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July 3, 2018

New president likely to curb Mexico’s energy reform

Mexico’s electorate voted in President Andrés Manuel López Obrador (AMLO) of the Juntos Heremos Historia coalition on Sunday with a 53% majority.

By Talal Husseini

Mexico’s electorate voted in President Andrés Manuel López Obrador (AMLO) of the Juntos Haremos Historia coalition on Sunday with a 53% majority. During the election race, AMLO spoke of energy reform, parking new oil and gas investment acreage, building Mexico’s capacity for refining, and developing national gas supplies.

GlobalData senior oil and gas analyst Will Scargill told Power Technology: “AMLO has been a fierce critic of the 2014 energy reform, but his tone has moderated somewhat in the run-up to the elections. It is now unclear whether he will hold a referendum on reversing the reforms, as previously promised, but it is likely that the pace and scale of new licensing will be reined in.”

The Atlantic Council’s Global Energy Center Advisory Group chair David L Goldwyn agreed, writing: “Changes in Mexico’s energy framework will likely be incremental, but there is much that industry, think tanks, and even the US Government can do to address the concerns raised by the president-elect during the campaign.”

The Mexico election came as the US is threatening to withdraw from the North American Free Trade Agreement, eliminate investor protections and curb illegal and legal migration; adding to the president’s desire for greater energy self-sufficiency to counter its dependence on US supplies.

According to Reuters, a top aide of AMLO has said that the president will support pension and cost-cutting reforms at state-owned oil firm Pemex as part of more prudent economic management. AMLO has been a considerable ally to national labour unions and has supported a strong Pemex throughout his political career.

Scargill said: “The president-elect has stated that he will ask outgoing President Peña Nieto to halt the two onshore bid rounds planned for September, before his term starts on 1 December. Once in office, he may limit the new opportunities available to investors, seeking to maintain the dominance of Pemex in its onshore and shallow-water heartlands or tighten the terms for new contracts in favour of the state.

“However, he has stated that a proposed review of existing contracts will be to check for potential corruption and investment protection provisions will limit his ability to roll-back licensing.”

Mexico’s energy reforms in 2013 were written into the constitution and have since been reinforced by Congress. AMLO stated that he will respect existing contracts – the build-out of the national gas pipeline system and national grid, the $200bn foreign investment, and the opening of more than 1,700 gas stations by 30 new private operators.

Scargill added: “After nine bid rounds the Mexican upstream landscape looks very different, with a variety of companies from major IOCs to small independents holding acreage. However, production is still declining and the outgoing government overpromised on the timeline for the reforms to have an impact on the output. We expect that the first new field development resulting from the process will start production in 2019. The sector may, in fact, see the fruits of Peña Nieto’s reforms during AMLO’s tenure as work progresses in existing contracts, even if new licensing slows.”

Much of Mexico’s energy reform under AMLO will allow for government discretion over exactly how Pemex partners with private operators.

Goldwyn wrote: “As the new administration evaluates its options, it may suspend offerings of new areas for oil and gas investment, and assess whether it can or should push Pemex into projects like new refinery construction, deep-water exploration and unconventional gas development – areas the designers of the energy reform were certain that Pemex lacked the capital or expertise to pursue.”

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