Regulatory Uncertainty Blocks FDI in Energy SectorBy María José Goytia | Wed, 02/23/2022 - 16:44
The potential new energy reform has negatively impacted FDI in the Mexican energy sector. Meanwhile, the Senate has begun to negotiate drafts that may dilute this reform so that it stands a higher chance of being approved by Congress. In other news, the crisis in Ukraine threatens to rise energy prices and jeopardize energy security in Europe.
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MORENA senators are drafting potential changes to López Obrador’s energy reform, which would dilute the original proposal to evade complaints from commercial partners and arbitration under USMCA, say analysts. The reform is still being discussed in Congress and has been cause for concern among US stakeholders during the Open Parliament discussions.
The boost to fossil fuel-fired power production and the strengthening of state companies like CFE and PEMEX are driving away renewable energy investments, as well as jeopardizing Mexico’s commitment to an energy transition aimed at reducing carbon emissions by 35 percent in 2024, says the Global Wind Energy Council.
Investment in the Mexican electricity sector has plummeted. According to 2021 FDI data published by the Ministry of Economy, the industry managed to capture just 1.4 percent of the total FDI, equivalent to US$452 million. This figure is the lowest since 2011 and represents a steep drop from the 2018 record of US$5 billion, captured during the last year of President Enrique Peña Nieto's administration. The lack of investment in the electricity sector is directly related to the regulatory uncertainty caused by President López Obrador's efforts to reform the energy sector, reports Forbes.
Patrick Ottensmeyer, CEO, Kansas City Southern, said the Mexican government's actions remain a significant concern for the company’s current and potential clients in the energy sector and are delaying business decisions. Ottensmeyer emphasized the palpable anxiety regarding Mexico's energy policy and that the US business community is indeed putting pressure on US legislators and the Biden administration to tackle this uncertainty in an interview with Forbes.
Monterra Energy announced its intention to sue Mexico for US$667 million to compensate the damages caused by the closure of its fuel storage terminal in Tuxpan, Veracruz. The facility was closed on Sept. 14 by order of the Energy Regulatory Commission (CRE). In addition to the financial settlement that Mexico may be forced to pay, analysts fear the damage caused to the country's reputation as an unsafe destination for foreign capital could be immense, reported WSJ.
Mexico’s gas flaring has dramatically increased under the López Obrador administration. The volume of gas flared soared by 50 percent, from 137.7Bcf in 2018 to 204.6Bcf in 2020, putting Mexico among the world's Top 10 flaring countries. Despite signing international commitments to reduce methane emissions and fight climate change, experts point out that Mexico’s energy policy is moving in the opposite direction of the global green energy transition.
Rising energy prices and the conflict between Russia and Ukraine are forcing Europe to reflect on its energy security, especially regarding its decades-long dependence on Russian natural gas. The outbreak of war threatens to disrupt pipeline flows coming from Russia. Gas reserves in the EU are low, so the continent focuses on obtaining liquefied natural gas (LNG) by ship from the US, Qatar, Algeria and other regions until renewables can meet energy demand.