AMLO's constitutional reforms cast long shadow over Mexican energy sector

The mild optimism felt across the Mexican energy sector when climate scientist Claudia Sheinbaum won the presidential election in June is giving way to rising concern, as the clock ticks down towards congressional voting on far-reaching constitutional reforms proposed by outgoing president and her mentor Andrés Manuel López Obrador.

If passed in September, before Sheinbaum takes office, the reforms could all but end the independence of not only the energy industry's regulatory authorities but also much of the judiciary.

At a time when a resurgent Donald Trump is promising a return to America-first trade and investment policies, the measures threaten to frustrate Sheinbaum's tentative efforts to reach out to foreign energy companies.

To discuss the outlook for foreign investment in the Mexican energy sector and the potential impact of these political developments, BNamericas caught up with David A. Gantz, Will Clayton Fellow for Trade and International Economics at the Center for the United States and Mexico/Baker Institute at Rice University. Gantz is also Samuel M. Fegtly professor emeritus at the The University of Arizona, Rogers College of Law. Gantz spent seven years as the chief lawyer responsible for Inter-American Affairs with the Office of the Legal Adviser at the US Department of State. He also served for eight years as the US judge on the Administrative Tribunal of the Organization of American States and as a consultant for various organizations, including the World Bank. Gantz answered the questions via email.

BNamericas: What impact will upcoming political developments, both in Mexico and the US, have on the Mexican energy sector?

Gantz: The main question is how much new legislating and constitutional amending may take place between September 1 – when [ruling party] Morena will probably have an effective super-majority in both houses of congress fully under AMLO's influence – and October 1, when Sheinbaum becomes president. If AMLO can get Morena to legislate to fire current federal judges so they can be replaced with elected (mostly Morena) judges, expand arbitrary presidential power to cancel existing licenses and concessions, and repeal the 2013 opening of the energy sectors to private investment or joint ventures with Pemex and CFE, Sheinbaum may have her hands tied. 

The increasingly likely prospect of another Trump presidency, with an even stronger "America First" set of populist policies (strongly supported by VP candidate J.D. Vance) is another good reason for investors to defer any new foreign direct investment in Mexico. 

BNamericas: What constitutional reforms are being proposed that would affect the energy sector?

Gantz: Reversion of Mexican energy law to the statist monopolies of the 1960s-1970s (through repeal of the 2013 reforms) could effectively doom any private sector participation in the energy sectors, particularly if potential investors know that any concessions granted today – for example for independent electric power projects – could be canceled at will in the future, with even less hope of judicial remedies than Mexico offers today.

BNamericas: What would be the impact on the sector if these reforms are passed?

Gantz: Pemex's oil production will continue to decline, and the lack of natural gas production and pipelines will cause Mexico to increase its already massive gas imports from Texas. The electric power sector will become even more unreliable, with interruptions more frequent even than today, production more heavily dependent on fossil fuels and a continuing lack of transmission infrastructure.

BNamericas: Does the USMCA free trade agreement offer any recourse to investors?

Gantz: The reforms as written conflict with national treatment provisions of Chapter 2, and with non-discriminatory treatment by SOEs [state-controlled enterprises], in Chapter 22. Other reforms may conflict with investment obligations under Chapter 14.

That being said, compliance with state-to-state dispute panel rulings under Chapter 31 is problematic. The US lost a case a couple of years ago on auto rules of origin but has declined to comply. If Mexico loses the current panel action on GMO corn, there is a good chance that Mexico will also refuse to comply. A private investor in petroleum or electric power may have standing to bring an ISDS [investor-state dispute settlement] arbitration case under Chapter 14, which preserves mostly traditional ISDS in those two sectors (but few others). 

Wise investors, particularly in projects that require a long-term payout, will probably continue to shun Mexico as they have under AMLO.

BNamericas: What do you think is the most likely scenario for investors in Mexican energy under the Sheinbaum administration?

Gantz: Wait and see, at least well into 2025, particularly if Mr. Trump is re-elected. FDI into Mexico is still about US$30-35bn annually as in 2019, despite the huge pressures on enterprises for nearshoring. Moreover, some 90% of that new investment is said to be reinvestment by existing investors in Mexico. That likely won't improve under a Sheinbaum administration unless she rejects many of AMLO's policies. 

It is helpful to have [foreign minister Marcelo] Ebrard and [finance minister Rogelio Ramírez] de la O in the cabinet, but she and they together can't hope to overcome AMLO's policies if they are set in stone this September. Moreover, she endorsed most of AMLO's extreme policies during the campaign, making it doubly difficult for her to change course even if that is legally possible.

AMLO seems likely in my view to continue to control Morena and most of the state governors well beyond October 1. Sheinbaum appears to be smarter and more pragmatic than AMLO, but lacks the dynamism. Will AMLO fade into the background, as most past Mexican presidents have done? I and many others have our doubts.