By Tom Kleckner

HOUSTON — The long transition between incoming Mexican President Andrés Manuel López Obrador’s July 1 election and his Dec. 1 inauguration has provided an early glimpse into how the new administration will approach the country’s energy reforms.

Unfortunately, the competing messages have left many observers confused, said political scientist and long-time Mexico watcher Tony Payan.

Members of López Obrador’s administration “don’t seem to have full agreement on what they want to do,” Payan told the International Society for Mexico Energy Monday night.

Payan, fellow and director of the Baker Institute’s Mexico Center at Rice University, said one official will call for NAFTA to stay in place, another will say, “No NAFTA is good NAFTA.” Another official will say the new government will review the 107 energy contracts signed with mostly foreign companies, then somebody else will say, “No, we’re not.”

“Then somebody says, ‘Put the energy reform to a referendum,’ and someone else says, ‘No, we’re not,’” Payan said. “The reality is there’s a lot of chaos. The incoming administration is spending too much time deliberating in public. They should put together the entire team, lock themselves in a room, agree on what they want to do, then come out and provide details to the public on what they want to do.”

Payan said the resulting confusion is “wearing them out” and reducing the Obrador administration’s political capital.

“The public debates is one of the worst things they can do, and they’re doing it,” he said. “Just two months after the election, and there’s already too many things up in the air.”

Most of the early focus has been on Mexico’s floundering petrochemical industry, which produced 1.88 million barrels of oil per day in the first half of 2018, compared to 3.4 million barrels per day in 2005. López Obrador has announced a $16 billion investment plan to increase the country’s oil production and refinery capacity.

Payan said Pemex, Mexico’s state-owned petroleum company, will take precedent over other companies and industries. Many in Mexico hold the ideological belief the country’s petroleum resources belong to the Mexican people. (See Opening of Mexico’s Market at Risk from New President.)

In the meantime, Payan said, the electric industry could very well continue to work on flexing its newly deregulated muscles.

“My guess is the electricity production landscape and markets are changing so quickly, and the technology is moving so fast, that it will be harder to restore any type of centrality to the state,” he said. “I think electricity is a little bit easier because it’s not wrapped in all that nationalism like oil is. Regulatorily, technologically, that market is so different. It’s a completely different ballgame. It’ll be hard to set them back.”

James Fowler, a senior Americas energy analyst for the ICIS Mexico Energy Report, agreed with Payan that the incoming government is sending mixed messages to participants in the electricity sector.

“On the one hand, they are talking about supporting private investments in the country and its infrastructure, whereas, on the other hand, they have talked about strengthening the role of state utility [Comisión Federal de Electricidad],” Fowler said. “Until energy market participants have a clear idea about where the new government’s energy policy is headed, we expect to see a slowdown in both new investment and the entrance of new companies into the Mexican power market.”

The Goodness of Competition

López Obrador’s $16 billion investment package includes plans to build more hydro facilities. However, he has also called for reducing the consumption of imported natural gas for power generation and cancelling a proposed retirement of 12 GW of inefficient and outdated power plants to boost the country’s energy independence, Fowler said.

“In reality, the new government will find it very hard to achieve these goals, while at the same time encouraging private investment in much needed new infrastructure, so something will have to give,” he said.

“When I look at the numbers, I can’t figure out how they’re going to do it,” Payan said, noting the disconnect between reduced taxes and increased infrastructure spending.

Renewable energy could also face some obstacles, Payan said. He pointed out López Obrador, a left-wing populist who emphasized social inequality on his way to a resounding victory, “wants to give a greater voice for farmers and indigenous communities.”

“If the federal government gives them a great voice in these deliberations, energy projects could be further delayed,” Payan said. “My guess is López Obrador will rediscover the goodness of private competition.”

Payan, a political scientist who spent 15 years on the U.S.-Mexico border at the University of Texas at El Paso, took a moment to address the trade agreement between the two countries trumpeted earlier in the day. He called it “much ado about nothing” and forecast a frosty reception in Mexico.

“I don’t think it’s going to go well in Mexico, once the critics begin to parse the agreement,” he said. “I think it actually strengthens the American manufacturing industry … steel, aluminum, cars. It weakens the car industry in Mexico and places it at a greater disadvantage than before.”

In the end, Payan said, López Obrador just wants NAFTA off his plate and may instruct his supporters in Congress to approve whatever the outgoing administration sends them. In the new Congress that began convening Sept. 1, the three parties that nominated him together hold commanding advantages in the Senate (68 of 128 seats) and Chamber of Deputies (307 of 500 seats).

“There’s a lot of uncertainty in the air. It’s not as amicable as you would think,” Payan said. “López Obrador has a lot more to clarify and define. He will have a tough time maintaining political discipline in Mexico. In general, I think we’re in for a rougher ride than we think.”

[Editor’s Note: A previous version of this story incorrectly reported that López Obrador’s MORENA party held 68 Senate and 307 Chamber seats. MORENA joined with the Social Encounter and Labor parties to nominate him and form a coalition government.]