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Is Amlo a threat to Mexico's oil opening?

The industry fears a López Obrador victory in July's presidential election could derail the country's reforms

The biggest threat hanging over Mexico's historic energy reforms is the rise of leftist presidential candidate Andrés Manuel López Obrador, widely known as Amlo, who has been a harsh critic of opening up the sector to foreign investors.

Amlo's critics warn that a victory in July's presidential election will derail the reforms and could bring a Hugo Chávez style renationalisation of the industry.

In a coordinated media blitz over the past couple of weeks, some of Amlo's top advisors have sought to soften the edges of the candidate's opposition to the reforms and tame industry fears over his possible victory.

"It would be an error for the next administration to cancel all that has been accomplished in this one," Abel Hibert, Amlo's top economic advisor, told Bloomberg.

His comments came a day after Amlo's chief business advisor, Alfonso Romo, told the same outlet that, "what we've seen from the bidding process is that they're very good for the country, they're well done, and up until today we have no complaints."  

Rocio Nahle, a lawmaker that is the leading candidate to become Amlo's energy minister if he wins the presidency, told Reuters that her party is "open to investment, we are open to the world."

Petropoliticking

Should the industry be assuaged? There are good reasons to be skeptical. The comments so far have not come from Amlo himself, only advisors who he frequently overrules. There is also clear politicking in play. Amlo has held a steady, though tentative, lead in polls ahead of the 1 July vote and he is looking to reassure Mexico's business community, which overwhelmingly opposes his populist candidacy and could sink his hopes of becoming president. And, of course, he could always simply change his mind.

Still, the oil opening has taken on a momentum of its own that could persuade Amlo to at least partly stay the course. The swift pace of bid rounds has pulled in dozens of companies that have committed billions of dollars in investment in initial exploration. That investment is still only a trickle as early stage exploration work moves slowly, but it will be an economic boon to whoever is sitting in Los Pinos for the next six years as activity picks up. There is little incentive for Amlo to derail these projects.

The case that Amlo represents an imminent nationalisation threat is not particularly compelling either. Many have taken Amlo's stance that he wants to review the contracts signed under the oil opening, along with his opposition to the reforms from the start, as a warning that he has designs on renationalising the industry. Even if that is Amlo's desire, the conditions in Mexico are not conducive to a renationalisation.

The Chávez case is illustrative. The former Venezuelan president took power in 1999 but didn't move to nationalise the industry until 2007, after foreign producers had pumped billions of dollars into a series of costly heavy-oil projects and started producing. Then came the oil price surge. That combination was an enticing opportunity for Chávez and provided a major short-term windfall for his socialist agenda (the long-term effects on the other hand have clearly been devastating).

The context for a potential Amlo presidency is quite different. Aside from the constitutional restraints, major new private-sector led projects, especially in the deep water, will still be in the capital-intensive exploration and development phase during the next president's term. There is little incentive to nationalise an oil project at this stage because the government would simply have to pick up the cost of seeing it through to production. Nor is an oil price in the $60s a strong incentive to nationalisation.

That doesn't mean there aren't risks to the reforms in an Amlo victory. The uncertainty around Amlo's populist agenda would very likely chill investment as foreign investors waited to see his administration's approach to the industry. Amlo would also almost certainly slow down the pace of the oil auctions, if not put them on hold entirely. That would be very disruptive to companies looking to establish a steady pipeline of projects for their new Mexico businesses.

Amlo would also likely try to return Pemex to a symbol of the nation's continued primacy in the energy business, even if he accepted a role for foreign investment. That could force Pemex to take a leading role in the most promising areas like the deep water, a policy that backfired in Brazil when Petrobras was given preferential rights in the pre-salt. An Amlo government would also likely push Pemex to make investments in the downstream and gas businesses, stymying foreign investment in those areas.

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