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Balance in Mexico's Energy Sector Now Rests with Next Government

By Arturo Carranza Guereca - Akza Advisory

Project Manager Energy

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The die is cast for this government. At least in terms of energy matters, little can be expected in the final stretch of Andrés Manuel López Obrador's administration.

Let's remember that the current president seized power using as one of his political banners the "rescue" of Mexico’s energy sector. In practice, this slogan translated into the displacement — through legal, regulatory, and political means — of the private sector from those activities that encompass the hydrocarbon and electricity industries.

It didn't take long for private companies to realize that in this historic stage, led by the so-called Fourth Transformation, government action would be decisively oriented toward favoring PEMEX and CFE. What these two public energy companies hadn't gained in the markets, they would soon obtain through administrative acts.

Thanks to the Energy Ministry (SENER), the national oil company would gradually and progressively regain its market share in the fuel sector. The same would be done by the state-owned electric utility, which with legal loopholes approved by the López Obrador administration would expand its energy sales in the domestic market.

In the last five years there were issues that, even with government support, public energy companies couldn't overcome. Despite the strong will of energy authorities, for example, PEMEX couldn't remedy the deep deterioration of the National Refining System. The processing and production of petroleum products fell significantly short of the goals set by President López Obrador.

CFE also fell short in very specific goals. The 2019 confrontation with the private sector over gas pipelines created a negative image for this utility, which has proven difficult to reverse. The implementation of a new mechanism to bid for the construction of a dozen combined-cycle power plants also raised doubts about CFE and the viability of these important projects. The result of this hazy business environment translates into five years where not much has happened in terms of new energy infrastructure deployment.

It is well known that the much-vaunted "rescue" of Mexico’s energy sector strained the government's relationship not only with domestic but also with foreign companies. Much of this tension is explained by the legislative barrages that the government carried out.

To support CFE, the López Obrador administration presented in February 2021 a legislative reform that would prioritize power dispatch from the state-owned utility. Faced with the discontent of the private sector, which expressed its opposition through legal protections, President López Obrador presented a proposal to amend the Constitution for the same purpose in October of that same year. The implementation of this reform is currently on hold due to the legal defense of private companies, who appear to have legal grounds on their side.

As far as strengthening PEMEX is concerned, in March 2021, the government proposed amending the Hydrocarbons Law so that the national oil company could have control over distribution, imports, and fuel sales. Just like what happened with the legislative barrage in the electric sector, private companies filed legal protections to defend their interests, which are pending resolution before the changes to this legislation can take effect.

Tensions with domestic and foreign companies escalated rapidly and turned into issues between governments. At the end of 2022, the United States and Canada, both strategic trade partners to Mexico, called for consultations within the mechanisms established by the USMCA to address the differences that the Mexican government's actions in the energy sector have created.

As of today, from a realistic perspective, it can be observed that the room for maneuvering to efficiently resolve the energy dispute is narrowing. The political-electoral dynamics in Mexico work against any good intentions. The dogmatism with which the current energy policy is carried out also affects any solution.

Under such conditions, it must be understood that a return to the precepts of the USMCA, as a starting point to address the profound differences prevailing in the Mexican energy sector, will depend on the next government. In this regard and considering the way pieces are moving on the political chessboard, such a possibility will depend on a woman.

For that reason, the candidates would do well to incorporate concepts in their campaign speeches that prove a deep understanding of the energy sector and how problems with private companies and trade partners should be resolved. It's very important to address the "what" and the "how."

Certainly, it wouldn't be surprising if both female contenders decide to engage in complaints and rigid positions, like those that don't allow for nuances. In a context of social polarization, which currently prevails in Mexico, it's easy to succumb to the temptation of proposing exclusionary solutions.

The truth is that to efficiently resolve the differences in Mexico’s energy sector, there should be no room for binary thinking. Dilemmas like "fossil fuels versus renewable energy" and concepts like "less PEMEX and more private investment" are part of an exclusionary and outdated narrative.

On the contrary, what is needed are proposals that address key aspects of a new energy paradigm. Green hydrogen, energy storage systems, and high-voltage direct current electric power transmission systems are key points in an innovative model. The same applies for carbon capture and electromobility.

Addressing these ideas would mean ending the profound differences in energy matters. These concepts propose, per se, solutions. But not only that: the most important aspect is that it would mean moving, as a country, in the right direction.