Mexico's new president, Andrés Manuel López Obrador, will take office on 1 December 2018. Throughout his campaign, and now as president elect, the leftist candidate has sent mixed messages with respect to various core reforms implemented by the outgoing administration, including the energy reform adopted in late 2013.
The energy reform covers upstream and downstream oil and gas activities and power generation and supply, mainly opening these activities up to private national and international participation. The incoming administration has expressly opposed the energy reform and publicly stated that it will reverse it where possible. At the same time, it has acknowledged the importance of private participation in the sector. Consequently, investors are uncertain of what to expect.
While López Obrador is viewed as a leftist politician, he is also practical and understands the importance of the energy sector as a whole. His team is comprised of both strong left-wing supporters and more centered individuals, which might result in balanced policies. However, there is still uncertainty in this regard. Based on López Obrador's Project for the Nation and the announcements made during the current transition period, the following changes are anticipated.
It is anticipated that the energy sector will be viewed as an important factor in Mexico's development. However, this does not mean that the new government will fully support private investment. The position of state-owned oil company Petroleos Mexicanos (Pemex) is intended to be strengthened to enable it to aid such development and act as the central player in the upstream and downstream sectors. This means that:
- bidding rounds to grant production sharing or licence contracts for exploration and development will be suspended or reduced; and
- asymmetric regulations that have been issued in an attempt to level the playing field between Pemex (who previously had a monopoly in the upstream and midstream sectors and strong dominance in the downstream sector) and the private sector may be repealed or amended in order to strengthen Pemex's position once again.
The security of energy will be enhanced and external dependency will be reduced by:
- increasing oil and gas production (currently envisioned by having Pemex grant service contracts rather than having the government grant production sharing and licence contracts);
- reducing natural gas imports; and
- increasing refining capacity by revamping existing refineries and building at least one new installation (through government spending rather than the granting of concessions or permits to private entities).
There has been little public discussion as to the government's stance on private producers, suppliers and other power market participants. However, it has been publicly stated that the incoming administration intends to strengthen the position of state-owned power company Comision Federal de Electricidad. Further, economic incentives and tax cuts are likely to be implemented in order to foster the use of renewable energy.
Despite the high level of uncertainty in the energy sector, this is mitigated by:
- the reality of Mexico's economic needs;
- its lack of budget to fund all required investments solely through the government; and
- its economic relationship with the United States.
The fact that the North American Free Trade Agreement has been renegotiated, albeit without Canada, with the incoming administration's blessing is a nod to the importance of private domestic and international investment in the energy sector. The incoming administration is likely to adopt a more central position once it takes office and faces the actual challenges that must be overcome.
For further information on this topic please contact Carlos Ramos Miranda at Hogan Lovells BSTL SC by telephone (+52 55 5091 0172) or email ([email protected]). The Hogan Lovells BSTL SC website can be accessed at www.hoganlovells.com.
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