Commentary: Policies hurt Mexico’s oil production

The partnership of government policy and ideology has a long history in Mexico, and with the election in 2018 of socialist President Andrés Manuel López Obrador, commonly known as AMLO, the country is now rethinking its lauded energy reforms.

Before the reforms, annual crude output at the state-owned oil company, Petróleos Mexicanos, which is usually shortened to Pemex, had been waning for the past decade. In response, then-President Calderón called for the reforms in 2013 and subsequent President Enrique Peña Nieto enacted them the next year, ending the government’s 75-year oil production monopoly and opening the Mexican energy sector to private investment.

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Beyond the initial capital infusion, foreign firms offer to share cutting-edge techniques for discovery, drilling and ecological sustainability. This was sorely lacking at Pemex at the time the reforms were initially introduced. And to add insult to injury, British Petroleum and Petrobras, the state-owned oil company of Brazil, had just discovered a record-breaking oil reserve in the Gulf of Mexico in 2009 that could top off at four to six billion barrels. Pemex finally signed a cooperation agreement with Russian oil giant Lukoil in 2014, its first cooperation agreement with a foreign nation since 1938.

Pundits praised the new Mexican energy policies, citing them as a successful example of energy reforms in the developing world. It was believed that oil production would once again be on the rise and renewable energy sources would be explored in greater depth. Opening the doors to private and foreign players was viewed not just as energy sector reform, but as a revolution that could provide a foundation for economic growth.

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But with the election of AMLO all that has changed. He has railed against the five-year overhaul of Mexico’s energy sector, instead opting to pour billions of dollars into solidifying Pemex and other state-owned companies. Critics have suggested that Obrador may be driven by nostalgia and nationalist ideology and has completely shut down exploration of alternative energy sources that could prove viable in Mexico.

Indeed, oil and nationalism have been part of the same dialogue ever since Mexico kicked out foreign oil companies and the government appropriated the energy sector back before World War II. And popular sentiment in the country is behind Obrador. Mexicans understand that Pemex, one of Mexico’s largest employers, dominates the economy of the country’s states that adjoin the Gulf and funds 20% of the national budget. Obrador spins his policy as a way to bolster the national economy, create more jobs, and increase GDP.

AMLO’s enthusiasm for one of the traditional symbols of Mexican strength may sound nice to voters, but Pemex is deeper in the red than any other energy company on the planet. As of the end of the second quarter of 2019 it was $104 billion in debt and spent a large part of 2019 on the brink of losing its investment grade status. Oil production has continued to wane as Mexico has slipped from fourth place to 11th globally. And government mismanagement and corruption that has plagued Mexico throughout its history has left its mark. In a continuation of that tradition, Obrador has appointed to positions of power those who share his opposition to private energy investments.

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Analysts have been scratching their heads, wondering why Mexico, a country heavily dependent on the global market, is shooting itself in the foot. They have compared the rise of Petrobras to a global oil production power to Pemex’s painfully slow decline as a case study of the intersection between nationalistic ideologies and political policy.

While Obrador has allowed foreign oil companies to continue doing business in Mexico, some pundits believe they will soon lose interest. AMLO has been a harsh critic of the 100 contracts that were awarded to private companies under the 2013-2014 legislation and refuses to issue more unless he sees the results he wants, though there is some ambiguity regarding exactly what that means.