[NGW Magazine] Amlo casts cloud over Mexico's E&P
At a private event hosted by Mexico’s hydrocarbon companies association early this year, a high-ranking executive at Pemex, the country’s largest natural gas and oil producer, was asked about how the energy industry could change if the populist, Andres Manuel Lopez Obrador, were elected president.
The executive named several key concerns: the possible interruption of oil and natural gas auctions; a refineries construction programme to reduce dependence on imported petroleum products; and the threat of a slowdown in the industry that only recently was opened to competition.
He concluded his remarks with a joke, encouraging peers in attendance to pray that Lopez Obrador would not win. The crowd erupted in laughter.
On July 1, members of the Mexican energy industry did not have so much to laugh about. Lopez Obrador, known as Amlo, won the Mexico election in a landslide, beating his closest competitor by more than 20 percentage points and claimed the country’s first presidency for the Morena party. Known as a leftist, Amlo won with a campaign that promised more opportunities for the lower classes and a purge of the corruption that he said had plagued the previous administration.
While many of his calls for change were celebrated across the country, his proposed modifications to energy policy have the industry worried. Following a constitutional amendment ended state-owned monopolies in the oil, natural gas and electricity industries in 2013, Mexico has held several public auctions to generate private energy investment. To date, the auctions have raised billions in promised investment, and the country forecasts increases in natural gas and oil production as a result of the new players in the market.
The Amlo administration, however, has threatened to temporarily stop the international auctions and focus on more self-sufficiency and local investment. He has said his government will construct two new refineries to reduce fuel imports from the US and has suggested that more renewable energy sources should be used to generate electricity and lessen dependency on natural gas imports from the US.
He has also promised to review the energy contracts won during the current administration to assure they were awarded fairly and legally. This will slow down the pace of oil and gas auctions, according to members of his proposed cabinet. Since 2015, Mexico has granted more than 100 oil and natural gas development contracts to major international producers such as US ExxonMobil and Chevron and Anglo-Dutch major Shell.
“The contracts in the energy sector signed with private companies will be reviewed to prevent acts of corruption or illegalities,” he said in his victory speech early July. “If we find anomalies that affect national interest, they will be presented to the congress and national and international tribunals. Everything will be done legally and there will not be confiscation or expropriation of assets.”
Since July 2015, Mexico has held nine public auctions to award onshore and offshore leases for natural gas and oil development, although the next one, scheduled for September, has attracted little attention from the international oil and gas community. The country’s natural gas production hit record lows last year and Mexican oil production has declined every year since 2004.
“It is the most inconvenient pause that you could possibly have in a reform implementation process,” the managing director of energy consultant IPD Latin America, John Padilla, told NGW. “The fact that you have all these processes in motion and now there is the threat of a brain-drain and slowdown – it’s crippling.”
Regime Change
Padilla’s concerns are matched by many in the industry. The entrance of the Lopez Obrador administration is likely to mean that those instrumental in the 2013 opening of the industry will be replaced by members of the incoming government. New secretaries will be named in energy and the government’s natural gas agencies, while Pemex might get yet another new CEO – the fourth since 2016. Long-term policies and processes already underway – such as the government’s five-year plan for natural gas and oil auctions – might be disrupted entirely.
Another concern of the industry is how high energy investment falls on Amlo’s priority list. For the outgoing administration of Enrique Peña Nieto, the energy reform and opening the industry was billed as one of his government’s top priorities. In contrast, AMLO, who barely mentioned the energy industry during his campaign, plans to put social initiatives – such as educational grants for Mexican youth, more agrarian support and increased pensions – at the top of his list.
“The election of Amlo augurs great uncertainty over the direction of Mexico’s seminal 2013 energy reforms,” the chairman of the Atlantic Council’s Global Energy Center Advisory Group, David Goldwyn, wrote in a July 1 post on the group’s website. “The trade-offs an Amlo administration may face between investing national income in energy infrastructure and increasing social spending may temper its strategy…. With a robust social spending agenda, sending taxpayer money to Pemex rather than using private capital may not be attractive upon close examination.”
What’s Next for Natural Gas?
Goals for higher gas production in Mexico during the Peña Nieto government were never reached. Imports from the US rose to record highs during the current administration while domestic natural gas production plummeted. In April, natural gas imports from the US averaged more than 5bn ft³/day, a 13% increase from a year earlier, according to the energy ministry.
Lopez Obrador has suggested that renewable energy sources, particularly hydroelectricity, will be a focal point of his administration’s plans for the industry. The incoming president has said that his administration will install and modernise as many as 125 hydroelectric dams across the country, which will decrease the need for imports of US natural gas.
Members of the current government feel that straying from natural gas development plans would be a mistake. Mexico has massive untapped basins, particularly in the northern part of the country, and continuing to depend on the US to provide natural gas could be a geopolitical risk, Juan Carlos Zepeda, head commissioner of the national hydrocarbons commission (CNH), has said. US imports are used to meet as much as 85% of Mexico’s natural gas demand.
“There is considerable uncertainty for natural gas vendors, distributors and transporters as to what the new government will do,” the chief energy counsel at Brilliant Energy Consulting and non-resident scholar at the Baker Institute Mexico Center, Miriam Grunstein, told NGW. “Since the liberalisation, Mexican natural gas prices have gone crazy and been very opaque. There needs to be a better system in place that obeys supply and demand. Amlo’s track record has not been strong in creating efficient markets. It’s going to be complicated.”
In the final months ahead of Lopez Obrador’s inauguration on December 1, Mexico plans to auction oil and natural gas rights in more than 40 onshore conventional and shale areas to private producers. The interest of foreign producers, particularly in the shale gas and oil fields offered, has been almost non-existent. To date, only Pemex has qualified to bid for the nine shale areas up for grabs in the northern Burgos basin, a sign that private producers are waiting to see what Amlo will do before committing to long-term investment in Mexico.
“Everyone is waiting to see what will happen and no one really knows what that will be once the Amlo administration begins,” Grunstein said. “There’s a lot of reluctance. This is the calm before the storm.”
However there is also some confidence that any change will be modest. The CNH is enshrined in the constitution as an independent licensor and regulator, Zepeda told NGW last year when the elections were looming on the horizon. This is believed to be a unique legal arrangement, one that makes it very difficult for any new government to wrest back control over its oil and gas reserves. "It is very unlikely that a single political party could reverse the reform process," he said.
New US export line starts
TransCanada said July 16 it had placed its US$1.2bn Topolobampo Pipeline project into service in northern Mexico, providing capacity for the delivery of 670mn ft3/day of capacity to the states of Chihuahua and Sinaloa as the upstream interconnection with TransCanada’s existing Mazatlan Pipeline.
The project involved the construction of approximately 560 km (348 miles) of 30-inch diameter pipeline from El Encino, near the city of Chihuahua, to Topolobampo, near the city of Los Mochis, Sinaloa. Combined, the Topolobampo and Mazatlan pipelines form a system that adds over 870 km (540 miles) of critical energy infrastructure that will play a fundamental role in providing natural gas to power plants, industrial and urban markets for the economic development of the northwest region of Mexico.
“The completion of the Topolobampo and Mazatlan pipeline system is an important milestone for TransCanada as we continue to expand our portfolio to deliver natural gas to serve Mexico’s electric generation needs,” TransCanada Mexico president Robert Jones said. “We are developing the infrastructure to feed new power plants and convert existing fuel oil and diesel power plants, thereby reducing both the cost of electricity and greenhouse gas emissions.”
The construction of the Topolobampo Pipeline presented some of the most demanding construction challenges in the country given the route’s geography, which included the Tarahumara mountain range in Chihuahua. TransCanada used innovative techniques such as a raised bore to cross the extreme steep cliff faces and air cranes for transporting pipes to remote locations along the route.
Throughout the course of the project, which was one of the first in Mexico to include government-led indigenous consultations with impacted communities, TransCanada worked closely with landowners and local officials to ensure they were an important part of the development and construction process. Construction work created jobs for nearly 3,500 workers, and achieved more than 10mn man-hours without a lost-time incident.