Protecting Pemex

Mexico’s president has submitted a bill that would allow government agencies to suspend fuel traders’ licences in the event of “imminent danger ... for national security, energy security or the national economy”

WHAT: AMLO wants the government to have the power to suspend fuel traders’ licences under certain circumstances.

WHY: The draft legislation is in line with the president’s overall preference for letting state-run entities dominate the energy sector.

WHAT NEXT: More populist policy initiatives may be forthcoming in the run-up to midterm elections in June.

Mexican President Andres Manuel Lopez Obrador appears to be stepping up his campaign to secure state control over the energy industry.

On March 26, the president sent a bill to Congress that provides for giving the government the right to suspend permits granted to traders in refined fuels under certain conditions. According to one section of the draft legislation cited by major news agencies, the Energy Regulatory Commission (CRE) or the Secretariat of Energy (SENER) may inactivate permits temporarily “when an imminent danger is foreseen for national security, energy security or the national economy” or when petroleum product importers are found to be handling contraband.

The bill does not provide a full explanation of what other circumstances might qualify as “imminent danger”, and the president has not spoken publicly about what might necessitate the suspension of permits. However, it asserts that a stricter policy is necessary in order to “combat corruption, ensure supply, and protect the national economy and state revenues.”

The legislation also gives Pemex, the national oil company (NOC), the power to assume control of facilities with suspended permits. Thus far, it is not clear what form this control might take. The presidential administration has not said exactly what Pemex would (and would not) be authorised to do if it took the reins of a company with a suspended permit.

Whatever the case, the new legislation is certain to unnerve the foreign and privately owned companies that have gained access to Mexico’s fuel market since 2013-2014, when former President Enrique Peña Nieto secured passage for a package of far-ranging energy reforms.

Policy stance

This reform initiative was designed to loosen Pemex’s long-standing monopoly over upstream and downstream operations in Mexico’s oil and gas industry, and it has enjoyed a certain amount of success. However, Lopez Obrador has been working to blunt the impact of the changes, which he views as a source of corruption and economic instability.

For example, he has postponed or suspended auctions of new upstream oil and gas assets. He has also stated explicitly that he believes the public sector should take a leading role in all aspects of the fuel and energy business, and he has instructed his administration to take as much action as possible under Mexican law, short of amending the constitution, to promote the interests of Pemex and its state-run cohorts. Additionally, he has shrugged off complaints that Mexican regulators are slow-walking foreign and privately owned companies’ requests for permission to import petroleum products for domestic consumption.

According to Alejandro Schtulmann, the head of the Mexico City-based risk consultancy Empra, the president’s actions on this front are quite deliberate. The current administration is trying to send a message that “the Mexican government doesn’t want you here,” he said, according to a report from Bloomberg.

Schtulmann indicated that he expected the president to continue throwing up legal obstacles to companies that might compete with Pemex, even if outside actors such as the US government sought to interfere in order to protect US companies’ interests. “If they made investments, they are going to try to operate, but it will all come down to a legal battle,” he remarked. “There could be strong retaliation from [Washington] toward this, and also from private parties.”

Market share

He also stressed that Lopez Obrador was determined to protect Pemex’s control over the downstream sector, particularly with respect to petroleum product imports, distribution and sales. The president’s “main motivation” for rolling out the new legislation, he said, is to prevent the NOC from losing any more market share.

This makes sense, given that the previous administration’s reforms have had a significant impact on Pemex’s downstream business. True, the NOC has lost its monopoly on upstream development projects, and it has seen a few new fields auctioned off to IOCs and privately owned firms since 2013-2014. But it has also seen its share of the domestic diesel and gasoline market drop “by double digits,” Bloomberg remarked last week. And in June 2020, it saw the total volume of diesel imported by private companies drop below its own import totals for the first time ever.

This development does not line up with the policy preferences of the Mexican president, who made it clear on March 29 that he believed opening the downstream fuel sector up to competition had spurred corruption. During a daily press briefing, he said: “Over 1,000 permits were granted in Mexico during the [previous] neo-liberal administrations to import gasoline and diesel, many of which were never used, but were kept for speculation purposes, even avoiding payments of royalties for years.”

He went on to say that his government would be taking a closer look at all private companies seeking permission to import petroleum products. From now on, he said, import permits will only go to firms that can prove that they own or lease storage facilities that hold five days’ worth of fuel.

The practical effect of this measure will be a reduction in the number of new petroleum product import contracts, Lopez Obrador said. “We will honour contracts, but we will not grant any more permits. We need to protect Pemex to ensure supply,” he declared.

The president acknowledged that Mexico was still reliant on fuel imports and attributed this dependence to under-investment in Pemex’s refining assets. He described the situation as unacceptable, saying: “We cannot continue depending on imported fuel.”

Election implications

It is too early to say how the new bill might affect Mexico’s oil and gas industry.

On the one hand, it has yet to pass through the legislature, so its provisions have not taken effect. On the other hand, even if it does become law, it may draw a challenge from Mexico’s Supreme Court, which has sought to block some of the president’s other attempts to support public-sector energy companies.

Nevertheless, it does indicate that Lopez Obrador is not taking a different approach to energy policy in the run-up to Mexico’s mid-term elections in June of this year. As such, his administration may very well float more proposals designed to benefit Pemex and other state-controlled energy companies over the next two months.