Mexican energy sector's nervous wait for new president to take office

After Andres Manuel Lopez Obrador won Mexico's presidential elections on July 2, industry participants and investors have been wondering what the future holds for the energy sector in Mexico.

It is still unclear what the position of Lopez Obrador -- known widely as AMLO -- will be when once he takes office on December 1, as his campaign was marked by contradictions.

He has long supported a nationalistic outlook on energy and has spent years criticizing Mexico’s reforms in opening up its energy markets to the private sector, liberalizing energy prices and ending the decades-long monopoly of Pemex.

During his campaign, AMLO left the door open to making changes.

Election results gave AMLO’s political coalition a majority in both the  Congress and the Senate, but estimates indicate this will not exceed the two-thirds threshold needed to change the constitution.

Nevertheless, the results give AMLO a strong mandate for implementing his policy agenda and could make it easier for him to obtain the votes he lacks to change the current laws, a scenario that almost no one had envisioned.

Industry analysts believe AMLO will not halt the reforms; however, he could slow down the pace of new auctions and farmouts.

Mexico’s hydrocarbon regulator CNH has to date awarded 110 blocks to over 70 companies, and two more tenders under a third bidding round are slated for September. Will AMLO allow them to proceed, or will he halt all new auctions?

If he opts for the latter, AMLO will struggle to achieve Mexico's crude production targets. Pemex’s output has been declining since 2004 amid underinvestment, a lack of technology and infrastructure and natural decline at aging fields. According to Pemex’s year-end financial report, crude production fell 9.2% to 1.90 million b/d in 2017.

AMLO will also need the revenue generated by the energy sector to deliver on his campaign promises.

During his campaign and victory speech, AMLO pledged to review contracts awarded to private oil companies for signs of corruption. CNH has welcomed this and the possibility of finding such indicators is low, given CNH´s processes include transparency measures that make contract details public.

AMLO also pledged to build two refineries to produce oil products for domestic consumption. He estimated the cost of this at $6 billion-$8 billion; such projects typically end up costing more than was budgeted for.

With Mexico currently importing almost 70% of its gasoline from the US and domestic demand forecast to rise further, new refineries makes sense from a national security perspective, but do they make economic sense? Who will pay for these projects? And would it ultimately prove cheaper to upgrade Mexico’s existing refineries or import more from the US?

AMLO also pledged during his campaign to freeze gasoline and diesel prices for the first three years of his term - a retrocession in the newly liberalized fuel retail market. It could undermine all the government's efforts to gradually remove price controls to boost competition, and would come after the civil unrest of "gasolinazo," which erupted when gasoline prices surged in early 2017 amid rising global oil prices, a plummeting local currency and the end of gasoline subsidies.

A freeze on gasoline and diesel prices could discourage new entrants and investments after almost 40 brands have opened retail gas stations, and at a time when 50 new storage projects with a combined capacity of 30.7 million barrels are under development. According to Mexico's energy minister Pedro Joaquin Coldwell, “the current policy of weekly adjustments to a key tax applied to fuel sales is a better way to keep volatile prices swings at bay.”

Since his victory, AMLO has moderated his stance, saying he will not reverse the energy reform process. But uncertainty in the energy market will prevail until he takes office and Mexico sees whether politics or economics will drive the course of energy reform.