Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.
This 38th Q&A in the series is with Duncan Wood, Director of the Wilson Center’s Mexico Institute and internationally renowned specialist on North American politics, Mexico and U.S.-Mexican ties. Wood regularly lectures and publishes on North American issues, gives testimony to the U.S. Congress on U.S.-Mexico relations and is an expert on Mexican politics and the energy industry.
Wood, who is currently the co-chair of the World Economic Forum’s Global Future Council on Transparency and Anti-Corruption, worked closely with the WEF on energy policy from 1996-2012, and was a professor and the director of the International Relations Program at the Instituto Tecnologico Autonomo de Mexico (ITAM) in Mexico City.
Over the course of his 30-year career, he has been a Fulbright Fellow and a Fellow at the Center for Strategic and International Studies (CSIS), an editorial advisor to Reforma and El Universal newspapers, Technical Secretary of the Red Mexicana de Energia, and a consultant with several international agencies. He currently serves on the board of Signos Vitales, a Mexican non-governmental organization.
Wood studied in the UK and Canada, receiving his Doctorate in Political Studies from Queen’s University, Canada.
NGI: The momentum from the Mexican energy reform has slowed in the last two years under the new administration. From an international perspective, is Mexico still seen as an attractive investment opportunity in the energy industry?
Wood: There are two answers to this question. The first comes when you speak to investors about Mexico and in particular about the energy sector, they say Mexico is a great long-term bet because it has a very attractive demographic profile. Mexico should be adding demand for energy at a considerable pace every year, long into the future.
The country has the potential to become one of the world’s most important economies because of its population size and its proximity to the United States. Simply because of the signing of the USMCA, investment should be flowing into Mexican manufacturing, which means an increased demand for energy. People love the long-term investment profile of Mexico, and that directly impacts the desirability of investing in the energy sector.
However, every single one of those investors then says to me: But this is not the time to invest in Mexico. They say, long term, yes, we’re very, very interested. Short term, it’s problematic. And that’s for all the reasons you’d expect: the lack of certainty in the regulatory environment, the lack of certainty in the long term prospects for the 2013 energy reform, and the fact that, right now, we’re looking at such a severe economic contraction in Mexico that means declining demand for electricity, for fuels, etc.
On top of that, you have the current administration’s rhetoric in Mexico which is that they want to be energy independent, and their way to achieve this is highly statist. It includes a focus on CFE and a focus on Pemex, to the detriment of private producers. And there doesn’t seem to be any light at the end of the tunnel with the AMLO administration in terms of being more welcoming to private investment or to be welcoming to any kind of competition for either Comisión Federal de Electricidad (CFE) or Pemex in the energy sector.
NGI: What are your thoughts about the idea of energy independence and the message that is being pushed by the López Obrador administration?
Wood: It’s an interesting concept, isn’t it? Because the way that they formulate it in the AMLO administration is as “energy sovereignty,” so it is directly, intimately connected to a political construct. It is an idea of energy nationalism as much as anything.
In theory there is a connection with the concept of energy security, which is the security of supply and security of pricing stability. But the AMLO government formulation actually violates those principles of security of supply and pricing stability just simply by being focused on making this a nationalistic program.
If we look at the way in which Mexico has been evolving in recent years, it has become much more dependent on imports of natural gas and imports of refined products. It has become more dependent on imports of capital to move energy generation forward within the country. And that has generally been a positive influence because we’ve seen energy prices coming down in Mexico for electricity. Gasoline prices have responded to global markets much more than domestic regulation, which is a positive thing because we have seen, particularly in this year, that there has been downward pressure on gasoline prices. However, the AMLO administration’s approach to this means that Mexico will increasingly be divorced from global energy pricing.
In the future, if Mexico was to replace electricity generation from imported natural gas with fuel oil, or if they were to replace refined products coming from the United States with refined products in Mexico that cost more to produce thanks to inefficiencies, then ultimately there will be higher costs for energy generation in Mexico. And that clearly is not going to be good for either the consumer or the taxpayer in Mexico who is ultimately footing the bill.
NGI: Mexico’s natural gas imports from the U.S. continue to hit record levels. Do you see the high volume of imports from the U.S. as a sustainable model for the short- to mid-term?
Wood: Yes. For the good of the consumer and the broader economy Mexico can and should depend upon U.S. natural gas exports to satisfy demand for electricity generation and for other purposes. That’s why all of this infrastructure has been built to connect the natural gas markets of both countries. If you compare where electricity generation prices were before 2012 — when these pipelines were being constructed — with where they are now, it’s been a remarkable transformation. Electricity prices have been reduced by 50% for businesses and industrial companies. What the government of Mexico should be doing is focusing on how the two markets of Mexico and the United States can become even more integrated to take advantage of the lower cost of natural gas in the US.
What we hear from the AMLO administration is not that this is not feasible in the long term, it’s that it’s not desirable. And the reason why it’s not desirable is because they want to ultimately develop Mexico’s natural gas reserves. And there’s nothing wrong with that. But these are not mutually exclusive propositions. Ideally you could develop Mexico’s natural gas reserves at the same time as you’re benefiting from the imported gas.
This needs to be done in a way in which Mexico produces natural gas at a cost which is competitive with the United States. That way, if ever the price of gas production goes up in the United States beyond where it is in Mexico, then you can begin to export gas to the U.S. And in the meantime, why not take advantage of that low gas price as Mexico has been doing for the last six years or so? It makes perfect sense.
But therein lies the issue, which is that this administration in Mexico does not think in economic terms, it thinks in political terms. The logic is political and ideological. So, it doesn’t matter that you can import things more cheaply than you can make them yourself. AMLO wants to produce in Mexico, and that applies to natural gas and refined products.
NGI: Mexico hasn’t announced plans to develop much more natural gas, so does it appear that importing from the U.S. is presently the only option?
Wood: I think this is indicative of the way that this administration does business, which is that there isn’t really a strategic plan. They set goals and then they don’t show you how they’re going to get there. They don’t do the hard work of legal, regulatory and financial planning, to actually get you to the destination. So, they say they want energy sovereignty, and their plan is to build a refinery rather than focus on developing new energy sources. And refusing to invest in what should be the largest and most obvious source of energy sovereignty — which are renewables — is just cutting off your nose to spite your face. This is a ridiculous approach.
Mexico should be focusing on developing its renewable reserves, and that would be by far the easiest and cheapest way to achieve energy sovereignty. And yet AMLO is simply not interested. So we have this gap between rhetoric and reality, which doesn’t seem to be being bridged at all at this point.
NGI: The energy regulatory bodies in Mexico have been gutted in the last two years. What signal does that send to the market?
Wood: In many ways, it’s the most pernicious of any of the other processes that are underway in Mexico right now, because by weakening the regulatory institutions, you reduce what all investors crave, namely certainty. They want to know what the rules are and they don’t want those rules to change.
What we’re seeing is that the regulatory bodies that were set up during the energy reform are being undermined and politicized. And there is no longer certainty about the rules that they are going to emit. When investors look at Mexico, they say, why should I make an investment decision on a country when the rules under which I’m investing are going to change? And, in all likelihood, those changes are not going to be to our benefit.
So, this is a very, very damaging process that is underway in Mexico. Now you have the regulatory institutions populated by political appointees of the president. The institutions are now failing to do their job quickly and with efficacy.
As a result, there are significant delays in permitting and other regulations, which means that the private sector is waiting for paperwork to come through and is losing money with every day that goes by. Another reason that this is not a great time to invest in Mexico.
NGI: If you are an international energy company and have an existing contract in Mexico, is there fear that the contract could be modified or even cancelled?
Wood: This has happened already, but the generalized concern currently is more that the regulatory environment is going to change in such a way that even with the existing contract, you will not be able to turn a profit.
A number of companies, including some big oil companies, have made the decision to sell their stakes in Mexico to their competitors rather than continue under the prevailing conditions of uncertainty. And there is a very real chance that Mexico will not make money for them for years to come. So, they’d rather cut their losses, take that capital and invest it elsewhere in the world.
The question then becomes: Is it better to be in Mexico than it is in other parts of the world where we could use our capital?
The example of what happened with Sempra and TransCanada on the Texas-Tuxpan natural gas pipeline sent shockwaves through the energy investor community. The fact that the government was willing to play a game of chicken with the investors was shocking. It demonstrated that this administration doesn’t seem to care about the economic cost of violating or changing contracts.
So, they’d much rather change the environment in which the energy companies have to operate. That way, they’re not violating the terms of the contract, but it has the same effect, which is to dampen enthusiasm, force companies out and concentrate power in the hands of CFE and Pemex.
NGI: If you had the ability to change one thing in the Mexican energy industry right now, what would you choose?
Wood: I think I would change prevailing ideology in the energy ministry. Mexico needs leadership that works with the private sector, understands the long-term economic costs of the current government strategy, and sees the energy sector as a critical component of national competitiveness.
What we have right now is unfortunately an energy ministry in Mexico which is closed to the private sector. It is closed to dialogue with civil society, with analysts, and it is pursuing an ideological approach to energy rather than one based upon the interests of the nation.
By pursuing an ideological approach they are damaging the long-term interests of Mexico as a country and the long-term economic well-being of its citizens. And that, to me, is unforgivable. That’s really where you see a dereliction of duty.
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