Mexico’s Next President Will Pour Billions Into Oil

Lambert here: That’s nice.

By Nick Cunningham, a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. Originally published at OilPrice.com.

Mexico’s national oil company is about to receive an injection of cash.

Incoming President-elect Andres Manuel Lopez Obrador, or AMLO, has promised to invest around 175 billion pesos ($9.4 billion) into the state-owned energy companies. One of the goals is to reverse the decade and a half of declining oil production.

“Fourteen years ago, oil production was 3.4 million barrels a day. Now it’s 1.9 million barrels a day,” AMLO said at a news conference. “In 14 years, we’ve lost 1.5 million barrels a day in production, a downward trend because the oil industry was abandoned.”

The plan is a shaky one, perhaps because when it comes to the specifics, AMLO has only articulated a muddled notion of what he wants to do.

Outgoing President Enrique Pena Nieto ended more than seven decades of state-run monopoly over Mexico’s energy sector, opening up the country to private control and investment from international companies. The bid to partially-privatize the energy sector has led to a series of auctions, dozens of awarded licenses and tens of billions of dollars in commitments from some of the largest oil companies in the world.

AMLO staged fierce opposition to those reforms several years ago as they were implemented. His opposition softened during the presidential campaign, although he still threatened to revisit awarded contracts and/or suspend further auctions, at a minimum.

He has vowed to reverse declining oil production but he has not articulated how that can be achieved. Presumably, he wants that done through state-controlled Pemex, long considered a pillar of national pride.

AMLO’s promise to inject more than $9 billion into state-owned energy companies is likely a signal that that’s the course he wants to take. He also confirmed that he would appoint Rocio Nahle as energy minister, who was his top energy adviser during the campaign. She has favored a nationalist approach to energy policy – she tweeted a message of support for stiff local content rules for energy projects a few months ago.

To run Pemex, AMLO has tapped Octavio Romero Oropeza, an agronomist. Critics point out that he has no experience in energy. During the campaign, AMLO signaled a willingness to work with the private sector and not try to roll back the energy reforms. On the other hand, his personnel choices on energy skew towards the nationalist types. “The team on energy is projecting a different message than the economic and financial team,” Duncan Wood, director of the Mexico Institute at the Wilson Center, told the Washington Post. “The economic and financial teams are projecting openness and saying that Mexico will continue with orthodox policies.”

Yet, it is unlikely that he will try to aggressively roll back the energy reforms enacted during the Pena Nieto administration, not least because they would require a constitutional change. AMLO did shock the country with a resounding victory in the presidential election, plus sweeping wins for his party in both houses of the Congress. The wins exceeded expectations, granting his party, Morena, majorities in both the Senate and the Chamber of Deputies (including coalition support from two other parties). But making changes to the constitution is likely too much of an uphill climb, even after taking into account his impressive victory.

More to the point, because AMLO wants to restore lost oil production, he probably recognizes that the quickest and cheapest way to do that is to allow international companies to do the heavy lifting. The likes of ExxonMobil, Royal Dutch Shell, Eni, Chevron and others are pouring money into offshore Gulf of Mexico. They can probably do more than Pemex can – especially given Pemex’s track record – and at much less expense to public coffers.

Nevertheless, AMLO still has nationalist goals for the energy sector. Only, he has signaled an intent to spend heavily on the downstream sector in an effort to halt the slide in domestic gasoline production. The plan calls for around $2.6 billion to rehabilitate Pemex’s six aging refineries, while also breaking ground on a new refinery in Tabasco that would cost $8.6 billion over three years.

That could mean he leaves the upstream sector alone, or mostly alone, at least. He has still promised to review more than 100 contracts awarded to ensure they are up to snuff. But his camp has sent signals that they wouldn’t do much to interfere with these. “The auctions are going to continue if everything we find is alright,” Alfonso Romo, a business tycoon and top economic adviser to AMLO said in June, according to Reuters. He emphasized that AMLO had personally taken that message to investors. “He said it in New York. Andres Manuel, not Alfonso Romo.”

As a result, the injection of some $4 billion or so into Pemex is aimed at helping the state-owned company revive output. This strategy would seem to work in parallel to the already-awarded contracts to international companies. There is still a lot of uncertainty over what to expect when AMLO takes office later this year, but for now his plan seems to be injecting public money into the energy sector alongside what private industry is already trying to do. But, time will tell.