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Politics and policy in Mexico: Energy reform in question if Lopez Obrador wins presidency

Figuring out leading Mexico presidential candidate Andres Manuel Lopez Obrador isn’t easy. The populist is a riddle, the answer to which will be critical for the future of Mexico’s energy policy.

This is the third time the former head of the Mexico City government has thrown his hat into the presidential race. This time around, vote splitting from the other three presidential candidates could roll out the red carpet for Lopez to win the July election.

While leading Mexico City, Lopez worked well alongside the business community promoting infrastructure projects and local real estate development. But his populist personality concerned some critics, who tried to position him somewhere between Brazil’s Ignacio Lula Da Silva and former Venezuela leader Hugo Chavez.

Lopez, in his diagnosis of the Mexican energy sector, blames the bad management of previous administrations for the current state of affairs at state-owned company Pemex, giving much less weight to the crash of oil prices in 2014 and the operational shackles of the former monopoly scheme.

In his presidential platform, Lopez assess Mexico’s “wounded” energy industry while providing a seemingly simple goal like increasing Pemex’s oil and refined products output.

He does not say how he will achieve this beyond stating he will provide full budget and administrative autonomy to Pemex, consolidating its different subsidiaries under one company, and enhancing the development of new technologies for oil extraction.

WEIGHING THE OPTIONS

His platform is open to interpretation. He says that to lift Mexico’s energy sector and recover its energy sovereignty, the state must be a guarantor and a central figure in the sector, requiring “the political will to assume a nationalist and advanced attitude in favor of our Homeland.”

Also, he proposes to “remove” the possibility from oil operators of “establishing regions removed from the sovereignty and control of the Mexican state.”

In his platform, Lopez says he will “assess” the performance and legality of awarded contracts and the model behind Pemex’s farmouts and Mexico’s hydrocarbon auction rounds, postponing all activities.

Mexico oil production under the energy reform scenario

Observers say that the best-case scenario for any contract “assessment” is a six to 12-month hiatus on private investment, after which Lopez realizes it would be hard to improve on an already-efficient system, which has awarded 75 out of 94 blocks auctioned to date across several hydrocarbon auction rounds.

The worse case would be if Lopez proposes all new terms and reviews all current contracts—a move that could potentially cool private investment interest in Mexico for the next two to three years.

The worst scenario is hard to imagine, but following a Venezuelan or Brazilian model where Pemex would be required to hold a majority stake on all projects could derail the reform, especially since most analysts agree that it would be an uphill task for a cash-stranded and technologically challenged Pemex to spearhead all of Mexico’s unconventional and deepwater resources.

The International Energy Agency (IEA) recently calculated that without the energy reform and private participation, Mexico would produce 2.3 million b/d by 2040 and receive 45% less in oil revenue over the coming decades compared with 3.4 million b/d under the energy reform outlook.

Without private investment, Pemex would have to increase its exploration and production budget to $19.3 billion from $7.4 billion per year today over the coming decades to fulfill IEA’s reform production forecast, according to Pulso Energetico, a think-thank backed by Mexico’s Hydrocarbon Association.

PUTTING MEXICO'S REFORM TO A VOTE

One plank in the Lopez platform is especially controversial, and that is putting Mexico’s energy reform to a public vote.

Lopez promised he wouldn’t dismantle the historic reforms via authoritarian measures, but by requesting congress to cancel it after a referendum.

Many analysts have said that the constitutional nature of the energy reform makes it impossible to change, especially with divided national and state congresses.

However, Mexican referendums are legally binding if over 40% of registered voters participate in it.

Lopez’s party, the National Regeneration Movement, previously tried to do a referendum against the reform in 2014, collecting over 2% of national signatures of registered voters required by Mexico’s constitution.

However, Mexico’s Supreme Court of Justice squashed the referendum because it would have modified the federal government’s income, something prohibited by the constitution.

Referendums, are especially attractive for populist candidates because it is an expression of direct democracy of the people. For any political party, opposing the proposal of people expressing themselves directly via a referendum is already a difficult task. Fighting the results of a referendum would be even harder.

Mexicans in previous polls have said the energy reform is the biggest mistake of current President Enrique Peña Nieto’s administration.

It isn’t hard to understand why when fuel prices are going up and the Mexican political class sold the reform with the promise that it would lead to lower energy prices.

Energy is a crucial part of Mexico’s identity and imagination. Women gave away jewelry to help pay for the nationalization of foreign oil companies in open rebellion against the orders of Mexico’s Supreme Court of Justice for better salaries for Mexican workers back in 1936.

For industry and the political class, it will be a hard battle to defend the privatization of the energy sector. The reform may be the right response from an economic point of view, but in the political arena, complex economic reasoning can often be hard to sell.