AMLO’s Oil-Heavy Energy Policies Face Scrutiny

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Mexico’s President Andres Lopez Manuel Obrador (AMLO) has bet big on oil and gas since his inauguration in 2018 but the sector continues to be plagued by poor standards and high levels of debt, leading many to question his choices. While Mexico’s state-owned oil company Pemex has racked up huge levels of debt and repeatedly failed to improve its safety and environmental standards, the renewable energy industry has been swept aside, leaving Mexico’s energy sector in tatters. 

In August, Fitch Ratings said that Mexico’s Pemex was the biggest liquidity and debt concern among its Latin American peers, even after the Mexican government pumped billions of dollars into the company. Fitch stated, “Pemex’s ratings are four notches below those of the sovereign as a result of the company’s weak standalone credit profile and slow government reaction to strengthen Pemex’s capital structure and ESG (environmental, social and governance) considerations.” 

By December, Pemex’s failure to repay was threatening the survival of its suppliers. The state-owned oil major has racked up debt of over $105 billion, owing around $17.22 billion to local and foreign companies by the end of September. A private oil operators’ group, Amexhi, wrote a letter to the government warning of the potential impact that Pemex’s reluctance to pay could have on production, projects that are under construction, and the very existence of certain companies. Amespac, another industry group, echoed these sentiments, calling for Pemex to pay some of its debt by mid-December. The letter stated, “Some of the affected companies have officially notified Pemex of the impact these delays have on their financial position.” It went on to say that not paying “will have a severe impact on hydrocarbon production in the country.”

AMLO has repeatedly overstated the importance of state-owned oil production, as he sought to enhance “energy sovereignty”. This has made it more difficult for foreign players to participate in the Mexican market, just years after his predecessor Peña Nieto opened the industry to private investment. His administration has contributed over $70 billion in cash injections and tax breaks to Pemex since 2018. This has meant that many operators have no alternative options to Pemex, as few companies hold exploration permits. 

As well as pumping funds into Pemex to help keep it afloat, AMLO has also financially supported the development of the new Dos Bocas refinery in Tabasco – which has gone way over budget – and the acquisition of the Deer Park refinery in Texas. The government has plans to invest $6.2 billion in the construction of 15 gas and diesel power plants by 2024, demonstrating AMLO’s commitment to fossil fuels. 

While Mexico has invested heavily in its oil industry, renewable energy has largely fallen by the wayside, despite the country’s huge green potential. Mexico is home to several critical resources, from abundant sun to huge lithium reserves. But these remain relatively untapped as private companies cannot get the state support required to develop these resources and AMLO pumps funds into increasing the longevity of the country’s hydrocarbon resources. 

As the country fails to develop its renewable energy sector in line with its potential, and Pemex continues to fail, AMLO has been slammed by local and international actors for supporting oil and gas so strongly. In October, AMLO’s 2018 to 2019 finance minister, Carlos Urzua, warned that the president’s energy policies were harmful to the country, were outdated and were eroding investor confidence. Urzua stated, “He’s trying to destroy the very economic mechanism with which we could grow.” He added, “So many mistakes were made.”

Urzua suggested that much of the financial contribution to Pemex was based on ideology and was unsustainable. The ex-minister believes that Mexico could have benefitted from revenues from private investors in the sector, gaining from their knowledge and experience, to develop and modernise the industry. He also criticised AMLO’s antiquated thinking when it comes to renewable energy. 

AMLO’s U-turn on previous energy market liberalisation efforts has drawn negative attention from regional partners the U.S. and Canada in recent months, who suggested that his protectionist policies were at odds with the USMCA free trade agreement. In September, President Biden requested affidavits from major U.S. oil and renewable energy companies outlining how the Mexican President’s energy policies disrupted their investments, in preparation for the escalation of a trade dispute. This followed efforts by U.S. oil majors, such as Chevron and Marathon Petroleum, to expand within the Mexican market only to be denied permits in favour of projects by Pemex and national power utility Comision Federal de Electricidad (CFE). If Washington deems AMLO’s actions to be contrary to USCMA, it could impose billions of dollars in retaliatory tariffs on Mexican goods.

Mexico has been repeatedly criticised under AMLO’s presidency for its unsustainable and antiquated energy policies. The president has repeatedly backed a failing state-owned oil company, while rejecting private investment in the sector and neglecting the country’s renewable energy potential, at a time when other countries around the globe are pursuing a green transition. Following next year’s general election, we will see whether these policies remain in place or whether there’s a meaningful shift in Mexico’s energy sector. 

Source: Oil Price