By MARK LORENZANA
According to a report by the Wall Street Journal (WSJ) on Sunday, June 12, the government of Mexican President Andrés Manuel López Obrador (AMLO) “is shifting the country to a 1970s industrial policy” and has resorted to “greater state intervention” by targeting privately owned energy firms legally operating in Mexico and “backing state-run energy giants.”
The WSJ story, filed by David Luhnow and Santiago Pérez, cites the case of Spanish-owned energy firm Iberdrola SA, which operates a 1,100-megawatt power plant in Monterrey, the capital and largest city of the northeastern state of Nuevo León, Mexico. Iberdrola has powered scores of private companies in Monterrey.
However, since January of this year, half of Iberdrola’s gas-fired plant has been forcibly shut down by Mexico’s government, according to the WSJ report. The report also says that the electricity shutdown forced dozens of firms in Monterrey to return to the inefficient and more costly state-run utility for their power.
The report also says that in September 2022, a fuel-import terminal owned by global investment firm KKR & Co. was closed at gunpoint by Mexico’s energy regulator, months after it closed two other such terminals owned by U.S. companies. The WSJ report adds that, in 2022, the Mexican government took over operating control of the biggest oil find in recent Mexican history, stripping it from a U.S. company that made the discovery. The report notes that the AMLO government is also trying to revoke the operating license of Latin America’s largest wind farm — majority owned by Japan’s Mitsubishi Corp. — as an example of how its policies are hobbling Mexico’s transition to renewable energy.
The AMLO government has openly launched a broad effort to stop new private investment and restore the dominant position of former government monopolies in both oil and gas and electricity, says the report by Luhnow and Pérez. This effectively reversed an overhaul to the Mexican Constitution in 2013 that opened both the oil and gas markets to private firms.
The WSJ report states that, according to economists, AMLO’s moves targeting private energy companies will “cost Mexico billions of dollars in forgone investment; raise domestic energy prices; limit the growth of oil and electricity output; and damage the competitiveness of Mexican companies and hundreds of multinationals that operate (in Mexico),” thereby also risking prompting more migration by job-seeking Mexicans to the United States.
The state-run energy giants that the WSJ story refers to are Mexico’s Federal Electricity Commission (CFE) and state oil giant Petróleos Mexicanos (Pemex).
According to the WSJ report, AMLO has alleged — without offering evidence — that past governments were paid off by multinationals to allow them to enter the market, leaving Mexico’s energy security at risk and consumers at the mercy of profiteers. AMLO has also argued that Mexico’s turn to an open economy left too many poor people behind.
In a news conference on Monday, June 13, López Obrador said, “They (the private energy firms) had a plan to close all the CFE plants and leave everything to the private sector, to such a degree that half our country’s electricity is now made by private companies.”
In the report by Luhnow and Pérez, according to the Mexican Confederation of Industrial Organizations (Concamin), the country’s average electricity prices for companies are already about 40 percent higher than in the United States, putting Mexico at a disadvantage for manufacturing. But, as the WSJ points out, economic experts say López Obrador’s policies will make matters far worse.
In addition, says the WSJ, since the AMLO government took the reins in 2018, it has stopped new auctions for oil-and-gas exploration by private companies, new mining concessions and new investments for private electricity generation: This includes solar and wind farms that can produce electricity at — according to figures from Mexico’s energy regulator — roughly a third the CFE’s average cost.
The report also says that in 2022, the Mexican government passed a law forcing the national electric grid to give priority to electricity produced by the CFE, even though this was more costly and polluting compared to the power provided by private companies. This law also retroactively affected an estimated $22 billion in investment by firms such as Iberdrola.
The WSJ story says that the law forcing the grid to use the CFE’s electricity could raise the country’s electricity rates by up to 52 percent, or some $5.5 billion a year as well as boost carbon dioxide emissions by up to 73 million tons a year. That is a 65 percent jump from current emissions, according to a recent study by the U.S. government’s National Renewable Energy Laboratory, says the WSJ report. According to environmental groups like the Natural Resources Defense Council, says Luhnow and Pérez, this could prevent Mexico from meeting its carbon-reduction goals under the Paris Climate Agreements. The WSJ asked Mexico’s Environment Secretariat (Sedema) to comment on this point, but declined.
The Luhnow and Pérez story says that global investment firm KKR, which was closed at gunpoint by Mexico’s energy regulator, said it planned to sue the Mexican government for $667 million in damages linked to the takeover of its fuel terminal. For its part, Houston-based Talos Energy said, according to the WSJ, that it would pursue international arbitration over the AMLO government’s decision to seize operating control of its Zama field, which shares oil with a neighboring field under Pemex’s control.
The AMLO government has said that it is in talks with Talos, KKR and other U.S. firms to resolve the issues.
The fuel terminals that the López Obrador government closed, according to the WSJ story, all supply gasoline to private oil companies that are competing with Pemex to sell gasoline, part of the 2013 overhaul in Mexico that ended Pemex’s monopoly. The 2013 change in constitution allows private investment in energy, but the CFE kept a monopoly on the residential market, as well as all power transmission and distribution, adds the report by Luhnow and Pérez.
“The closure of the terminals and suspension of licenses to import fuel … selectively and unfairly benefit Pemex by putting in artificial and illegal barriers to free trade,” the Mexican Employers Confederation (Coparmex) said in a written statement, according to the WSJ.
Mexico’s Energy Secretariat (Sener) was asked by the WSJ to comment, but declined.
Iberdrola’s 1,100 megawatt power plant in the outskirts of Monterrey, says Luhnow and Pérez, produces 550 megawatts of energy that it sells to the CFE and another 550 that it sells to private companies.
In 2020, Ignacio Sánchez Galán, chief executive officer of Iberdrola, said the firm would halt further investment in Mexico, according to the WSJ report. “If they say they don’t want foreign investment, then we won’t invest,” Sánchez Galán told analysts during a quarterly results call.