Energy Reform in Mexico under an AMLO presidency? In short, very little. AMLO has forcefully intimated a drastic shakeup of the energy sector in Mexico. Both independently and through his energy advisor, Rocio Nahle, the MORENA party has told media that:

• MORENA will build two new refineries in the states of Campeche and Tabasco to become more self-sufficient as a nation. They predict the cost of these two refineries to total USD $6 billion and will be running three years from the start of construction.

• Within three years of his presidency, Mexico will be in a position to stop buying foreign fuel

• AMLO has also requested that incumbent Peña Nieto does away with offering upstream oil auctions, requesting he brings them to a halt and has asked him to put a stop to the privatization of the electricity sectors

However, none of these outrageous claims are achievable in the way they have been connoted. On the first point: there is a fundamental reason why Mexico currently imports more than 75 percent of its gasoline from abroad and that is because its six refineries operated by PEMEX are functioning at less than half their supposed capacity. In fact, Mexico’s refineries are at their lowest production rates in 27 years: PEMEX is struggling. Foreign companies are not going to be lining up to help assist with the creation of new assets given the high aversion to political and social risks that exists in the industry as well as the fact that the MORENA party will find it hard to justify investing in new assets when existing ones are so poorly managed. In essence, investors will not see the appeal in investing in this type of infrastructure in arguably one of the most inefficient refining nations in the world. In the face of foreign apprehension, MORENA may argue that the money will then come from public spending in Mexico which is an even weaker proposition. PEMEX has been a poorly run entity for decades and, one would assume, the basis of AMLO being voted in is to stop that type of wasteful public spending and corruption.

So why would the common AMLO supporter advocate putting even more money into PEMEX after the Energy Reform has already demonstrated foreigners are willing to put money into improving infrastructure in Mexico? The reclaiming of PEMEX will only serve to push away foreign direct investment and direct more public pesos into trying to overhaul a dinosaur rather than spending that money on other areas of government such as health and education. In essence, crime and corruption is not going to vanish by giving PEMEX back to the regulators, so MORENA’s argument here is nonsensical and will not fly with its voters.

The second point is associated to the first but it should be duly noted that Mexico currently has just over three days of refined products storage. Whilst SENER (Energy Secretariat) has discussed increasing that by another 10 days, Mexico is not in any position to depend on current production and stored capacity leaving them at the beck and call of its more efficient neighbor, the United States. The infrastructure arena in Mexico is vastly underdeveloped and will require significant investment, both domestically and internationally to be in a position where the country is less dependent on foreign fuels. These sweeping remarks by AMLO only serve to demonstrate how ill-equipped he is to discuss energy matters.

On the third and final point, the buoyant interest in the upstream fuels sector will only benefit Mexico and Mexicans: foreign money and ideas will boost the dilapidated nature of the oil and gas industry in Mexico as well as pumping money into government funds. In the most recent oil auctions, Mexico received over USD $500 million in cash, which is said to have been transferred to government funds. The wide-spanning feeling is AMLO will not offer the same types of deep and shallow water auctions if he were to take the presidential seat. Initially in 2016, his rhetoric was antagonistic towards the offering of oil contracts but one of his senior advisers, Alfonso Romo, has mooted to the idea by claiming the MORENA administration will review contracts but not necessarily cancel them. This is in line with previous presidencies and there is little incongruity or possible argument with this action.

Therefore, the AMLO argument that to “Privatize Is to Steal” - as per one of the titles of his chapters in his best-selling book 2018: La Salida - may not hold much weight in a political argument here. The electricity sector is wholly convoluted and complex but, once again, the U.S.-Mexico dependency will only continue to grow. Mexico's power grids presently intersect with their U.S. counterparts at 11 points and there are plans to advance at various points across the border with the most recent high profile agreement being between CENACE and CAISO, linking the Greater San Diego area with Baja California through the EIM market (Energy Imbalance Market) and allowing the Mexican system operator to participate in the western EIM. Related: Disaster Hits Canada’s Oil Sands


With or without AMLO’s approval, the Energy Reform has arrived in Mexico and it is part of La Ley, making it almost impossible to reverse and incredibly costly to halt. His energy rhetoric has been as convincing as his knowledge of drilling for oil. In business terms, it is simple. The United States is “long” energy products and Mexico is “short,” so a natural benefit for both countries would be to do business with one another. There is very little a great big wall or Mexican nationalism can do to change the aforementioned facts and any move to prevent this business would only serve to harm the Mexican people, which comes across as the antithesis to MORENA’S utopian socialist manifesto. AMLO has argued that Mexico is undergoing a period of neoporfirismo. He alleges that the PAN and the PRI have sold out to multinationals worldwide and have left nothing for its own people – which, as indicated earlier in this article, was the precedent to the Mexican Revolution. This may be why AMLO’s stance has earned him the title of Messiah, saving the nation from foreign invasion. Sadly, it is Cardenismo that has partially led Mexico to its current tenuous political situation.

Thus, are we merely experiencing a vicious cycle with no light at the end of the tunnel? Well, the world is a very different place to what it was pre- World War Two, and Mexico needs to get with the times. My expert tutor of Mexican History at university, Professor Alan Knight, talked about the Mexican Revolution as the “revolution of many revolutions”; an all-encompassing, nationwide revolt against the political system of its era. With the four parties, PRI, PAN, PRD and MORENA all vying for the next presidency in 2018, that internal Mexican disjunction is just as true now. Whatever the results of the election, any one of those candidates will have to work with the United States for the country’s energy needs; the lack of infrastructure and product leaves them with no other option. Whilst a lot has changed for Mexico, not all has: to quote the late President Porfirio Díaz, "Pobre de México, tan lejos de Dios y tan cerca de los Estados Unidos/ Poor Mexico, so far from God and so close to the United States.”

By Rajan Vig for Oilprice.com

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Leave a comment
  • John Brown on April 16 2018 said:
    If Mexico is crazy enough to elect socialist Cardenas and go down the road Chavez/Maduro have taken Venezuela so be it. All the more reason to build the wall now because socialism will destroy the Mexican economy and impoverish it resulting in a wave of millions heading toward the jobs and prosperity that Trump and Republicans are providing in the USA. Socialism has nearly destroyed the wealthiest country in Latin America. The one with the biggest oil reserves in the world. While Venezuelans starve the State oil company under socialist is failing. The one sector still providing Venezuela with an income and socialism is destroying even that. So good luck with Cardenas Mexico, but consider. Socialism had closed the gap in Venezuela between rich and poor. Its eliminated the rich and made over 85% of the country POOR, really poor. And the few rich that are left aren't hard working capitalists producing for the country while making themselves rich. They are members and cronies of Maduro who are looting the country and stashing billions outside of Venezuela. That's what will happen in Mexico. Its the way socialism always works.
  • Mexico Regeneration on July 08 2018 said:
    AMLO is no socialist, he is a mexican nationalist with the zeitgeist gift. He Will always fight for the mexican people by banishing corruption, betrayers and foreigner's presence

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