Contents

Introduction

Mexico's President-elect Andrés Manuel López Obrador, who will take office on December 1, has begun outlining his plans for the country's oil sector, which include the construction of at least one oil refinery and a transfer of state oil firm Pemex's headquarters to the oil-producing state of Campeche.

López Obrador, known by his acronym AMLO, a veteran leftwinger who won a landslide victory on July 1 in his third run for office, having previously campaigned in 2006 and 2012, had caused some uncertainty in the oil sector with a pledge early in this year's campaign to make "corrections" to the energy reform.

In campaigning, AMLO (pictured, below) pledged to review all the contracts so far awarded in the country's oil and gas auctions to ensure transparency had been observed on behalf of the energy regulatory commission (CRE), vowing to cancel any contract found to have been won through corrupt practices.

While there have been no allegations of such practices, some observers of Mexico's recent reforms - which also modified the telecommunications and education sectors - had become skeptical of the levels of transparency applied.

This sentiment was exacerbated by the scandal involving bribes paid to secure contracts for Brazilian conglomerate Odebrecht, as well as that surrounding outgoing President Enrique Peña Nieto's purchase of a US$7 million Mexico City mansion from Grupo Higa, a contractor that had been awarded a contract to build a high-speed train in the country, and which was rescinded as a result.

Fears that the energy reform would suffer setbacks were assuaged in February however when AMLO's close advisor Alfonso Romo told the media that the candidate is in favor of the auction process, as he views them as beneficial to the country, and that, in AMLO's opinion, the auctions held so far were well executed and transparent.

Romo was also quoted as saying that AMLO does not plan to nationalize any assets or companies active in Mexico.

And since winning the election, analysts have reinforced their expectation that AMLO will not reverse the energy reform.

According to Ixchel Castro, manager of oil and refining markets at consultancy Wood Mackenzie in Mexico City, AMLO will need to use the reform to achieve the country's oil production targets.

As we get closer to the start of his presidency on December 1, messages remain somewhat mixed. According to a document outlining AMLO's transition team's energy plans quoted by local media on August 28, the incoming government will "indefinitely suspend" all oil and gas contracts, "postpone alliances with Pemex" and regulate the export of oil by private companies operating in Mexico.

The suspension of such contracts would jeopardize the country's stated aim of ramping up oil and gas production, which have been in constant decline since 2004.

The document also states that the new government would evaluate Mexico's departure from the International Energy Agency (IEA), which the country joined in February of this year, and explore the possibility of a closer relationship and greater coordination with the Organization of Petroleum Exporting Countries (OPEC). 

Such measures would represent a marked shift in policy from that of the current government of President Enrique Peña Nieto, whose government proposed the energy reform that was approved by congress in late 2013. The reform allowed for greater private participation in the country's oil and gas and electric power sector, created new regulatory bodies and paved the way for oil and gas auctions that have so far awarded some 100 contracts to private players, while allowing for Pemex to strike up partnerships and farm-outs for deepwater exploration.

Meanwhile, in late August Mexico and the United States reached a trade agreement and might go it alone in a two-way deal if Canada and the US cannot resolve its issues for a trilateral Nafta 2.0.

Three months before AMLO takes office, uncertainty regarding what modifications will be made to Mexico's recently opened oil and gas sector remains rife, and investors and observers will be keenly watching how the new government acts to analyze the possible short- and long-term implications of its policies on the sector.  

Figure: Oil Production
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