Commodities 2021: Elections in Mexico to prove paramount for energy sector future

Mexico City — Mexico's upcoming regional and congressional elections could hand more support to the country's current president, further unraveling the energy liberalization plans enacted by his predecessors.

At stake is the possibility to bring back much-needed investment to explore the country's reserves of roughly 20 billion barrels of crude equivalent, and build the power plants the country needs to meet its expected demand.

President Andres Manuel Lopez Obrador has called the 2013 energy reforms a fraud that have weakened state companies CFE and Pemex, and since being sworn in has successfully stalled the implementation of the reforms, which were meant to open Mexico's energy sector to competition. The president needs as much political support as possible to carry out the changes to the constitution he has repeatedly said he wants to make to kill the reform for good.

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On June 6, Mexico will hold its largest election process in its recent history. Mexicans will elect 15 state governors, 500 members of the lower House of Congress, as well as thousands of public servants.

Lopez Obrador's Morena party currently controls five states and Mexico City, the federal capital. The first leftist party ever to win the presidency, Morena was formed by Lopez Obrador after he lost the presidential elections of 2006.

Morena currently has a majority in the lower house, where representatives serve three-year terms. Upper House congressional elections are held every six years, along with presidential elections.

In order to change the constitution, Morena needs two-thirds of both houses, as well as a ratification by a majority of state congresses. Morena can achieve this majority with a coalition and is analyzing which of the smaller parties it will team up with.

The big three — Institutional Revolutionary Party (PRI), National Action Party (PAN) and the Democratic Revolution Party (PRD) — have already announced they will be collaborating for the first time in history to face off against Morena, to the dismay of many of their die-hard supporters.

Killing the reform

Upon taking office in late 2018, Lopez Obrador vowed to restore the dominance of Pemex and CFE with the existing legal framework, and said he would refrain from making changes to the constitution for the first three years of his administration.

So far, Lopez Obrador has blocked competition through what many observers have called discretionary regulation, such as delaying or denying permits for importers of refined products, or by cancelling open market processes in oil and gas extraction and exploration, as well as in power generation. These moves were denounced in recent months by the offices of some European governments, the Canadian embassy and even a bipartisan group of US congressmen.

Lopez Obrador has pushed to boost crude production and increase the country's refined products output in order to reduce its dependence on imported fuels. But so far Mexico is falling short of his goals.

Pemex is committed to raising its crude output to 2.4 million b/d by 2024 from its current 1.6 million b/d. But S&P Global Platts Analytics sees Mexico's output remaining roughly flat over the next five years.

As for the country's dependence on imported fuels, imports of gasoline as a percentage of sales have remained above 60% for most of 2020 as Pemex's refineries are operating below capacity, Energy Secretariat data shows.

Seeking a majority

Having already pushed the limits of the legal framework, Lopez Obrador needs to find a majority in state congresses, said Eduardo Prud´homme, co-partner at Mexico-based consultancy Gadex.

"For that majority to occur, Morena has to secure victories in key northern states like Nuevo Leon," Prud´homme said. If that happens, the Lopez Obrador movement will stay beyond his presidency, he said.

Nuevo Leon, one of the richest in the country, has long been governed by PAN, which in 2000 became the first opposition party to win a presidential election, ending seven decades of a one-party system under the PRI.

Prud´homme fears a counter reform from Lopez Obrador would bring back the state corporatism of the old PRI regime.

Gonzalo Monroy, CEO of Mexico-based consultancy GMEC, said most of the reform has already been killed, adding that constitutional changes would kill them "for good".

"Changing the constitution to eliminate a reform they call 'neoliberal' is dangerous; they are betting the future on the success of their 'I-do-it-all' strategy," Monroy said.

Winning majority in Congress still does not buy Morena a direct change to the constitution and the party will have to make alliances and negotiate. So the party will more likely use the outcome of the election as a political thermometer, said Paul Alejandro Sanchez Campos, a Mexico-based independent consultant and professor.

"2021 will be a proxy for the 2024 presidential elections. Morena will see how they fare in the ballots without Lopez Obrador in it. They will want to see how much they have for the heavy lifting that a constitutional reform requires," Sanchez Campos said.

The president might begin to draft a reform in 2021 if Morena wins a majority, and that will face opposition in the Senate and in the states, many of which attempting to lure investment individually.

Since the reform, states like Yucatán have been able to attract investments to generate electricity using renewable technologies. This has improved not only the environment but also the competitiveness of the state, said Ernesto Herrera, secretary of economic development in the state, who added that the state sees private investment in energy as paramount and will continue to look for ways to be a good partner.

Yucatan's medium term goal is to become the first state in Mexico to generate all the power it needs using clean energy technologies, Herrera said.

If Morena wins a strong majority again in 2024, they could then try to replicate what President Enrique Pena Nieto did in 2013, enacting a profound constitutional amendment that was passed swiftly through both chambers of Congress and passed into law, Sanchez Campos said.

"Morena is far from having that power," he said.