'Emblematic of the degradation of the sector' – Mexico's energy firms prepare for life without independent regulators

The far-reaching constitutional changes that Andrés Manuel López Obrador (AMLO) is implementing in his final month as Mexican president are sending shockwaves through the business community.

While reforms to the judiciary are dominating the headlines, for investors in Mexico's energy sector the major concern is the proposal to subsume energy regulators CRE and CNH under energy ministry Sener, ending their life as independent entities.

To discuss the implications for investors and assess the outlook for the Mexican energy industry under the next president, Claudia Sheinbaum, BNamericas caught up with Jeremy Martin, vice president for energy and sustainability at the Institute of the Americas, an inter-American public policy think tank located at the University of California San Diego (UCSD).

BNamericas: What impact do you think the current reforms will have on the Mexican energy sector?

Martin: Everyone is focused on the judicial reforms but the potential disappearance of several regulatory bodies, including two energy regulators, is just as alarming. 

As a result of the energy reforms of [previous president] Enrique Peña Nieto, the regulators became more substantive and more independent. When AMLO came in, he tried to make them disappear and politicized them.

At this point, you could argue that the regulators have already been sidelined and are not relevant anymore, but what is happening to them is emblematic of the overall degradation of the Mexican energy sector. CRE was established more than 30 years ago, long before the Peña Nieto energy reforms, when Mexico was moving into its free trade and globalization phase. CNH was created during the Calderón administration [2006-12] to enable oversight of Pemex and a more regulated oil sector. To get rid of them now is a big deal.

BNamericas: What are the implications for foreign investment in the Mexican energy sector?

Martin: The AMLO years have shown that there will always be companies who have a different calculus when it comes to political and regulatory issues. Mexico has a lot of fundamentals that make it extremely attractive. Some oil companies have walked away from Mexico and handed back or sold their assets, but I don't think there will be a wholesale abandonment by the power companies and the pipeline companies who are already there. 

What makes people upset about these kinds of changes is that Mexico should be seizing this moment. It shouldn't be throwing up impediments. The reforms are certainly going to have medium-term and long-term impacts in Mexico. You can already see that with what's happening with the peso. 

BNamericas: What are your first impressions of Claudia Sheinbaum? 

Martin: I try to be hopeful. But when I see her support for what [the governing political party] Morena is doing and the legislative changes, it's hard to reconcile with that. On some issues there seems to be no daylight between her and AMLO. Sheinbaum will definitely be less strident but it's hard to see major market changes from the AMLO years.

BNamericas: What energy policy changes are you seeing? 

Martin: Just changing the heads of Pemex and [federal power company] CFE is already a positive. You couldn't do a lot worse than the previous directors. So by that metric we are already better off.

There could also be more openness to renewable energy and distributed generation. There is talk about increasing the maximum number of megawatts for self-supply from 0.5MW to a higher limit. But that's quite a marginal change. Sheinbaum has been very clear that CFE is going to maintain its 54% market share. 

BNamericas: Mexico depends on the US for 70% of its natural gas. Do you see that changing at all under Sheinbaum?

Martin: It was always one of the most ironic developments of the AMLO years that he has this very nationalistic discourse about oil and the primacy of state-owned enterprises, while Mexico continued to increase its dependency on natural gas from the United States. 

Historically, Pemex had the easy oil in shallow waters and did not focus on natural gas. There was some talk about it 10-12 years ago, but Pemex cannot compete with the extremely cheap shale gas that Mexico can just pipe in from the US. 

AMLO is obsessed with energy sovereignty for oil and power and refined products, but we don't hear too much about sovereignty when it comes to natural gas.