In Nov. 2013, just weeks before Mexico’s historic energy opening was signed into law, two-time presidential candidate Andrés Manuel López Obrador sent an open letter to the CEO of ExxonMobil, Rex Tillerson “informing” the executive that Mexico’s oil belonged to its people. López Obrador urged Tillerson to measure the costs of investing in Mexico should the reform ultimately be approved, writing that it would be “like buying merchandise without a receipt.”
On Dec. 5, Tillerson went shopping anyway. After three earlier auctions of oil and gas blocks that drew interest primarily from small and mid-sized producers, several of the oil industry’s “supermajors” joined the party on Monday in a highly anticipated auction of licenses on 10 deepwater blocks in the Gulf of Mexico. ExxonMobil, in consortium with French producer Total, submitted a winning bid alongside the likes of Chevron, Statoil and BP. In all, eight of 10 available blocks – plus a joint venture opportunity with Mexico’s state-oil giant Pemex – received qualifying offers.
“The result was great for Mexico,” said Jason Fargo, Latin America Team Leader at Energy Intelligence, a publisher of energy news and analysis. “In many ways it cements the fact that they are now a serious player in the oil sector.” Energy Secretary Pedro Joaquín Coldwell told reporters after the event that he expected the contracts offered Monday to bring in around $41 billion in investment and create 450,000 new long-term jobs.
But whether the world’s 12th-largest oil producer ends up enjoying those benefits will depend on more than just whether companies like ExxonMobil find the oil they’re expecting in the Gulf. General elections in 2018 mean that a new president will take office in Mexico well before the exploratory contracts awarded on Monday turn into productive oil and gas wells. And following the election of Donald Trump to the U.S. presidency in November, many experts believe that Mexico’s own populist champion, López Obrador, could be next in line (he is near or at the top of early polls).
That could have a significant effect on the future direction of Mexico’s energy sector. While the results of the auction were widely viewed as a validation of Peña Nieto’s efforts to revitalize Mexico’s oil and gas industry, a big part of his success thus far has come thanks to the administration’s willingness to stimulate the type of investment that López Obrador warns against. After the perceived failure of an earlier auction in 2015, for example, Mexican officials – with plenty of industry input – made changes to bidding rules that clarified offer requirements and provided more favorable tax terms on oil and gas concessions.
That willingness to solicit and react to investor concerns fits a pattern across other aspects of the country’s energy opening; one renewable energy executive told AQ that government officials were “impressively responsive” to private sector suggestions on improvements to draft rules for a power production auction held by the country’s electricity utility in September.
But this suddenly friendly environment for international energy investors isn’t shatterproof, and López Obrador hasn’t softened his stance against the reforms since sending his letter to Tillerson and other industry executives.
Although the constitutional changes that enabled reforms to proceed in 2013 would be nearly impossible to overturn, the next Mexican administration could alter the course of the opening through other means, according to Duncan Wood, director of the Woodrow Wilson Center’s Mexico Institute.
“You can’t reverse the reform, but you can put obstacles in the way of its effective implementation, from changing the fiscal regime to being less communicative with investors to offering less competitive terms in future bidding rounds,” Wood told AQ. “You make the investment climate less friendly to investors, and then they’ll stop coming.”
And despite praise from developers and industry analysts, Peña Nieto’s energy reform remains unpopular among the general public. In a Buendía and Laredo poll conducted in November, 12 percent of respondents thought the country’s structural reforms – which also include changes in education, telecommunications, tax and labor laws – were “the worst thing” the president had done during his tenure, more than for any other perceived mistake. Increasing gas prices and ending the Pemex oil monopoly were the 4th and 5th most common answers, respectively. Similar polls suggest that the energy reform is among the least popular of those enacted by the administration.
The unpopularity of the energy reform isn’t likely to be enough to swing the election on its own, said Wood, but a candidate like López Obrador could use it to whip up support.
Part of the reason for this may be due to the current state of the heavily-indebted Pemex, which despite Monday’s positive bid for a “farmout” service contract in the Trión oil field has struggled to adapt to the new energy environment. Though he cited new leadership at the company as having started to turn things around, Wood told AQ that evolution at Pemex had been slow in coming.
“During the first four years of this administration, the leadership at Pemex failed to achieve any significant advance either in corporate governance … in eliminating corruption from the company or, most importantly at the current time, in increasing production,” said Wood. “And you have to remember that a lot of people in Mexico either work at Pemex or have a family member or friend who works or has worked at Pemex. It really is a national symbol.”
Though the energy reform was intended to revitalize the company partly by allowing it to shed unproductive assets and focus on areas that favored its strengths, Pemex’s own projected production average of less than 2 million barrels of oil per day next year – from a peak of 3.4 million barrels per day in 2004 – highlights the extent of the firm’s decline.
The unpopularity of Peña Nieto’s energy reform may also be partly of the government’s own making, according to Juan E. Pardinas of the Instituto Mexicano para la Competitividad (IMCO), a think-tank based in Mexico City. He told AQ that many of the promises the government made while selling the reforms to the public were unrealistic.
“You can’t commit to the price of a product that is dependent on global markets,” Pardinas said, referring to government suggestions that gas and electricity prices would drop as a result of the reform. “Not only does nobody control it, nobody can even predict it with real certainty.”
Indeed, one of the five stated “concrete benefits to the Mexican people” of the reform package was the promise of lower electricity prices for all consumers. But just last week, CFE, the state-owned energy utility, announced a sixth straight month of price increases for industrial users, muddying perceptions even as some businesses and individuals have seen occasional drops in their electric bills in recent months. Other metrics for success – from the immediate creation of new jobs to a bump in long-term GDP growth – were similarly out of reach or difficult to prove.
And, of course, the messenger matters. According to the Buendía and Laredo poll, President Peña Nieto is now facing the lowest approval ratings of his administration, due in part to recurring conflict of interest charges, deteriorating security and an ill-fated visit from then-candidate Trump in August. The administration’s response to controversy has confirmed many Mexicans’ worst fears of what a return to power of Peña Nieto’s PRI, which dominated Mexican politics for the better part of the last century, might look like – and has tainted perceptions of his reform agenda.
“The great challenge of the energy reform is to rescue it from the loss of credibility of President Peña Nieto,” said Pardinas, “to make sure that feelings toward the government don’t contaminate the strides it made during those first 18 months.”
All this means that one of the bright spots of Peña Nieto’s tenure risks unwarranted ridicule, or worse; if voters in 2018 show their dissatisfaction with the administration by sending a candidate such as López Obrador to Los Pinos, Mexico’s new energy paradigm itself could be in jeopardy.
After a scandal-ridden first four years in office – years that include the still-unresolved disappearance of 43 students in 2014 – Enrique Peña Nieto’s refrain that “people barely ever talk about the good things” is tone deaf at best. But when it comes to energy reform, the president may have a point.
Russell is an editor for AQ.
Tags: Mexico, oil and gas, Pemex