Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.
The fate of the Mexican energy sector might depend on two upcoming elections. The first will take place in the United States on Nov. 3. The general expectation among those in the gas and electricity industries is that a change in the U.S. presidency may lead to greater attention paid north of the border to Mexico President Andrés Manuel López Obrador’s intrusive energy policy. The second key election is the Mexican midterms on June 6, 2021. Up for grabs is the composition of the lower house, some state governments and various local authorities. Investors believe that an advance by the opposition represents the last and best chance to avoid a counter-reform to undo the energy reform of 2014.
The current Mexican president has the greatest political power of any president of the last four decades. With that power, he is able to de facto reverse the openness and competition in the energy sector that are today written into the law. But he doesn’t follow the rules. He has no qualms about meddling in the daily actions of regulatory bodies in favor of his champions: Petróleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE). He defends his actions, blaming outsiders and the private sector for trying to conquer and ruin Mexico’s proud public entities.
The discourse of the current political elite in Mexico is very similar to what the leaders of the PRI political party said throughout the 20th century in an effort to legitimize their monopoly on power. Nationalism and sovereignty (democracy was soon left behind) were the pillars of defense for the rich Mexican nation that pitifully saw its population impoverished because of the conquest and exploitation by foreigners, particularly at the hands of those favorite villains of popular imagination, Spain and the United States. Anyone who advocated the rule of law was insensitive to the true causes of injustice. Ideas that came from abroad violated the sovereignty of the country and the wise values of Mexican culture.
For the giant unions of oil workers and electricians, there has been no better strategy to achieve their permanent support than to offer them plentiful jobs and state benefits. Local politicians, especially governors of states with oil wealth, have also enjoyed similar economic benefits. In the past, symbiotic relationships between union leaders, Pemex operational managers, and local authorities were quite often the sources of mighty personal fortunes. This scheme left large sectors of the population happy in the southeast and Gulf of Mexico areas.
After 2014, with the energy reform, growth expectations were quickly exceeded by disappointment. At the end of the Peña Nieto administration in 2018, some in the energy sector in Tamaulipas, Veracruz and Tabasco lamented low levels of activity, and poor demand for equipment and services contracts. This drought was related to the decline in Pemex activities. Furthermore, structural change did not seem to have improved this situation. On the contrary, it was made worse. Pemex carried less weight in the energy landscape, and new brands populated the industry; strange, foreign brands with a different corporate culture. It was no longer possible to reach the purchasing area of these companies through relationships with the political apparatus. It is more difficult to secure contracts through friendships or improper payments. The influence peddling so common in the corridors of CFE and Pemex was no longer acceptable. The promise of economic growth did not happen. The unions were unhappy.
The apparent beneficiaries of the energy reform were multinationals, foreign capital, investment funds, the personifications of “neoliberalism.” Thus AMLO’s words echo with important economic groups and unions. These groups will do little to defend a structural change like the energy reform if they do not see immediate gain.
After U.S. legislators sent President Trump a letter making him aware that energy policy in Mexico was harming U.S. business interests, AMLO said that “the only businesses that should matter to us are public businesses. We have to defend Pemex, not private companies.” This position does not mean a loss of votes among his electoral base. The skewed narrative that foreign investment in the energy sector only benefits specific interests reinforces the view that the energy reform was wrong. The notion of the harmfulness of having a monopoly governing the market is lost on the lay citizen.
This brings us to next year’s midterm elections. If AMLO manages to consolidate his majority in the lower house, and at a local level in the states, he can get enough support for an amendment to the constitution. If he does not succeed electorally, the opposition will call into question the personal power of the president, and take him to account for overstepping his bounds. In a strict sense, his energy policy has already violated the law on several fronts. The many legal cases involving CENACE, CRE and SENER are indicative of this. Hence the government’s urgency to simplify the discussion: the energy reform was brought into being by corrupt means, and proof of this is seen in the case of Emilio Lozoya, former CEO of Pemex, who reportedly has admitted to taking bribes.
It’s true that the 2014 energy reform was not a sufficient condition on its own to better the sector. It’s actually necessary to deepen its principles and make effective what is in the law. Open access, competition and the entry of new participants must be accompanied by proper regulation that sets the terms and conditions balancing the interaction between powerful companies and users that have an inelastic demand for energy. Competition comes from the continuous work to regulate and promote investment conditions. It comes from clear and consistent rules – rules that are being broken, causing alarm in Mexico and abroad.
The relationship between Mexico and the United States will lose shine if on one side of the border there is a complex and competitive market and on the other a monopolistic structure headed by two state-owned companies. A bit of analysis and political vision would show that at the root of the migration problem is the lack of productive investment and wellbeing for the majority of Mexicans. Whoever occupies the White House next January should make it clear that in a global environment that is gradually polarizing, it is well worth having an agenda that takes into account its neighbors and business partners. The robustness of the Mexican energy industry is strategic for the tranquility of the American voter, and that can only be achieved if the conditions of openness and competition are deepened. The PRI method of interaction with the United States seen in the 20th century is simply no longer sustainable.
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