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Anxiety north of the border as López Obrador set to assume Mexico’s presidency

MEXICO CITY — Mexico in less than two weeks will inaugurate a new president, a leftist and populist elected on promises of restoring national pride and shaking up the status quo and representing a potentially radical shift in Mexican politics. It’s a new era with broad implications for Texas businesses and the economy.

Mexico is by far the state’s biggest trading partner and foreign market, accounting for more than one-third — 37 percent — of Texas exports, according to the U.S. Commerce Department. Andrés Manuel López Obrador, known as AMLO, and his party swept the elections held this summer, gaining a decisive majority in Congress while creating anxiety across the border about whether market reforms put in place by his by his predecessor, Enrique Peña Nieto, will unravel and the national government will resume a larger role in the Mexican economy.

The litmus test is likely how López Obrador approaches the overhaul of the country’s energy sector, which was controlled by the state for 75 years. Constitutional changes ended the monopoly of the state-owned oil company, Petróleos Mexicanos, or Pemex, and opened oil and fuel markets to foreign investment competition in 2014. Those reforms became controversial when gasoline prices rose sharply, spurring rioting early last year.

López Obrador has signaled that he does not plan to undo Peña Nieto’s energy market reforms, which have attracted billions of dollars in investment into developing new oil fields, building fuel storage and distribution facilities and constructing new pipelines to transport refined petroleum products and natural gas. But his proposals since winning the election, such as building new Pemex refineries to reduce fuel imports, has raised concerns among refiners and oil companies across the border.

As part of fulfilling his pledge to root out corruption, López Obrador has said he plans to review the several auctions in the last three years that awarded 90 blocks, peppered throughout the country and Gulf of Mexico too private operators, raising over $150 billion in commitments for new investment. It’s a veritable who’s who of energy companies, including Royal Dutch Shell, ExxonMobil and Chevron.

Some of these companies have expressed concern that additional rounds of bidding may not take place under the new administration, even though the reforms made under Pena Nieto envisioned further auctions down the road.

Analysts, however, say the López Obrador may have no choice but to advance the energy reforms and work with foreign companies and investors. Three-quarters of a century of monopoly control left Pemex ossified and inefficient, unable to make the investments needed to modernize the nation’s oil industry, where production has fallen for years, and develop the technical know-how to reverse the trend.

A lack of refining capacity, in part due to failures to maintain the refineries, has required Mexico to import increasing amounts of gasoline in recent years. More than half of the 800,000 barrels of day exported by the United States in 2017 went to Mexico, much of it from Gulf Coast refineries, according to the U.S. Energy Department. López Obrador has pledged to bring an end to fuel imports within three years, but that will require massive investment in upgrading old refineries and building new ones.

“Either you face the music and realize you have no choice other than to move forward with the reform,” said Michelle Michot Foss, an energy fellow at the Baker Institute for Public Policy at Rice University. “Or, if you are going to roll back and make Pemex great again, you have to be prepared to give the company independence and budget to do it.”

Investors also are watching the power sector, where investment rules that limited foreign companies were lifted in 2014. Three public auctions for new power generation projects have taken place in the last four years, raising a $9 billion in promised investment for new solar and wind power plants. It’s a sector that Mexico’s national power company, the Federal Commission for Electricity, or CFE, has historically dominated.

The path for attracting private investment has involved dismantling CFE’s monopoly position and trying to develop a competitive power market similar to that in Texas. It’s another area where López Obrador has been vague, indicating that he wants CFE to increase power production. but not necessarily at the expense of foreign investment.

More wind and solar projects are needed to meet the country’s growing electricity demand and a national goal of generating 35 percent of power from renewables by 2024 and 50 percent by 2050. That will require billions in foreign investment, said Robert Downing, an attorney with Greenberg Traurig specializing in Latin American energy deals.

“People are looking to see what happens over the next two months in the transition after December,” Downing said. “Some clients have a ‘wait and see’ attitude, while others say, ‘We believe that Mexico is an attractive market for energy investment and we want to proceed’.”

 

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