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Constitutional Reform Unlikely in 2022, but Mexico Energy Sector Risk Still High, Analysts Say
(Editor’s Note: This story is one in a series providing expert forecasts for the global natural gas and oil markets in 2022. Look for NGI’s extensive coverage of what happened in 2021 and what can be expected in 2022 and beyond in terms of prices, the LNG export markets, ESG, Mexico’s production and project prospects, North American midstream infrastructure plans and exploration and production strategies.)
For this upcoming year, Mexico President Andrés Manuel López Obrador’s proposed constitutional energy reform – whether it gets enough votes to pass or not – will set the tone of his political agenda, according to analysts and experts in the field.
The vote is set to take place early in the year. The reform, if passed, would modify the constitution to eliminate upstream oil and gas regulator Comisión Nacional de Hidrocarburos (CNH). It also would eliminate midstream, downstream and electricity regulator Comisión Reguladora de Energía (CRE). Independent power grid operator Centro Nacional del Control de Energía (CENACE) would be absorbed by state-owned power company Comisión Federal de Electricidad (CFE), while CFE would win a mandate to supply 54% of electricity generated in the country.
For the reform proposal to pass, López Obrador’s Morena party would need to pick up 53 votes from opposition legislators in the lower house, and at least 10 in the Senate. The Partido Revolucionario Institucional (PRI) party is central to this. The PRI controls 71 seats in the 500-person lower house and 13 seats in the 100-person Senate.
“Our assumption is that the incentives for the PRI party, which had been showing some willingness to go along with the government, are not really going to be there,” Eurasia Group analyst Carlos Petersen told NGI’s Mexico GPI. “The PRI would have to decide to turn its back on its most important ally, which is the private sector. And then there is no guarantee that helping Morena would lead to anything.”
Although the likelihood of its passing is “very low,” the private sector “is fearful that if López Obrador doesn’t get a win, this issue will remain a high risk for the energy sector,” Petersen added.
Gadex consultant Eduardo Prud’homme agrees that the reform likely won’t go through. He said this would then lead the president to modify his proposal. “It’s important that all the people working in the energy sector know that it’s going to be a fundamental part of the political environment this year,” he said.
“It’s a very important piece for the direction of the president’s narrative,” Prud’homme said, adding it has “a very big weight in his political decision making. He’s stubborn. He wants some kind of reform. It will come at some price.”
For 2022, this adds an extra layer of uncertainty in the energy sector, according to energy sector lawyer David Enríquez.
“The uncertainty lies in how the proposal might be modified in order to gain approval,” he told NGI’s Mexico GPI. “What I think is going to happen is that it isn’t going to be a black and white issue, and I think modifications will be made to the constitutional reform proposal. But I think those modifications, instead of adding certainty to the proposal, will do the exact opposite. I think that what the government is looking to do is a strategy of divide and conquer, in that instead of having one large battle or debate, they will seek small victories and try to convince some senators to reconsider their position.”
Going into the second half of the López Obrador presidency, the president is clearly adamant on modifying the energy sector so that Petróleos Mexicanos (Pemex) and CFE become the dominant forces in the energy sector. He wants to continue to centralize power and weaken autonomous regulators.
He is also going to throw his capital behind finishing major infrastructure projects.
“The government will be extremely focused on finalizing everything that the president launched,” Petersen said. “The government will increasingly have some sort of tunnel vision working on those projects.”
Principal among these projects is the 340,000 b/d Dos Bocas refinery set for the president’s home state of Tabasco. Despite the government’s efforts, the Baker Institute for Public Policy’s Tony Payan thinks the project might not get done in time.
“They are working 24-7, but they are way behind schedule and way over budget,” Payan told NGI’s Mexico GPI. “But he wants to turn on the switch and be the one to do it.”
Payan said that, “if you look at the priorities as set out in the 2022 budget, everything is getting cut in the budget. Education, health care. So where is the money going? The president is looking at the clock, and he’s saying hey, my time is running out. My projects need to be finished. The president has put his entire legacy not on a change in economic regime… the entire legacy is in three major infrastructure projects which he thinks will bring economic progress to the south.”
Beyond Dos Bocas is the Isthmus of Tehuantepec infrastructure project which would link the deepwater ports of Coatzacoalcos and Salina Cruz on either side of the 77-mile isthmus. It also would include a natural gas pipeline, 10 industrial centers and a liquefied natural gas (LNG) export facility proposed for Salina Cruz.
Payan said the project is “the most promising but least important, and it needs a lot more investment, and private investment. The cash just isn’t there.”
The third project is the $10 billion Maya Train, which would traverse the states of Tabasco, Chiapas, Campeche, Quintana Roo and Yucatán in southeast Mexico. It is slated to be completed in 2024, López Obrador’s final year in office.
Looking ahead to the presidential elections in 2024, the frontrunners include Mexico City mayor Claudia Sheinbaum, foreign secretary Marcelo Ebrard and Senator Ricardo Monreal. They are all part of the president’s Morena party.
Analysts rule out the possibility that López Obrador – who has maintained approval ratings above 60% throughout his presidency – would try to change the constitution to run again.
The president is “obsessed with history,” and wouldn’t try to become like 19th Century autocrat Porfirio Díaz, who didn’t relinquish power, Petersen said. “He wants to finish his term as one of the most popular presidents Mexico has had.”
He added, “There are no real opposition figures to oppose him.”
In recent polling, Sheinbaum looks best positioned to succeed López Obrador in 2024. Payan said she “seems to be a carbon copy of the president.”
But, Payan said, “We shouldn’t discard the ability of the three main opposition parties to come up with a unified candidate to mount a very good run.”
He added that the Morena party lost around 10 million votes in last year’s midterm election compared to the prior three years. “The reality is in many of the governships, Morena barely squeezed through in the midterms. The presidential election is still very much up in the air.”
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