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article imageMexico's 'AMLO' should learn to love energy reform: analysts

By Jean Luis ARCE, Yussel GONZALEZ (AFP)     Jul 19, 2018 in Politics

Mexican President-elect Andres Manuel Lopez Obrador has been a harsh critic of the landmark energy reform that privatized the country's oil sector, but the anti-establishment leftist will need it more than he realizes, analysts say.

Lopez Obrador, who won a landslide victory in Mexico's July 1 elections, is famous for bashing the 2014 reform, which ended a 76-year monopoly by state oil company Pemex and reopened the sector to private companies.

He once called the reform, one of outgoing President Enrique Pena Nieto's proudest achievements, an act of "treason" comparable to the agreement to fork over half Mexico's territory to the United States after the Mexican-American War in 1848.

The new president is nostalgic for the days when Mexico was the world's largest oil exporter a century ago, and the nationalization of the sector in 1938 -- an event still glorified with monuments and annual celebrations.

But he will need the private investment he was so fond of criticizing on the campaign trail if he wants to fulfill his promises to restore the ailing Pemex to its glory days and make Mexico self-sufficient in gasoline for the first time in years, according to energy experts.

Pemex was long seen as a cash cow by the Mexican government, which depended on the company's revenues for more than a third of its budget.

Weighed down by heavy taxes and unable to invest enough in production, the firm has struggled with declining production for years -- from a peak of 3.4 million barrels per day in 2004 to around two million this year.

Mexico has meanwhile fallen to 15th place on the list of world oil exporters.

One of the energy reform's main goals was to give Pemex a shot in the arm, by forcing it to face private competition, and also allowing it to strike lucrative deals with private partners.

"This is a job that Pemex can't do alone. It's a job that's going to require help from the private sector," said Ixchel Castro, an analyst at the consulting firm Wood Mackenzie.

- Auctions halted -

The reform threw open the door to foreign firms like Shell, Total, BP, Chevron and Exxon-Mobil, which have all bid for Mexican oil and gas fields in a new auction process that has raised more than $150 billion in investment commitments.

So far, the government has held 14 auctions, attracting 75 companies from 20 countries and signing more than 100 contracts.

Lopez Obrador, who takes office on December 1, wants to halt the auctions while his government reviews all the contracts for evidence of corruption.

That is giving foreign investors the jitters.

But many analysts agree the auctions are likely to resume, even if Lopez Obrador has to do it through clenched teeth.

After all, they will help raise the cash he needs to achieve other campaign promises, such as building new Pemex refineries so Mexico can stop importing US gasoline.

"If they decide to do that alone, without help from the private sector, obviously the pressure it will put on the government's finances will be much greater," said Castro.

- Uncertainty is expensive -

In the meantime, the uncertainty could be costly, as other oil producing countries compete to seduce investors.

"Investors are looking for a system, for political and institutional stability that remains in place even when there is a change in government," said Javier Diaz, an analyst at S&P Global Platts.

Mexico's National Hydrocarbons Commission (CNH) announced Wednesday it was postponing all three of its currently scheduled auctions until February 14, after Lopez Obrador takes office.

The move was aimed at giving it time to discuss the process with the incoming administration and also to drum up more interest from oil companies, it said.

"This was likely caused by the limited interest of oil companies to participate in a tender right before the new government takes office or because of some kind of agreement between the current and incoming administration to stop the process from moving forward during this transition period," said the consulting firm Eurasia Group.

"The prospects of a deterioration in the sector are already starting to have a negative impact."

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