Getting a grip on AMLO's conditions for private energy investment

Meeting with US energy firms last week, Mexican President Andrés Manuel López Obrador (AMLO) said the government welcomed private investment in solar projects – as long as state-owned utility CFE is the majority shareholder.

But rather than a real change in law or regulation, experts say the announcement reflects de facto energy policy and the ideology on which it is based.

“The president's statement should surprise no one,” Rosanety Barrios, an independent energy consultant and former commissioner at energy sector regulator CRE, told BNamericas.

AMLO has long held the opinion that “all energy services [not just solar] should be provided by state companies," said Barrios.

"And the participation of the [private sector] ... should only be considered as direct support to the SOEs [state-owned enterprises] and never as direct competition," she told BNamericas.

However, with exponential growth in demand and the need to make the transition to clean energy, CFE and national oil company (NOC) Pemex can hardly foot the investment bill alone, she added.

“It’s absolutely impossible for the SOEs to satisfy all the energy needs that our economy requires in the 21st century,” said Barrios.

TARGETING PRIVATES

Other critics see the announcement as a yet another attack on private enterprise.

“It must be said frankly … what AMLO is doing is extortion,” energy expert and former head of planning at natural gas network operator Cenagas Eduardo Prud'homme told BNamericas.

“With his speeches every morning, what he’s doing is forcing investors to go through CFE and Pemex if they want to invest in Mexico,” said Prud’homme, “[This is] by presidential decision, not by financial or business logic.”

For Prud’homme, “[It’s] basically conditioning investment to something discretionary and arbitrary, to getting along with the president.”

WILLING TO PARTNER

Several companies, however, see their willingness to cooperate with the administration now bearing fruit.

In early July, CFE and Pemex announced partnerships with private firms to carry out four projects valued at US$12.5bn.

Among these, Pemex plans to jointly invest US$1.5bn with US-based LNG player New Fortress Energy (NFE) to revive development of its long dormant Lakach deepwater field after suspending the project in 2016. The NOC announced it planned to revive the project late last year, but lacked a partner at the time.

NFE is also partnering with CFE to build a US$2.2bn liquefaction plant in Baja California Sur state. The utility said it would have a 10% share in the first unit, 15% in the second and 20% in the third, as well as have access to a new power generation unit included in the project.

The project follows CFE’s signing of a memorandum of understanding in February with Sempra Infraestructura to partner on the Vista Pacific LNG regasification plant in La Paz, Baja California Sur state and the reopening of operations on the Guaymas-El Oro natural gas pipeline in Sonora state.

CFE, meanwhile, said it would build a new underwater pipeline in partnership with Canada's TC Energy for a total investment of US$5bn. 

The project will connect the port town of Tuxpan in Veracruz state with Coatzacoalcos to the south and then with the port of Dos Bocas in Tabasco state to the east.

Pemex also announced on July 1 that it will sign a turnkey contract with ICA Fluor to build a long-announced coker unit at the Salina Cruz refinery in Oaxaca state. According to Pemex, the plant requires investments of US$3.8bn.

LEGALITY

The stated condition on majority CFE partnership, however, is neither new law nor new regulation, said Barrios.

“Nothing prevents CFE from associating with whoever it wants,” said Barrios, and CRE under AMLO hasn’t given permits to new independent private solar projects in years, adding, “Nothing changes with this.”

AMLO’s announcement follows his party’s failure in April to push through constitutional changes that would have established CFE as the self-regulating, sole buyer of electricity in Mexico with the ability to fix prices and giving its own power plants dispatch priority.

With this statement, “what the president is trying to do is implement by decree what he set out to do with the failed constitutional reforms … but couldn’t,” said Claudio Rodríguez Galán, attorney and partner at Holland & Knight in an op-ed for local daily Reforma.

This means that articles 25, 26 and 27 of the constitution still reflect changes to the energy sector established in 2013, wrote Rodríguez, adding, “This is fundamental because private investments are not conditioned in any of these.”

Article 25, furthermore, obliges the state to promote competition in the electricity marketplace and includes no conditions that investments must bring CFE on board, he added.

Likewise, said Rodríguez, international treaties, such as the US-Mexico-Canada free trade agreement (USMCA), expressly forbid imposing conditions on investments that are not already on the law books and/or addressed by the treaty.

NO BUSINESS SENSE

Both Prud’homme and Barrios said that, by law, the recently announced projects should have been presented in an open competition rather than by direct award too.

But putting the legality aside, the experts don’t see any business logic to the president’s strategy either.

“CFE can do whatever it wants, but if it wants the energy it’s going to generate with new plants to be bought by users, it should compete in costs with private plants,” said Barrios.

“What AMLO is looking for is to give economic viability to something that isn’t viable … trying to rescue a very inefficient productive entity,” with a non-competitive labor component, Prud’homme told BNamericas, saying that work crews on CFE projects can be five times larger than those at private operations.

“AMLO is trying to transfer CFE’s inefficiency to the private sector,” he added.