What a Xóchitl Gálvez administration would mean for Mexico's energy sector

Xóchitl Gálvez, the presidential candidate representing Mexico's broad opposition coalition, who trails ruling party frontrunner Claudia Sheinbaum, aims to modernize the country's energy sector and make it more sustainable.

She proposes changing the economic model to reduce dependence on hydrocarbons and explore clean alternatives. Gálvez also wants to change the focus of federal oil company Pemex toward clean energy.

In this interview, Gálvez's energy adviser, Rosanety Barrios, who is a former commissioner of regulator CRE, talks about the five axes of the campaign's proposed energy policy, the future of Pemex and foreign investment.

Elections are slated for June 2, and the next president will take office on October 1.

BNamericas: What is Xóchitl Gálvez's analysis of the energy crisis?

Barrios: Xochitl Gálvez is very clear about the demands of the 21st century: that everyone has access to energy, that energy is as clean as possible and that it does not cost us as much as we are already paying.

To achieve that, we have to understand where we're coming from. We come from a model which relied on fuel oil, not even oil.

[The government] ordered Pemex to refine without it having the necessary equipment to process the crude oil we produce. This lack causes 30% of each barrel of oil to be wasted because it is converted into fuel oil. Fuel oil is a product that has become profoundly harmful to health and that has a lower value than petroleum.

So, the effects of producing fuel oil are very serious. On the one hand, it kills people, on the other it loses [money] like crazy. This policy has been so absurd that Pemex has been plunged into the worst crisis in its history. Now no one wants to lend to Pemex because it can no longer pay even its suppliers.

Xóchitl knows that Mexico is a country that's most affected by the pandemic. It is one of the countries that's most vulnerable to the climate crisis, the second after India.

BNamericas: What are the pillars of Gálvez's energy policy?

Barrios: Xóchitl's energy policy focuses on five axes.

The first axis is the energy transition. We need to evolve, completely change our model. Mexico's energy model depends 87% on hydrocarbons. So, we have to reverse that as quickly as possible. We need to accelerate the energy transition and that means not only adding much more renewable energy, but it also means being much more efficient. We need to adapt our entire economy to consume less energy.

The second axis, which goes hand in hand with the first, is to modernize the two state companies, Pemex and [utility] CFE. What does that mean? Changing the way they operate. It is very important that they modify their governance and business model.

The third axis of Xóchitl Gálvez's energy policy is the development of infrastructure under the direction of the State. Xóchitl's approach is to take advantage of the mechanisms that are established in the laws so that private investment participates with a stewardship exercised through regulators – strong, technically autonomous regulators.

The fourth axis is close collaboration with state and municipal governments. This is a contribution by Xóchitl, who is aware that each state has different conditions and solutions, different problems and solutions, and that they have developed important technical capabilities.

The fifth axis is alignment with social policy. Xóchitl wants to end the structural conditions of poverty, that is, improve the conditions of the health, safety, education and inclusive development we have today. Therefore, she is aware that it is necessary to directly influence the benefit of those who have less.

BNamericas: Although Pemex's debt is expected to fall from US$106bn to US$94.5bn this year, it is still huge, even though it will also receive 481bn pesos (US$29bn) from the 2024 federal budget and a cash injection of 145bn pesos to help cover its debt. What does Gálvez propose to save the company and what does she mean by modernizing it?

Barrios: Its governance must be modified so that it is managed by people who know about energy and the challenges the company faces in the 21st century.

They put it into production without any respect for environmental standards, without advancing on energy transition issues. So, first governance, then business model.

To understand a little what Xóchitl means when she talks about a change in the business model, she wants Mexico to consume less gasoline and less diesel. How is that achieved? Promoting electromobility. So, it makes no sense to invest in refinery equipment.

Pemex's most profitable business is exploration and production, but not in the way it is carried out today. Globally, oil companies, first of all, have two ways to advance the energy transition. On the one hand, decarbonize exploration and production and, on the other, diversify production.

Everyone is doing those two things except Pemex. And for it to do so, it needs technology and investment.

That is why she proposes the closure of two refineries. It is very important that it be clear to people that our obligatory intention is to become a country that develops in an inclusive way to consume fewer hydrocarbons.

BNamericas: What about alternatives, such as geothermal energy?

Barrios: Geothermal energy has a common line with oil companies. This means that in the end, exploration must be carried out and [crude oil] wells have many parallels with geothermal wells.

That is why it is natural for an oil company to participate in geothermal energy. Of course, geothermal is an option. Another option is hydrogen, green hydrogen.

BNamericas: Gálvez promised to bring back auctions and allow private companies to compete with CFE for cleaner, cheaper energy. Does this promise imply the return of international players?

Barrios: Auctions, yes. In all honesty, it seems like a mistake to me to handle this based on the nationality of companies. There's no point saying that they are foreign or national companies. It's about seeing what kind of projects we want.

We want to incorporate much more renewable energy into the electrical matrix. What are abundant resources in Mexico? Sun, wind, geothermal – and well, it seems to me that we should also get into offshore wind. If there are auctions, the normal thing is that they are, let's say, large projects.

It is a reality that Mexico doesn't have an industry related to photovoltaic energy or wind energy, nor does the United States. Who is a power? China. Do we want the development of a national industry? Yes. For that to happen, it is necessary to establish a series of appropriate incentives for each process.

BNamericas: Moody's said that Mexico is lagging in the energy transition because of low investments in transmission, while the International Chamber of Commerce of Mexico previously warned that the country has a transmission deficit, as 4,370km of lines have not been built between 2018 and 2022.

Will Gálvez invest in transmission?

Barrios: Certainly! Nobody invested in that segment in the past five years because it is the constitutional obligation of the State to invest in transmission, and if it doesn't do it, no one else will. So the candidate says 'I have to do it'.

BNamericas: Natural gas powers 48% of electricity generation and is widely used in households and industrial processes, but 70% of demand is imported from the US. Will Gálvez reinforce the construction of pipelines to import natural gas?

Barrios: We want to think that the current administration left that part finished because they have presumed that. We must do the same with natural gas as with gasoline, consume fewer hydrocarbons. Less. Not more.

That doesn't mean that from one day to the next, overnight, we will no longer use gas. No way. But we must seek to encourage efficiency to consume less gas. That's what we have to do.

In the electrical matrix, it is clear. We already have a lot of gas there. The industry needs gas, yes, but the industry also needs to be much more efficient.