Mexico's upcoming presidential election keeps uncertainty in the air for energy reform: Baker Institute

A slowdown versus a reversal of Mexico's energy reform legislation is the most likely scenario to emerge following July’s presidential election, according to a number of Mexico energy experts gathered February 15 at the Baker Institute, where they discussed the state of the country's energy reform and how that law will be shaped after this year's July elections.

Speaking at the event dubbed "Political Uncertainty and Mexico's Energy Reform" were Jesus Reyes-Heroles, former Pemex CEO and former energy secretary of Mexico, and now heading his own consultancy; Miriam Grunstein, chief energy counsel for Brilliant Energy Consulting; Lourdes Melgar, former Mexican deputy secretary of energy for hydrocarbons and now a research affiliate with the Massachusetts Institute of Technology; Pablo Zarate, with FTI Consulting; and Francisco Monaldi of the Baker Institute and moderator of the discussion.

Mexico's leading presidential candidate, Andres Manuel Lopez Obrador – or AMLO, as he’s known – is a so-called populist from the National Regeneration Movement party (MORENA) that some have feared may attempt to reverse Mexico's energy reform.

Early in his campaign, Lopez Obrador was highly critical of the legislation and indicated he might try to roll it back. But as the campaign has rolled on, his tone has been more measured, but nonetheless, he has indicated he wants changes.

Experts at the Baker Institute discussion pointed to the fact that Lopez Obrador has provided little detail or clarity on his energy plans – other than to say he wants more energy independence for Mexico to free it from heavy imports of fuels and natural gas from the US.

The likely scenario for energy reform, the experts say, is that a Lopez Obrador administration, or any new administration, would slow, delay or disrupt implementation of the energy reform legislation, versus trying to fully repeal the law, as this would legislatively challenging with no presidential winner able to hold a majority in Congress, according to Reyes-Heroles.

The other leading candidates include Jose Antonio Meade, from Mexico’s ruling Institutional Revolutionary Party (PRI) party, who previously served in several key government posts in energy, foreign affairs and finance. The third key candidate is Ricardo Anaya Cortes of the National Action Party (PAN), who is considered a conservative.

President Enrique Pena Nieto of the PRI party will see his six-year term end this year.

While energy was the focus of the panel, Reyes-Heroles said during his presentation that strong pessimism prevails in the country as a result of deep social concerns around a lack of security and pervasive corruption, which he noted is the worst he has seen. "The real discussion in the campaign will not be energy," he said, but instead security and corruption.

Despite these deep social issues and uncertainties around how a future administration might shape the current energy legislation, Reyes-Heroles and Grunstein noted that investors continue to put money into Mexico.

Some of the potential changes/risks investors could face with a new administration driving the reform could include contractual changes and deeper entitlements for Pemex. Grunstein said that while she doesn't think Lopez Obrador will reverse the reform, he could make it more nationalistic.

The panel listed a number of areas where Mexico's energy reform could be made stronger or where implementation could improve, providing greater benefit for Mexico:

• Decrease the power and influence of Mexico's finance ministry, or "Hacienda" as it is known.

• Remove Pemex from Mexico's federal budget.

• Improve Pemex governance by depoliticizing the board and getting more oil and gas experience in the CEO chair.

• Further strengthen Mexico's regulatory agencies overseeing implementation of the reform

• Implement the social aspects of reform, where general public understands the benefits and feels the benefits “trickle down.”

• Implement the reform on a technical basis, not for political reasons.

All the panelists were in agreement that the Treasury's (finance ministry) influence and power in energy reform needs to be reduced.

Grunstein said she would have restricted Treasury in the legislation, but instead "their hands are in everything." She said Treasury’s role is really looking at money, not reform.

Making a more radical suggestion, Reyes-Heroles said an initial public offering of Pemex would "defend" it from the Treasury/Hacienda, but Melgar countered that privatization of Pemex is "off the table."

On the topic of management, Melgar said it was time to "take politics out of the board of Pemex." As an example, she said that Pemex got into the fertilizer business because of political promises, not because it made business sense.

She was also critical of some of the political sales pitches made to get the reforms through, including the timeline for uplifting the country’s downward trending oil and gas production levels.

"We should not have promised what we knew we could not deliver," she said.