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Mexico Pivot for Energy Sovereignty



The United States and Mexico have long been partners on a variety of fronts due to deeply interconnected cultures and supply chains, as well as an interest in a prosperous long term mutually beneficial working relationship. Last fall, this working relationship has been strained from heavy-handed state tactics that threaten to reverse recent gains in Mexico’s energy sector and chill international investment that had been, until very recently, welcomed as a positive trend on fighting greenhouse gas emissions. Andrés Manuel López Obrador (AMLO) has expressed a strong desire to re-nationalize the state energy sector, at the same time militarily seizing natural gas, and renewable energy assets from international firms. The implications and political landscape for the US to navigate this new reality will test the long standing relationship with Mexico as well as Canada because of the USMCA agreement among the three major North American nations.


Mexico First?

Although quite different from former President Trump politically, AMLO exemplifies a similar strong desire for an imagined more prosperous past, and while not explicitly stated, a recent trend of Mexico-first policy ideas is starting to pop up. In particular, AMLO recently submitted a bill to Mexican lawmakers to renationalize the energy sector and consolidate energy utilities under the state owned utility, Comisión Federal de Electricidad (CFE). The proposal would gut the upstream and downstream regulation authorities and end the country’s independent energy operator. Channeling all energy production and sale through CFE would incentivise the state owned apparatus to prioritize its own power generation above others, either by restricting access via permits or through physical means by delaying infrastructure connections from private energy producers to the state grid.

AMLO seeks to protect the Mexican people from the perils of big business, but many researchers agree that a drastic path to revert to a more heavily state owned model would be disastrous to the Mexican economy. Beyond just energy security, the AMLO administration, however, sees this move as a way to bolster the nation’s economic security. It views the nationalization approach as a way to more directly control and direct energy into industries and commerce to directly benefit domestic Mexican companies. This inward looking approach will chill international investment, and overlooks the gains that recent energy reforms sought to address. In 2014, former president Nieto opened up the energy market to a more independent market based energy sector due to decades of mismanagement at Pemex. The reforms brought in billions of dollars of international investment, badly needed to diversify Mexico’s energy mix and bolster capacity for renewables. Current and future investments are now severely curtailed, and the goal of economic security is in limbo with these proposed changes.


Authoritarian Tactics

The proposed reforms to renationalize the energy sector still have to be ratified by ⅔ of both chambers of the Mexican legislature to become a constitutional amendment, but that has not stopped the AMLO administration from altering the energy landscape already. In September the Mexican National Guard sealed the gates of a major fuel terminal owned by Monterra Energy, owned by US investment firm KKR. The terminal is worth about a half of a billion dollars for gasoline and diesel fuel storage. Other international fuel companies have similarly been blocked from operation. All of these companies would compete with Pemex in some area of the energy cycle. Other authoritarian administrative tactics would include:


  • Suspending the permits of several U.S.-owned fuel storage terminals used by private operators of fuel stations across the country.

  • Authorizing the social and environmental agency ASEA to deploy the national guard to conduct joint ‘inspections of fuel-related sites with the CRE. Those inspections produced 23 full temporary closures and 17 partial temporary closures of sites over alleged violations of environmental impact rules.

  • Using Mexico's tax authority to change Mexico's General Rules for External Trade in June and September 2021. The changes first banned private companies from obtaining or renewing three-year permits that are required for fuel terminals to serve as points of entry and exit for hydrocarbons, and then backtracked but tied them to other permits from various agencies, including the Energy Ministry and the Navy. The tax authorities also suspended 82 companies in July from trading fuels over alleged fiscal violations.

  • By Presidential decree, Mexico’s customs operations were placed under military control in July, a move that was taken with no prior consultation or public debate.

Even without the constitutionally amended energy reforms to give the state-owned apparatus tremendous control once again, the heavy handed tactics of the AMLO administration show the desire to stifle international involvement and investment. The administration has come under fire from both Texas state lawmakers and the US State Department due to the violation of contracts, which also violates free trade rules of the USMCA. The unpredictability of the Mexican political landscape will undoubtedly give pause to US and other firms going forward. The depressed or complete absence of foreign investment in any industry, including the energy sector, will have a direct impact on Mexico's economic security. Pemex was originally nationalized in 1938, and even in times of an oil boom, Mexico has never really been able to capitalize on its energy resources and expand innovation in the energy sector to compete internationally.


Climate be Damned

The state reversal to a centralized state run enterprise backtracks on investments and expansions of renewables, especially wind, and natural gas in the past few years. The moves have called into question Mexico’s commitment to international climate targets to reduce greenhouse gas emissions. AMLO insists that Mexico can maintain climate goals, citing plans to invest in aging hydroelectric power and a tree planting program in southern Mexico. However, hydro power may be hard to come by in the near future given vast drought problems affecting the American West to North and Central Mexico. There is nothing other than these two fairly flimsy climate projects that would give assurance that Mexico will take serious climate action. The move to nationalize CFE demonstrate a desire to boost oil refining and the usage of coal burning power plants. According to a former head of Mexico’s Energy Regulation Commission, Mexico believes climate change is a “rich-person problem.” This push to more GHG emitting energy production puts AMLO at odds with President Biden who is pushing hard for the US to be a leader in reduction of carbon emissions. Both climate action and fair trade practices are areas that are currently being addressed between the two countries, but currently exist in the background behind other glaring bilateral issues.


Conclusion

The reason the news of Mexico’s proposed energy reforms, authoritarian tactics, and lack of climate urgency have not been discussed widely in the US is due to the continued reliance on Mexico’s help in dealing with immigration issues. Despite campaign pledges to drastically alter immigration policies enacted by the Trump administration, many are still in place. Title 42, which allows for the curtailing of immigration due to a public health crisis, such as the lingering coronavirus pandemic, is still in effect. Plus, a federal judge ordered the Biden administration to resume the Remain In Mexico policy. “The Biden administration said in a court filing this week that it’s prepared to enforce the rule once Mexico “makes an independent decision” to accept migrants who are awaiting immigration proceedings.” The national security implications of an unmanaged immigration system are taking precedence over the energy and climate concerns in Mexico, and are overshadowing the impact to US business caught in the crossfire of a hostile Mexican government. The oversized leverage the AMLO has on the US-Mexico relationship due to immigration arrangements may affect future economic investment and ties should an equitable deal on all fronts be hard to come by.


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