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News Article

Energy Reform, Uncertainty Are Damaging Investment in Mexico

By Antonio Gozain | Thu, 03/10/2022 - 14:04

Whereas the future of the energy reform proposed by President Andrés Manuel López Obrador is still unknown, the legal uncertainty it caused is already damaging investment, as well as the country’s competitiveness, agreed industry experts. The future of the country is at stake and all voices must be heard to pass the reform with the necessary changes, a process that must be resolved promptly, they added.

“The future of the electricity market itself is not the most important for Mexico. What is at stake is the country’s competitiveness. Electricity costs influence how competitive a country is in all industries, which directly impacts employment rates. The worst part is the uncertainty. Companies that have already invested in energy will begin their legal fight. However, there will be no new investments under this uncertainty,” said Alfredo Álvarez, Partner and Energy Segment Leader, EY.

In 2014, articles 25, 27 and 28 of the Mexican Constitution were reformed under former president Enrique Peña Nieto’s Energy Reform, explained Claudio Rodríguez, Partner, Holland & Knight. “This was a significant shift. It was the first time that political consensus was reached across the board. The wholesale electricity market (WEM) was established and grid operator CENACE, which already existed, became an autonomous organization.”

The 2014 Energy Reform provided Mexico with a historic opportunity to revitalize its energy sector and bolster the overall economy, wrote Goldman Sachs. The country’s vast oil resources, including offshore and unconventional fields, were opened to international companies without privatizing state-owned assets. In the electricity sector, the existing transmission and distribution infrastructure remained in CFE’s hands. However, the reform fostered private sector participation in the other parts of the WEM.

Since President López Obrador’s administration began in 2018, uncertainty arose in the energy, oil and gas sectors because of the president’s far-reaching campaign promises to rescue PEMEX and CFE at the cost of further private participation. By the end of 2021, López Obrador had sent an initiative to Mexico’s Congress to reform articles 25, 27 and 28. This reform was originally known as the electricity reform since its main intention is to create greater state control over the electrical sector, eliminating competition to favor CFE. If passed to the letter, the reform could seriously harm the country’s development, the experts agreed.

Although the reform was originally thought to be focused on electricity, the oil and gas industry is also implicated, as it proposes the elimination of the Energy Regulatory Commission (CRE) and the National Hydrocarbons Commission (CNH). These independent regulators have the autonomy to foster a fair competition between state-owned and private companies in the market.

“In the oil and gas sector, suppressing CNH and handing over its functions to the Ministry of Energy would be a step backwards. The 2014 Energy Reform achieved a lot, boosted by an open vision regarding competition and how to attract local and foreign investment,” said Javier Mundo, Development Director and Energy Specialist, KPMG.

CNH played a central role in the organization of the bidding rounds through which new operators have entered Mexico’s upstream oil and gas environment, as reported by MBN. It also generated significant revenue for the state by commercializing all available Mexican hydrocarbons data to these new operators. Through the creation of CNH, the Mexican government retains ownership over all data pertaining to oil and gas resources. All operators must report the results of their exploration campaigns to CNH by law. Since the commission is widely respected as a fair caretaker, operators were usually willing to hand over this valuable information. 

The country faces three scenarios regarding the new reform’s approval, said Rodríguez. It can be rejected, which is “very unlikely,” approved verbatim, or approved “with substantial changes,” as the most probable scenario.

Regardless of what scenario ensues, the challenge comes with its implementation, said Jorge Pedroza, Director of Energy, PwC. “Following the 2014 Energy Reform, it was a challenge to translate this written law to the real-life operations of companies. Whatever the outcome, the real point is to see how the resulting document’s tenets will materialize in the sector.” Although the 2014 Energy Reform provided legal certainty on several fronts, many others remained pending. Some issues were solved and others forgotten, recognized Pedroza. Companies must be prepared to deal with these risks and resort to legal action, he added. “Out of their own conviction and business culture, companies will always respect what the law says. However, companies are entitled to defend their businesses,” Pedroza said.

For Mexico, the most beneficial outcome is that the reform is passed as soon as possible, whatever the outcome may be, said Álvarez. “No one is investing because there are no clear rules in the sector. Even if there were, the government does not comply and tries to push secondary regulations. No matter if the new reform’s rules are downright bad or unfair, there will still be investment in Mexico. We will not have the world’s best energy prices, but there will always be investment when the rules are clear even if they are not evenhanded,” he emphasized.    

Pathways for Mexico's Energy Sector Development

None of the possible scenarios would be actively catastrophic, argued Valeria Vázquez, Energy Segment Leader, Deloitte. Energy sectors across the world, from hydrocarbons to electricity, are highly-regulated industries. Countries have the sovereign mandate to regulate their natural resources, she added. “The problem is not that companies are regulated, it is legal uncertainty and sudden rules changes,” concluded Vázquez.

All stakeholders must carry out efforts to foster an efficient electricity sector for the overall good of Mexico, said Vázquez: “We need to continue developing our oil and gas industry, to take optimal advantage of our natural resources.”

International implications play a key role in the future of Mexico’s energy sector and the economy in general, said Benjamín Torres-Barrón, Principal, Baker McKenzie, who explained that regardless the outcome of López Obrador’s reform, “the damage has been already done, due to the message it sent and the uncertainty it created.” Beyond Mexico’s international sustainability commitments, the USMCA has already been enforced. The agreement has mechanisms to protect US company investments in Mexico, he added.

To address the reform and create a dialogue between diverse players, the Open Parliament forums were created. It included the private sector’s insight through the participation of associations such as CCE, CONCAMIN, CANACINTRA and COPARMEX. On Feb. 28, the parliament ended following 42 days of discussions, 25 open forums and presentations of 135 expert panelists. Congress remains divided on the reform’s approval, reported MBN. While discussions surrounding the new reform will continue during the following weeks, it is crucial for Mexico that it passes promptly. However, it should pass with as many amendments as possible to reestablish trust in the sector, so that it can continue attracting investment.

Antonio Gozain Antonio Gozain Journalist and Industry Analyst