OPINION

PART 2

Second in a seven-part series

By ALEXANDRA HELGOTT and DUNCAN WOOD

Introduction

The successful candidate in Mexico’s 2024 presidential elections will face a once-in-a-generation opportunity to propel the country into a period of unprecedented prosperity and competitiveness. Nearshoring is a potentially transformative phenomenon during geopolitical and geo-economic realignment.

However, to achieve the nation’s full potential, access to abundant and affordable energy must be ensured and Mexico must achieve unprecedented levels of environmental sustainability in producing that energy. Balancing efficiency and equity in a sustainable way is the key to creating a long-term vision for the energy sector. This challenge, more than any other, will define the success of the new Mexican administration that takes power in October of 2024.

The Energy Trilemma

To be fully successful, Mexico’s national energy policy must provide for abundant energy supplies that are affordable and environmentally sustainable. In 2010, the World Energy Council coined the term “energy trilemma,” emphasizing the need to balance three main dimensions of a nation’s energy sector:

1. Energy security: a measure of a nation’s ability to satisfy current and future energy demand, and to be resilient to systemic shock. For most countries, this requires a combination of domestic and foreign sourcing strategies.
2. Energy equity: a nation’s ability to ensure affordable and abundant access to energy for both residential and commercial consumer.
3. Sustainability: an evaluation of the environmental and climate impacts of an energy system. In the contemporary era, this includes a strong focus on decarbonization.

In 2022, Mexico stood at position number 46 in the global energy trilemma rankings, below Uruguay, Chile, Argentina, Brazil, Costa Rica, Ecuador, Panama, Peru, Colombia and El Salvador, a position that has remained barely changed for the past decade. This ranking for Mexico highlights the ongoing challenge for Mexican governments to provide the conditions for a more secure, equitable and sustainable energy sector. Of particular concern in the 2022 rankings was the problem of energy security in Mexico, especially as it pertains to growing energy demand from the nearshoring phenomenon and rising societal aspirations.

Over the past decade, Mexico has swung between two extremes in the energy policy arena. In 2013 and 2014, the centralist Institutional Revolutionary Party (PRI) government of former President Enrique Peña Nieto embarked on an ambitious and audacious program of opening Mexico’s previously closed energy sector to private investment, both foreign and domestic. However, Mexico’s current President Andrés Manuel López Obrador (AMLO) challenged the impact of the energy reforms and then tried to revoke key elements of 2013 reforms. AMLO has consistently argued for an energy sector that both promotes national sovereignty and delivers concrete benefits to Mexican society, especially to those left behind by the modernization of the national economy.

The dramatic contrast between the visions of Mexico’s energy sector presented by the country’s two most recent presidents may seem to be a classic case of the political pendulum swinging between visions of modernization and tradition. To be successful, Mexico’s energy system must combine elements of both modernity and tradition, of both liberalization and a role for the state, and it must serve the interests of the business sector and provide affordable access to energy for the broader population. Efficiency and productivity must be balanced with the concern for energy equity. Only by doing so can the next government successfully build a sustainable vision of Mexico’s energy future.

State vs Markets: The Need for Reconciliation

Prior to the constitutional reform of Mexico’s energy sector in 2013, oil production had been suffering from an extended period of decline, dating back to at least 2004, when production peaked at 3.4 million barrels per day (bpd). Successive attempts at reforming Mexico’s energy sector had failed for political reasons. However, when the government of Peña Nieto announced its intent to open the hydrocarbon sector to private and foreign investment, a flood of capital suddenly appeared likely to deluge not just the oil sector but also electricity generation, particularly from renewable sources, such as wind and solar. Hundreds of billions of dollars were promised, with investors delighting in a level playing field, regulatory predictability and transparency in the bidding process for auctions of Mexico’s oil wealth and generation capacity.

The expected investment influx failed to materialize when newly elected President López Obrador announced that he would freeze the energy options and conduct an evaluation of the benefits of the 2013 reform. Soon after, his government withdrew funding from regulatory agencies and intentionally slowed down the permitting process across the energy sector, generating considerable discontent and uncertainty. At the same time, AMLO decided to give the state-run oil giant Petróleos Mexicanos (Pemex) huge injections of cash from the federal budget, enabling Pemex to make its debt payments (it is the most-indebted oil company in the world) and helping the company stabilize its oil production at around 1.6 million bpd. Furthermore, the president proposed legislation to the National Congress to formally establish the dominance of the national electricity utility, the Federal Electricity Commission (CFE), granting it the majority share in national generation, a move which was rejected by the Mexican Supreme Court.

The problems with both approaches should be clear. Under the Peña Nieto administration, the rapid and dramatic liberalization of the energy sector resulted in enormous wealth generation opportunities for a small percentage of the population, as well as foreign investors, but failed to generate any sense of legitimacy in the broader population. Moreover, the problems facing the national oil company, Pemex, (declining production, corruption and crippling debt levels) remain unresolved. In 2019, according to the U.S. Energy Information Administration (EIA), Mexico became a net oil importer for the first time. At the same time, the AMLO administration deterred private investment in both the hydrocarbons and electricity sectors, meaning that Mexico continues to be highly dependent on energy imports and vulnerable to the possibility of electricity shortages at exactly the moment that it needs abundant, affordable and clean energy because of nearshoring investment and energy poverty. The challenge, therefore, is to build the basis for an energy sector that provides for growing demand while satisfying conditions of equitable access to energy without irreparably damaging the environment.

To do so, requires a vision from Mexico’s new president that balances energy security, equity and sustainability.

A Strategic Vision for Mexican Energy

The next Mexican president should embrace an inclusive approach to building a strategic vision for Mexico’s energy sector, one that satisfies all three dimensions of the energy trilemma. Energy security must be achieved to take full advantage of the nearshoring opportunity. Energy equity is essential to legitimize national energy policy in the eyes of the electorate and to reduce energy poverty. Lastly, sustainability must be enhanced to achieve national and global climate goals and improve other environmental metrics, such as air quality.

Ideological concerns must take a back seat to serving the interests of people and businesses. To balance the three dimensions of the trilemma, an inclusive consultation process must be undertaken that incorporates the concerns and interests of diverse groups across society and the economy.

Hydrocarbons: Oil

The first challenge for Mexico’s next president will be to lift oil production. Though the AMLO government’s promise to raise production to 2.5 million bpd by the end of its term will not be fulfilled, it has at least stabilized production. This has happened partly due to the nation’s costly investment in Pemex, but also due to the private sector contracts signed during the previous administration that have begun to bear fruit, with private companies now producing over 5 percent of the nation’s crude oil.

Investing in Pemex’s Future: The national oil company simply does not have the bandwidth nor the expertise to be able to fully exploit Mexico’s significant remaining oil reserves, particularly those in the deep waters of the Gulf of Mexico, and complex onshore fields. Allowing and encouraging Pemex to partner with private firms, as permitted by the 2013 reform, will be essential to moving the company forward both in terms of production and technical capacity. Farm-outs (or joint-ventures) provide a model for sharing risk and increasing capacity that will be instrumental in enhancing energy security.

Raising Production: The success of private oil companies in Mexico since 2015 has been significant, despite the many obstacles placed in their way by the government and regulators and the fact that new bidding rounds have not been forthcoming under AMLO. There is still a small window of opportunity to attract foreign and private firms into Mexico’s oil industry if the government is willing to reverse the currently unfriendly investment climate. If this happens, it would be reasonable to expect Mexico’s oil production to grow significantly by 2035.

Levelling the Playing Field: A crucial factor in attracting investment will be to invest in the regulatory process once again in Mexico, boosting permitting and supervisory capacity, and granting private companies equal treatment with Pemex.

Hydrocarbons: Developing Natural Gas

One of the great achievements of the past 12 years has been the integration of the U.S. and Mexican natural gas networks via the building of pipelines across the border and within Mexican natural territory. Mexican consumption of U.S-produced gas has risen from just over 2 billion cubic feet per day in 2015 to over 6.8 billion by August 2023. This stunning rise has facilitated low-cost electricity production in Mexico, thereby boosting economic competitiveness.

To meet rising demand from nearshoring and residential consumers, Mexico must boost natural gas supplies.

To meet rising demand from nearshoring and residential consumers, Mexico must boost natural gas supplies. New pipelines from the United States and within Mexico will be necessary to bring gas to where it is most needed. The north and center of the country will see the most growth, but the south must also be served. The construction of an Interoceanic Corridor across the Isthmus of Tehuantepec provides the perfect opportunity to bring gas to the south of Mexico, spurring economic development and cheaper energy prices.

In addition to importing gas, Mexico must develop its own resources. Despite proven reserves of natural gas declining from 12 trillion cubic feet (tcf) in 2017 to 6.4 tcf in 2021, Mexico is estimated to have close to 550 tcf in technically recoverable shale gas reserves. Developing those reserves will require a consolidated effort by government, regulators, Pemex and the private sector.

The sector must take urgent measures to reduce flaring. In November 2022, Pemex committed to reducing its flaring, but in January of 2023, Reuters reported that flaring (the burning of natural gas during oil extraction) had increased dramatically after that commitment. This is a case of the national oil company burning potential revenues.

In 2016, Mexico committed to cutting methane emissions from the oil and gas sector from 40 percent to 45 percent by 2025. That agreement has not been respected but should be revisited to rapidly reduce carbon emissions, save valuable energy and improve the sector’s efficiency.

Electricity: Boosting Sustainable Supply

The dramatic decline in investment in generation and transmission of electricity in Mexico has increased the frequency and severity of power outages across the country, dramatically impacting not only the productive economy but also the most vulnerable segments of society. A power outage can mean the loss of a week’s groceries, an inability to access internet for homework and a potentially serious interruption in communication with essential services. As the legitimacy of existing generation contracts was questioned and reforms to the electricity sector were presented, interest in investment dropped drastically off.

Mexico urgently needs to expand both generation and transmission, but the CFE has limited bandwidth and funds to do so. The private sector should be encouraged to invest in new capacity, especially in renewable sources, to boost supply, reduce costs and increase both sustainability and national energy independence.

Mexico’s enormous potential in renewable energy generation has been well-documented, and three successful auction rounds in 2016-17 doubled the country’s renewable energy capacity and produced record-low prices for wind and solar power. The three rounds produced close to $9 billion in promised investment and moved Mexico firmly toward a market-based model. A strong signal from the new president that Mexico is open for business, with a commitment to faster permitting and a level regulatory playing field would do a lot to resurrect private sector enthusiasm.

A strong signal from the new president that Mexico is open for business, with a commitment to faster permitting and a level regulatory playing field would do a lot to resurrect private sector enthusiasm.

Further developing wind and solar resources in the south of Mexico will do much to alleviate energy poverty in poorer areas. It will be an essential part of the energy solution for the Interoceanic Corridor industrial development. However, social license issues must be overcome and effective social engagement by energy companies will be vital to making future investments sustainable.

Conclusion

Mexico once again stands on the brink of a major step forward in its economic development. The opportunity presented by the realignment of supply chains and nearshoring can grow the economy, raise living standards and create the conditions for sustainable and equitable development. To take advantage of this opportunity, however, the next Mexican president must develop a strategic vision of the energy sector that finally balances the energy trilemma. Fortunately, Mexico has enormous traditional and renewable energy reserves that can be developed if the investment climate is right. Energy security, equity and sustainability can all be achieved if that vision is developed in an inclusive way.

RECOMMENDATIONS

A crucial factor in attracting investment will be to invest in the regulatory process, boosting permitting and supervisory capacity, and granting private companies equal treatment with Pemex.

Mexico must boost supplies of natural gas through imports and developing its own national resource.

The hydrocarbons industry must take urgent measures to reduce flaring and cut methane emissions.

Mexico urgently needs to expand both electricity generation and transmission, but the CFE has limited bandwidth and funds to do so. The private sector should be encouraged to invest in both areas.

A strong signal from the new president that Mexico is open for business, with a commitment to faster permitting and a level regulatory playing field would do a lot to resurrect private sector enthusiasm.

Further developing wind and solar resources in the south of Mexico will help alleviate energy poverty in poorer areas.

The above article is part of a seven-part series first published by the Wilson Center Mexico Institute and is being republished in Pulse News Mexico with express prior permission.