It has everything to be an energetic powerhouse. Mexico benefits from high levels of solar radiation with photovoltaic panels, a large lithium deposit and the infrastructure to import the world’s cheapest natural gas. But the government’s energy policies, which have stifled renewable energy and restricted private company involvement in the electricity sector, are blurring the weight of Latin America’s second-largest economy.
With Eastern Europe being thrown into uncertainty by the Russian offensive in Ukraine and Asia suffering from the trade war between China and the United States, Latin America is emerging as a more stable option for global investors. Reports from the World Economic Forum, taking place in Davos these days, consistently highlight the desire to switch from fossil fuels to clean sources, and Latin America has important resources to contribute. Colombian President Gustavo Petro, for example, did not hesitate to use his presentation at the forum to invite investors to build an “American” electricity grid powered by renewable energy with “a guaranteed market”.
Talks are taking place, but they don’t include Mexico, a country that for decades was an oil powerhouse with extensive experience in the energy sector. Today, the state-owned Petróleos Mexicanos (Pemex) is one of the most indebted oil companies in the world. Its production has been declining for years, and Mexico became a net importer of oil in 2014. Meanwhile, the Federal Electricity Commission (CFE) has disconnected renewable energy plants from the transmission grid because they are privately owned, which limits power generation. CFE has recently opened up to cooperation with foreign companies and small concessions have slightly revived interest from private individuals, but uncertainty remains.
“Mexico has an historic opportunity and is missing it,” says Francisco Monaldi, director of the Latin American Energy Program at the Baker Institute in Houston. “It’s really incredible that a country that’s one of the hydrocarbon giants in the region, that has tons of advantages in terms of location and human resources, sits next to the United States and could therefore benefit from the development of shale gas, for example.” just not on the investor map, no one talks about Mexico or thinks about Mexico.”
To some extent, this is the intention of the government. López Obrador’s idea of reversing the opening of the energy sector is precisely that state companies have control over the market. The cost will therefore be borne by the Mexicans, as taxes that could be used to pay for infrastructure or education expenses will pay off the oil company’s debt. If the oil company were willing to work with private parties to boost production, it would have greater resources to meet its borrowing obligations. Neither the budget released by the Treasury Department nor that of Pemex this year includes a section on debt service payments, according to Bloomberg agency.
Pemex is not making the investments needed to grow the oil sector, Monaldi points out. “That’s because López Obradors bet on refineries, which has no logic, where there are no profits in the oil sector, and even less in a state-owned company. Historically, all state-owned companies in Latin America have lost money in the refining sector. The misallocation of resources at Pemex also has important consequences.”
Symptoms of the opening in the CFE
For its part, CFE is showing signs of opening up. After CFE complained that the last government had required the company to buy huge amounts of natural gas from the US (today it is the main buyer worldwide), CFE outlined a new plan to build fuel liquefaction plants that would allow it to use it to sell to Europe. To achieve this, he signed contracts with three companies, two American and one Canadian. The idea is to take advantage of the geopolitical situation in which Europe is looking for alternatives to Russian natural gas.
But efforts to oust private companies from the sector continue as the US and Canada started an official row under the TMEC Free Trade Agreement. For the US, the most important trading partner, the blockade of renewable energies is the most annoying issue. Meanwhile, Mexico’s major lithium deposit, which could play a major role in the electrification of many technologies, is in legislative limbo.
Even if the next government, which takes office late next year, wanted to reverse López Obrador’s strategy, it will be difficult to attract the investment the country needs to recover its energy sector, Monaldi says. “There is already reputational damage,” explains the academic and international advisor.
“This is a sector where investors are more cautious once the rules of the game for investors have changed or they have reversed private sector ownership policies. You have to give them more guarantees, more conditions, and you see the difference, for example, in the continuity of politics in Brazil, which is perhaps the most impressive case compared to Mexico,” says Monaldi. In the South American country, the region’s largest economy, there has been continuity in the rules of the sector despite intense political polarization that has led to a change of government.
López Obrador has also weakened the regulatory framework, streamlining and disqualifying the sector’s regulators. In recent discussions with investors in Mexico, Monaldi shares that this is one of the frustrations they express. “What they’re saying is that one of the fundamental problems is that they don’t have a person to talk to because all of Mexico’s energy technocracy is gone,” he says.
As the energy transition progresses, oil will continue to be needed and production forecasts for the next 15 years suggest it will increase in Latin America, driven primarily by Brazil and Guyana and secondarily by Argentina and Venezuela. “Mexico doesn’t show up there,” says Monaldi. “How incredible that these two countries come out, Argentina and Venezuela, which are completely dysfunctional. In the case of Venezuela, it’s a country that couldn’t be managed any worse, but they’re trying to attract foreign investment,” says the scholar, “at least they’re trying.”
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