Mexico’s energy sovereignty may be assured under USMCA, but foreign investment is not
The new North America trade deal USMCA explicitly affirms Mexico’s right to control and develop its energy resources, but the government’s attempts to change energy regulations could still undermine investment.
“The government of Mexico is absolutely sovereign in terms of it can do whatever it wants in energy policy,” said Pierre Alarie, former Canadian ambassador to Mexico, “but it is also sovereign in the fact that they have signed international agreements, and they need to respect those agreements also.”
“So, it is a political balance,” Alarie said, during a webinar hosted by hosted by Mexican energy association ISME on Wednesday, “between how far you want to push your sovereignty, how well you want to develop your private sector, and what role you want your state-owned enterprise to play.”
Canada operated as an energy market at some remove throughout most of the NAFTA era, the precursor trade deal. But in recent years, gas pipelines built by Calgary-based TC Energy came online in Mexico, while firms like Canadian Solar have begun building solar parks in Mexico.
“You couldn’t send a molecule of natural gas from Calgary, Alberta, to Mexico City,” Alarie said about the start of NAFTA in 1994, “now you could do that.”
USMCA, which replaced and modernized NAFTA on July 1, promises to see further integration as North America’s power grid, especially based on natural gas, becomes integrated among Canada, the US and Mexico.
CANADIAN INVESTMENT IN DOUBT
Yet, the energy policy of President Andrés Manuel López Obrador (AMLO) has sought to fortify state utility CFE and NOC Pemex in ways that have unsettled foreign investors, including the Canadians.
In mid-2019, AMLO forced private gas companies to renegotiate contracts with Mexican power utility CFE. Among other impacts, it delayed TC Energy and Mexico’s IEnova jointly built South Texas-Tuxpan pipeline from transiting gas in Veracruz state.
In late 2019, Mexico tried to do away with the criteria for green energy credits (CELs), a move that could have undermined the value of US and Canadian wind and solar investments in the country.
Then, in early May, a rule by Mexican grid operator Cenace stopped testing of late-stage wind and solar parks throughout Mexico, followed up a move by Mexico’s energy department to emphasize “reliable” power sources over intermittent generators like solar parks.
In the wake of that regulatory one-two, Canadian utilities like Atco and Northland Power criticized the decisions. Armando Ortega, president of Canada’s Chamber of Commerce in Mexico, said the “sudden change” in Mexico’s energy policy was “a very regrettable signal.”
US diplomats added their displeasure, and US oil lobby API claimed discrimination in Mexico by NOC Pemex.
DIALOGUE AND ENERGY TRANSITION
It is “not the right approach to the future,” said former Mexican ambassador to the US Gerónimo Gutiérrez on Wednesday, adding that policymakers in Mexico needed to be persuaded “of the benefits of a more open energy sector.”
So far, private firms have countered the regulatory changes by winning legal injunctions. But Alarie warned that arbitration of such disputes “is not the solution long-term.” Instead, the three nations should be open to dialogue under the USMCA.
“The future of energy is not in fossil fuels,” Alarie said, “the future of energy is in renewables, and probably hydrogen also.”
“That is not exclusive of Pemex,” he added, “that is with Pemex as part of a transition.”
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