When soon-to-be former President Enrique Peña Nieto announced his government’s energy reform before Mexico’s congress in December 2013 he proclaimed, “we are facing a historical opportunity to change what has been preventing the country to move forward.”

With that speech, Peña Nieto pinpointed an important impediment to Mexico’s economic growth and unleashed a highly bold move to liberalize Mexico’s dwindling energy industry, which for nearly 80 years has been dominated by state-monopoly Pemex.

That reform effort is now under threat after the landslide victory of left-populist Andrés Manuel López Obrador (commonly referred to as AMLO) in Mexico’s presidential elections in July. However, whereas he once planned to scrap the reform entirely, as the election drew closer, AMLO softened his stance, thereby exemplifying the contest between idealism and pragmatism that will likely define his premiership. His announcements since being elected suggest the net result of his stance will be that the reform will largely be implemented, but that his program, will hinder not help energy production. Contrary to Peña Nieto and his PRI party’s stance, AMLO’s team believe that the route to increased production lies in revitalizing Pemex and restoring its role as the central pillar of the industry, rather than opening the sector to foreign players.

The context behind the reform was the precipitous fall in the chronically inefficient Pemex’s production – its crude output dropped below 1.9 million barrels per day from a peak of 3.4 million barrels per day in 2004. Mexico has a growing population, impressive manufacturing base and is highly connected to international trade via some 44 trade agreements with countries around the world. However, high electricity and gasoline costs compared to the United States harm its competitiveness and it is increasingly dependent on imports of oil and gas, made worse by a severe lack of refining capacity. Therefore, there is broad agreement in Mexico that its hydrocarbon production needs to increase, including by AMLO himself. Of course, from a sustainability standpoint, ideally Mexico would aggressively pursue renewables, but such sources of energy are a long way off in meeting Mexico’s immediate needs.

Mexico’s energy reform has taken time to bear fruit, but it is starting to do so–five upstream projects have been awarded to date, mainly due to the reforms, and they are expected to contribute 400,000 barrels of oil equivalent of hydrocarbon production by 2021-2022. Additionally, the amount of acreage being explored in the Mexican Gulf of Mexico has more than tripled because of the 12 bid rounds completed since 2013 which have led to 107 contracts being awarded.

Implications Of Rhetoric

On September 2 AMLO announced the indefinite suspension of energy sector tenders and auctions until the revision of the contracts awarded since the introduction of the energy reform. Additionally, the president of the National Hydrocarbons Commission (CNH) announced the postponement from November this year to February 2019 of a tender for Pemex to find partners for exploration projects. Somewhat assuaging investors’ fears, the incoming minister of energy Rocío Nahle confirmed that the new administration does not intend to permanently cancel future auctions and tenders, which she said will continue once the review process for the awarded contracts is over.

Nevertheless, AMLO’s team have made it clear that Pemex will regain its position as the leading actor in Mexico’s energy landscape, and they have promised to increase the company’s exploration and production (E&P) budget to $11 billion in 2019 from $7 billion in 2018. It is highly likely that the new administration will give preferential treatment to Pemex over private players, including by limiting the number of auctions and blocks available to foreign operators for E&P projects.

Prior to these latest moves, AMLO on July 27 announced new directors of Pemex and national utilities company CFE, which have sparked criticisms for being highly political appointments when what is needed is competent technical managers. Both appointees are political confidants of AMLO and have little experience in the energy sector. The new director of Pemex, Octavio Romero Oropeza, is a former mayoral candidate in AMLO’s home state of Tabasco and a member of his National Regeneration Movement (Morena) party. The new CFE director, Manuel Bartlett, is coordinator of the Labor Party, part of the same left-wing coalition as Morena, in Mexico’s Senate.

Additionally, AMLO has long demanded that a new refinery be built in Tabasco, pledging to make the state the “oil capital of Mexico,” and wants to build another one in Campeche state. He has promised that construction of the Tabasco refinery will start in December this year and be complete within three years’ time. Rocío Nahle has already visited the world’s largest refinery in India, whose output is 1.2 million b/d, in preparation.

“In one area at least, the conflict between pragmatism and idealism does not look positive for Mexico.”

Whilst the construction of these plants will help plug Mexico’s refinery capacity and ensure less gasoline is imported, overall AMLO’s policies will not increase hydrocarbon production as he desires. There will likely be a prolonged review period of contracts, which may allow AMLO to score political points if any irregularities are unearthed, but by suspending any new tenders or auctions there will be many missed opportunities for increased oil and gas output.

According to S&P Global Platts, Mexico requires upstream investment of more than $20 billion per year to produce 2 million barrels per day, almost twice Pemex’s increased budget under AMLO’s plans. Meanwhile, conservative estimates expect Mexico’s oil production to reduce to 1.6 million barrels per day by the end of the incoming administration’s term. The key to increased production is private sector involvement, as one company alone cannot achieve the required increase. But this is something which AMLO has historically rejected, although now will probably have to reluctantly accept.

Ideologue Or Pragmatist?

The future direction of Mexico’s hinges in large part in answer to the question of what sort of president AMLO will be: an ideologue or a pragmatist? His stance on the energy reform and other areas provides some clues. On the pragmatic side, he has significantly softened his stance on the energy reform, supported keeping NAFTA which he once railed against, as well as having the army on the streets to fight drug cartels. At the same time, he has made highly political appointments to technocratic posts and has initiated the contract review process.

Another example of his pragmatism is the continuation of the program of contract termination (PCC) in the natural gas sector which was launched in 2016 to promote entry of new players in distribution. Under the initiative, Pemex will cede transport contracts to new players up to 70% of the total volume of natural gas transported over a period of four years. According to political risk advisors Control Risks, AMLO’s team has not set out major revisions to policy for the downstream natural gas sector most likely because demand for LPG in Mexico is depressed with only 15% of households using it as their main source of energy and instead relying on more polluting sources such as wood.

For now, key investors such as Premier Oil, which holds 25% in Block 7 which includes the world-class Zama discovery made last year, do not appear too worried. “We had meetings with people very close to the top of the AMLO administration. These are sophisticated, clever people. They’re well attuned to the concept of international business and the need for international oil companies to participate in their sector,” remarked Premier’s director of exploration Robin Allan in an earnings call in August. “(i)t’s a political change for sure, but business is carrying on uninterrupted and we don’t foresee any interruption,” according to Allan.

By giving preferential treatment to Pemex and suspending new auctions and tenders, AMLO’s administration will make it harder for Mexico to improve its energy production. In one area at least, the conflict between pragmatism and idealism does not look positive for Mexico.