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Mexico Giving “Stay Away” Signal to Investors, Atlantic Council Energy Group Chairman Says (Part 1)
“By pausing the renewable energy auctions and pausing the oil auctions, the president has basically given a ‘stay away’ signal to foreign investment in the energy sector,” David Goldwyn, Chairman of the Atlantic Council Global Energy Center’s Energy Advisory Board, told NGI’s Mexico Gas Price Index.
Recent policy decisions have “really put into question Mexico’s adherence to the rule of law and the integrity of the regulatory system, which raises above-ground risk considerably,” he said.
Goldwyn is president of Goldwyn Global Strategies LLC (GGS), an international energy advisory consultancy and chairman of the Atlantic Council Global Energy Center’s Energy Advisory Board. He is a globally recognized thought leader, educator and policy innovator in energy security and extractive industry transparency. Goldwyn served as the U.S. State Department’s special envoy and coordinator for international energy affairs from 2009 to 2011 and assistant secretary of energy for international affairs (1999-2001), the only person to hold both the US government’s international energy leadership positions.
He holds a B.A. in Government from Georgetown University, an M.A. in Public Affairs from Princeton University Woodrow Wilson School of Public and International Affairs and a J.D. from New York University.
(Part One of Two)
NGI: The electricity law proposal has dominated conversation in the Mexican energy sector in recent weeks. What are your thoughts on the proposal?
Goldwyn: It’s very unfortunate that the benefits of the energy reform passed under Enrique Peña Nieto — increased Mexican energy security, lower energy costs, lower carbon energy and greater private investment – are being reversed. The electricity law is a serious setback.
In terms of context, this law followed a regulatory attempt to roll back the level playing field for renewable energy created by the energy reform. That attempt was rejected by the courts. Now the president is trying a legislative attempt, which the courts have also said seems to have serious questionability in terms of its constitutionality, and so it’s been suspended. The president has said if he fails on the legislative front, that he will — if he wins sufficient support in the midterm elections — try and constitutionally roll back the energy reform.
So, it’s destructive. It’s hard to understand from the outside why Mexico would do this to itself. The solar and wind projects have provided extremely low-cost energy, making manufacturing more attractive, investment more attractive and providing consumers with an important benefit in difficult times. And, if passed, the electricity law would likely raise electricity prices as well as carbon emissions. So, if Mexico has the ability to reduce both those risks using other people’s money, why not? It’s very hard to understand.
NGI: President López Obrador has since targeted the judge that ruled against the electricity proposal. At this point, it’s hard to tell what the next turn will be.
Goldwyn: My understanding is that the judicial process is likely to run through the end of this calendar year, which means that it won’t be decided until after the midterm elections. So, my guess is that if López Obrador wins a supermajority in the house – already having the majority in the Senate — and the Morena party wins enough governorships, then he could change the constitution, depending on how the Supreme Court rules.
If he doesn’t have a sufficient majority, then a constitutional reform is not an option for him. If that’s the case, then the court ruling would be binding and then there would be a wait until the next elections to see whether anything else could change. So, there’s a high level of uncertainty there about what the president will be able to accomplish, and we won’t know until after the election.
NGI: In the event of a majority in both Mexican legislative houses, the energy reform could be rolled back and constitutionally undone. With that in mind, how are recent policy moves impacting foreign investment decisions?
Goldwyn: I think taking the entirety of the president’s actions in this space — the renegotiation of the natural gas contracts, the changing of the fuel oil system to disfavor private investors, the pulling of the airport project at the beginning of the administration, the attacks on some of the regulators and then pushing modestly qualified people into regulatory positions — has all had a severely negative impact on foreign investment.
This new law, even while it’s in suspense, essentially freezes investment in renewable energy and probably freezes investment in just about everything else. Some of this is by design. By pausing the renewable energy auctions and pausing the oil auctions, the president has basically given a “stay away” signal to foreign investment in the energy sector. And the other steps, which really put into question Mexico’s adherence to the rule of law and the integrity of the regulatory system, raises above-ground risk considerably.
So, I think it really hurts the energy sector and going forward, it’s going to raise the bar for what it’s going to take for anybody to invest in Mexico. Because even if you’re not in the energy sector, the question is, will you get fair treatment? Will you have stability of terms of the contract? Will the contract be respected? And if you have a dispute, will the courts deal with it fairly? All of this is being put into question. The courts have been really remarkable, but the president’s attack on the courts even puts the ability of the judiciary to function independently in question.
NGI: Last fall, the U.S. government sent a letter to Mexico expressing their concerns about what’s going on in the energy industry here and changes to the regulatory bodies. Do you think the United States will send more such letters and continue to pressure members of the Mexican energy industry?
Goldwyn: I think for the United States, it’s probably both difficult and unwise to pressure Mexico on much of anything, but especially on how they ought to conduct the energy sector. Energy has been, since the revolution, a source of pride and nationalism and great friction between the United States and Mexico. The U.S. isn’t going to be pressuring Mexico for change.
But the U.S. does have interests and concerns, and it will raise those. The first probably, which I’m sure that special presidential envoy Kerry will raise, is the desire to see Mexico adhere to its own legally binding climate change targets and to raise its ambitions for Paris. We think that’s in the United States and Mexico’s interest, and the U.S. will ask Mexico how it will meet its own goals. The U.S. always expresses concern for the rule of law, contract sanctity and for countries following their own constitutions and, to the extent that the United States feels that Mexico is not doing that, it will raise those concerns at least at the embassy level.
The U.S. will have better success trying to engage Mexico on how Mexico can address the problems which the president is focused on. The Comision Federal de Electricidad’s (CFE) CEO Manuel Bartlett is concerned that CFE’s economics are undermined by owning heritage fuel oil and nuclear plants. And this is essentially a capacity market problem where the heritage plants provide the backup, but they are the least compensated. Mexico is not the only country with this problem.
I think if the U.S. — either bilaterally or multilaterally — can engage Mexico on how to deal with that problem, how to deal with the self-supply contracts, which are so frustrating to Mr. Bartlett, then I think we have a better basis for engagement. We need to try and work the problem, and we need to try and be helpful rather than add pressure. I think that’s probably the way to be smart about this.
The United-States-Mexico-Canada-Agreement (USMCA) issue comes up a lot and has people wondering if the United States should file a claim. I think both companies and governments feel that by the time you are moving to litigation, you are essentially recouping your losses and getting ready to leave. And none of the big companies want to do that with Mexico. They want to stay and they want it to grow. And I think they’re all going to try to resolve things by negotiation first. And so, I don’t believe that trade will be the leading edge of the U.S. engagement. At least that’s my hope.
NGI: The big story last month was the power outages in Texas and parts of Mexico. What do you think these outages say about the balance in the energy relationship between the two countries?
Goldwyn: Governor Abbott’s action was unfortunate, unnecessary and probably extralegal. So, the problems in Texas were not from a lack of adequacy of natural gas supply, they were because the plants were not insulated. Pipes froze, and there was no reserve. So, it was really unnecessary to cut off gas to Mexico and cause the blackouts down there. And the governor really only has authority over state lands, not over other lands, which is probably why he ended the export ban pretty quickly.
But it is really unfortunate because it played into Mexico’s insecurities about the reliability of U.S. gas. President Trump raised it with the threat of tariffs and now Governor Abbott has raised it with the threat of supply. And I think one thing the U.S. can do is reassure Mexico that governors are not going to cut off federally permitted supply in the future and that they can trust us. But it does play into Mexico’s insecurity.
And again, how do we engage in that? From the U.S. side, we can talk about reliability and we can have a technical conversation about gas storage in Mexico, which is really the answer to Mexico’s security needs. And that’s a sector that if it were structured rightly, private investment would help to fund. And so that’s really what needs to happen on that front.
There are other steps that Mexico could take to be autonomous or self-sufficient we can talk about, but it’s not taking any of those steps either. So, it was really unfortunate because the cut-off was harmful to Mexican consumers, and it was frankly harmful to American businesses because it puts the reliability of that supply in question.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, offers the above question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market. Goldwyn is the 52nd expert to participate in the series. This is part one of a two-part interview.
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