It has everything to be an energetic powerhouse. Mexico enjoys high solar radiation to take advantage of with photovoltaic panels, a large lithium deposit and the infrastructure to import the cheapest natural gas in the world. But the government’s energy policy, which has stifled renewable energy and limited the participation of private companies in the electricity sector, is blurring the weight of Latin America’s second largest economy.
As Eastern Europe is plunged into uncertainty by the Russian offensive in Ukraine and Asia suffers from the trade war between China and the United States, Latin America is emerging as a more stable option for investors globally. In reports from the World Economic Forum that is being held these days in Davos, the appetite for migrating from fossil fuels to clean sources stands out recurrently, and Latin America has important resources to contribute. Colombian President Gustavo Petro, for example, did not hesitate to take advantage of his presentation at the Forum to invite investors to build an “American” electricity grid powered by renewables with “a guaranteed market.”
Discussions are taking place, but they do not include Mexico, a country that for decades was an oil powerhouse with extensive experience in the energy sector. Today, the state company Petróleos Mexicanos (Pemex) is one of the most indebted oil companies in the world. Its production has been falling for years and Mexico became a net importer of oil in 2014. Meanwhile, the Federal Electricity Commission (CFE) has disconnected renewable energy plants from the transmission grid because they are in private hands, limiting electricity generation. CFE recently opened up to work with foreign companies, and small concessions have moderately revived interest among private individuals, but uncertainty persists.
“Mexico has a historic opportunity and it is missing it,” says Francisco Monaldi, director of the Latin American Energy Program at the Baker Institute in Houston. “It is really incredible that a country that is one of the hydrocarbon giants in the region, that has tons of advantages in terms of location, human resources, that is next to the United States and could with that take advantage of the development of the natural gas shaleFor example, it is simply not on the investors’ map, that nobody is talking about Mexico or thinking about Mexico”.
This is, to some extent, by design of the Government. López Obrador’s idea of reversing the opening of the energy sector is precisely that state companies have control of the market. The cost, therefore, is paid by Mexicans because the taxes that could go to spending on infrastructure or education, are going to pay the debt of the oil company. If the oil company were open to partnering with private parties to trigger its production, it would have greater resources to meet its credit obligations. This year, according to the agency BloombergNeither the budget published by the Ministry of Finance nor that of Pemex include a section to pay debt service.
Pemex is not making the investments it would have to make for the oil sector to grow, Monaldi points out. “This is because López Obrador’s bet has been on refining, which has no logic, which is not where profits are generated in the oil sector and even less so in a state company. Historically, all the state-owned companies in Latin America have lost money in the refining area. The misallocation of resources at Pemex also has important consequences”.
Symptoms of opening in the CFE
For its part, CFE shows signs of opening. After complaining that the last Administration committed the company to buying massive amounts of natural gas from the US (today it is the main buyer worldwide), CFE outlined a new plan to build fuel liquefaction plants that will allow it to sell it. to Europe. To achieve this, he signed contracts with three companies, two American and one Canadian. The idea is to take advantage of the geopolitical situation in which Europe is looking for alternatives to Russian natural gas.
But the effort to eliminate private companies from the sector continues, to the extent that the US and Canada started an official dispute within the framework of the free trade agreement, the TMEC. For the US, the main trading partner, the blockade on renewable energy is the most annoying issue. Meanwhile, the large Mexican lithium deposit, which could play an important role in the electrification of many technologies, is in a legislative limbo.
Even if the next government that arrives at the end of next year wanted to reverse López Obrador’s strategy, it will be difficult to attract the investment the country needs for its energy sector to rebound, Monaldi says. “There is already reputational damage,” explains the academic and international consultant.
“This is a sector in which, once the rules of the game have changed for investors or they have reversed private sector participation policies, they are more cautious. You have to give them more guarantees, more conditions, and one sees the difference, for example, with the continuity of the policies in Brazil, which is perhaps the most impressive case to compare with Mexico”, says Monaldi. In the South American country, the largest economy in the region, there has been continuity in the sector’s rules despite intense political polarization that has led to alternation in government.
López Obrador has also weakened the regulatory framework, slimming down and disqualifying sector regulators. In recent conversations with investors in Mexico, Monaldi shares, this is one of the frustrations they express. “What they say is that one of the fundamental problems is that they have no counterpart to talk to, because the entire energy technocracy in Mexico has disappeared,” he points out.
While the energy transition progresses, oil will continue to be necessary and production projections for the next 15 years indicate that it will increase in Latin America, driven mainly by Brazil and Guyana and, secondly, by Argentina and Venezuela. “Mexico does not appear there,” says Monaldi. “How incredible that these two countries appear, Argentina and Venezuela, which are totally dysfunctional. In the case of Venezuela, it is a country that cannot be managed worse, but they are trying to attract foreign investment,” says the academic, “at least they are trying.”
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