Editor’s Note: This is one of a 14-piece series NGI undertook as the energy industry readied for the new year, with Lower 48 natural gas and oil supply continuing to surge in an uncertain environment as liquefied natural gas exports ramp up, Mexico markets remain shrouded and stakeholders demand more value. Get your complimentary copy of NGI’s 2020 Special Report today.
On Sunday, exactly one year after taking office, Mexican President Andrés Manuel López Obrador told a packed Zocalo square in Mexico City that he had fulfilled 89 of his 100 campaign promises and said by next year at this time everything would be in place to construct “a new country.”
Mexicans remain optimistic about their president, with his approval ratings, while down slightly from his first few months in office, still strong and stable at 65-70%. However, analysts said there are various difficulties facing the country that were not present when he came into office.
What has the presidency of López Obrador meant for Mexico, in particular in the energy sector?
The indefatigable López Obrador, who holds an early morning, hours-long press conference each day, came to power vowing to completely transform Mexico, including its recently opened energy sector. He has, by and large, followed through on his word.
In his 12 months in office, he has canceled upstream oil and gas rounds and farmout tenders; postponed electricity auctions; slashed the budgets of energy sector regulators that he feels have unfairly favored nonstate entities; renegotiated natural gas contracts with developers; and injected fresh capital into the state oil company Petróleos Mexicanos (Pemex), vowing to rebuild the oil giant that he alleged previous administrations had destroyed.
López Obrador hails from the oil state of Tabasco and claims Lázaro Cardenas, who nationalized Mexican oil and created Pemex in 1938, as his role model. He was careful to highlight what he perceived as energy sector gains in his one-year anniversary speech.
“It’s an honor to inform you that for the first time in 14 years, we stopped the progressive drop in oil production,” he told thousands of supporters on Sunday.
He also proclaimed that fuel theft has declined by 94% in one year, and said the natural gas contract renegotiations which he presided over would prove fundamental to Mexican power production and economic development over the next 20 years. He also praised the construction of a new refinery called Dos Bocas that he had promised for his home state.
Meanwhile, oil and natural gas projects designed during the previous administration have by and large continued to progress. In September, Mexico’s natural gas pipeline import capacity grew by 40% with the start up of the 2.6 Bcf/d Sur de Texas-Tuxpan pipeline.
The best news of all to industry participants is that the energy reform remains fully intact.
The Bad News
Underneath the surface, however, not all is rosy. Mexico is still producing less oil and gas this year than it did last year. In October, at fields operated solely by Pemex, production was 1.64 million b/d of liquid hydrocarbons and 3.74 Bcf/d of natural gas, down from 1.73 million b/d and 3.8 Bcf/d in October 2018.
Most analyses suggest that hitting the targets the president established for the end of his term in 2024 of 2.6 million b/d crude and 4.91 Bcf/d of natural gas are wildly unrealistic, especially without the help of the private sector. For example, the drilling and production goals at the gas-rich Ixachi field in Veracruz state, a central part of Pemex’s plans, can’t be met as currently set out, according to Welligence Energy Analytics.
The diversion of at least $8 billion to a refinery project in the name of “energy sovereignty” is likewise seen as only further hobbling Pemex, said to be the most indebted oil company on earth. Credit ratings agencies have cited the building of the refinery as a reason behind downgrades to Pemex debt this year.
Many Mexican energy experts suggest the only way Mexico will increase domestic production is through hydraulic fracturing (fracking) its untapped unconventional resources. But in his speech, López Obrador insisted, once again, that his government would not allow the practice.
Moreover, the cancellation of bid rounds and farmouts, along with the message sent to investors from the pipeline squabble that contracts signed during the previous government are contestable, has had tangible impacts in the sector.
Foreign direct investment in the energy sector dropped by 54% in his first year in office, according to think tank México Evalúa. Mexico also dropped six positions in the ranking of best places to invest by consultancy EY.
The economy, meanwhile, has completely flopped. Goldman Sachs economist Alberto Ramos said in a recent note that no growth will be registered in Mexico in 2019, compared to gross domestic product (GDP) growth of 2% last year. López Obrador proclaimed during presidential campaigning that Mexico’s GDP would grow by 4% annually during his administration.
For the first time in decades, the Mexican economy has de-linked from the economic momentum of the United States. Symbolically, the free trade agreement between the United States, Canada and Mexico (USMCA), aka Nafta 2.0, has yet to be signed.
“One word to use in thinking of U.S.-Mexico relations is uncertainty,” former U.S. Ambassador to Mexico Earl Anthony Wayne said Monday in a conference call assessing López Obrador’s first year. “Both governments have done a good job in not getting into large disagreements. But there remains a large degree of uncertainty. Ultimately, it has to come down to a decision in the U.S. House and Speaker [Nancy] Pelosi to bring this to a vote. In some sense, they are very close but it is unclear how close.”
Violence continues to be a problem in Mexico; in fact homicide rates have risen over the past 12 months.
“Violence has not subsided,” said professor Blanca Heredia at Mexico’s Centro de Investigación y Docencia Económicas (CIDE) during the conference call to discuss the president’s first year. “But what is more concerning, is there is no clear security strategy in place. He insists he is tackling the root causes, but it is unclear how this works in practice.”
Heredia was also quick to point out that Mexicans continue to back López Obrador because they believe previous governments failed the country, and when they voted for him they were willing to try something new.
“Mexico had 30 years of governments trying to tackle Mexico’s problems with the same set of solutions. And they worked for some things like macroeconomic indicators and modernizing parts of the economy. But inequality grew and violence was rampant and this is where he comes from. He campaigned against this model of growth and these social arrangements. He was very clear that what he terms ‘neo-liberalism’ would be dismantled so Mexico could address its many problems. So far, we have elements that are positive and some that are not so positive.”