The Strategist

Mexico’s new President exposes the country's oil industry to a risk

08/27/2018 - 15:37

Mexico may stop oil auctions for at least two years. The President of Mexico also intends to review the already concluded contracts.

According to the Wall Street Journal, the elected president of Mexico Andres Manuel Lopez Obrador will suspend oil auctions for at least two years. Some experts believe that his administration will not conduct any new oil auctions at all during the entire six-year period.

Lopez Obrador also promised to review 107 contracts that have already been signed with companies following the results of the auctions over the past several years. The contracts will be checked for corruption, although President noted that he will not try to cancel them until the verification is completed.

In addition, Andrés Manuel López Obrador wants to revise certain points of energy legislation that regulate the oil and gas sector. This, as the newspaper notes, can dramatically change the climate for foreign oil and gas companies. Lopez Obrador has long opposed historic reforms that have completed 70 years of state control over the energy sector, although he corrected his position during the presidential campaign this year. At the same time, the rollback of reforms would be an extremely difficult process, requiring a change in the country's constitution.

However, Lopez Obrador's plans do not go so far: according to the WSJ, the corrections planned by President should strengthen positions of the state-owned Pemex company.

In particular, the company may be able to choose partners from the private sector, without requiring approval from the regulatory authorities. The current rules require that Pemex cooperate with those who offer the maximum price for oil sites. President, according to the WSJ, intends to allow the government to allocate the state oil company directly. Plus, Lopez Obrador intends to make Pemex the only seller of commercial oil.

These changes will mean a partial rollback of energy reforms, a reorientation of Pemex and government control over the oil sector. Moreover, Head of Pemex will be appointed by President, which gives him additional leverage over the company.

"If the stages of licensing are abolished, and joint ventures become the only means for companies to enter the oil industry of the country, all process management will be consolidated into Pemex. And this can have a negative impact on external investors," believes Maria Cortez, a leading analyst in Latin America in the field of intelligence in Wood Mackenzie.

In addition, Lopez Obrador will insist on tightening rules for residents on the use of local resources, which will lead to an increase in percentage of internal participation in oil projects. That is, if a company such as ExxonMobil or Chevron wants to drill oil in Mexico, it will need to deliver a certain percentage of equipment and services from Mexico. The idea is to maximize benefits of developing oil and gas for the country, and to allow local industries to gain additional experience.

However, foreign investors clearly do not like these changes, the newspaper notes. This will be an onerous burden for many companies, which, moreover, will add uncertainty to investment projects. And oil companies have repeatedly expressed outrage with strict rules on the use of local resources in Brazil.