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What happens to Mexico's energy reform — and Sempra
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His polling numbers are impressive and with little more than just one month to go before the July 1 national election, Andrés Manuel López Obrador is the clear-cut favorite to become the next president of Mexico.

So what would that mean for the sweeping energy reform measures Mexico recently put into place?

It’s hardly a trivial question, considering the reforms aimed at giving the sclerotic energy sector in Mexico a dose of free-market dynamism has attracted international and domestic companies bringing in projects totaling as much as $200 billion (U.S.) in the coming years.

Among those companies is Sempra Energy, the San Diego-based Fortune 500 company who through its subsidiary based in Mexico — IEnova — has invested billions in natural gas, renewable, liquefied natural gas (LNG) and liquid fuels projects.

López Obrador, a leftist populist often referred to by his initials — AMLO, is no fan of the energy reform measures put into place in 2013 and codified in 2014.

He has vowed to review all energy contracts, even from a massive auction earlier this year of offshore oil and gas rights expected to generate $93 billion from investors including Royal Dutch Shell. The former mayor of Mexico City has also promised to freeze fuel prices in the first three years of his six-year term.

Energy reform: Sí or no?

Most energy and economic analysts agree energy reform in Mexico was needed and has been a step forward in a country where only 7 percent of households have access to natural gas. In less than three years, 107 bids for oil exploration and production have been awarded to 73 companies from 20 different countries.

According to the U.S. Energy Information Administration, the U.S. energy exports twice as much energy product to Mexico than it imports — including 4.6 billion cubic feet of natural gas each day.

But energy reform is not popular among many voters, who have not yet seen its promised benefits. In January 2017, riots broke out after gasoline prices soared.

López Obrador has tapped into that frustration, said Jeremy Martin, vice president of energy and sustainability at the Institute of the Americas, a think tank at UC San Diego that hosted a conference last week in La Jolla that featured prominent names in Mexico’s energy sector.

For many Mexican voters, the current government “told us to do this reform,” Martin said. “They said our prices would go down, they said employment would increase (but) our prices haven't gone down, we don't see any more employment opportunities … And I think that's really where people say, ‘Let's give AMLO a chance.’ ”

Mexico’s oil production has dropped 26 percent since 2013, largely due to lower international crude prices during that time frame, and Pemex, the national oil company now stripped of its monopoly status, has been floundering. Its debt increased more than 60 percent between 2013 and 2017, putting more strain on the national economy.

“A private company facing similar financial challenges would be declared bankrupt,” said a report issued in April by IPD Latin America and the Mexico Institute at the Washington D.C.-based Wilson Center.

What the investors say

Few of the companies with major energy investments in Mexico seem to be willing to express concerns in public.

In an interview with the Union-Tribune last month, Sempra’s new CEO, Jeff Martin, said, “Independent of who the presidential candidate turns out to be, I think the energy reforms have worked. You're seeing a lot of new infrastructure, whether it's pipelines or wind farms or solar facilities like the ones we build.”

In 2016 alone, Sempra’s IEnova subsidiary partnered with TransCanada to construct and operate a $2.1 billion underwater natural gas pipeline and bought 100 percent of the Ventika wind farm in northeastern Mexico for $852 million.

In April IEnova announced a $130 million venture in a marine terminal that will receive, store and deliver gasoline and diesel fuel near Ensenada.

“At the end of the day, if the value you're creating is reaching consumers and improving the quality of life, we're quite confident that it doesn't really matter who wins” the presidential election, Martin said. “I think we're on the right side of it.”

An executive with Sierra Oil and Gas, Mexico’s first independent oil and gas company echoed Martin’s sentiments.

“I think if (López Obrador) actually analyzes (energy reform), he'll see that actually the investment is good for Mexico, it's good for Pemex and overall (he) shouldn't change things much, I hope,” said Gabriel Heller Green, who also spoke at the La Jolla conference.

Political upheaval is hardly a rarity in Latin America and Martin of the Institute of the Americas said energy companies take the long view.

“Political calendars are much shorter than energy calendars,” Martin said. “(Energy) investments to a large degree are long-term investments. I'm sure there's concern (in) many quarters about what this may mean in the near term, but these are long-term projects predicated on 10, 15, 20-year horizons.”

Political polls can be tricky but it’s looking increasingly likely that López Obrador will win on July 1.

One survey released Wednesday showed him leading by 16.5 points over his closest challenger, Ricardo Anaya. A poll released by the Dallas Morning News and the University of North Texas had López Obrador up by 26 points.

Not an easy thing to do

Making major changes to Mexico’s energy reform would be difficult.

The reform was placed into the country’s constitution, so rescinding it would require a two-thirds vote from both houses of Mexico’s congress. In addition, a majority of the legislatures from Mexico’s 32 states would have to approve the change.

“So it’s a big move that needs a lot of support from many, many actors,” said Guillermo García Alcocer, chairman of Mexico’s Energy Regulatory Commission.

A number of other Mexican energy officials attended the conference in La Jolla and expressed their support for the reform — often in blunt terms.

“Energy reform in Mexico is here to stay,” said Aldo Flores Quiroga, Mexico’s deputy secretary of energy for hydrocarbons. “Companies have already made a long-term assessment of the opportunity in Mexico. They have set up shop. We have companies from 20 countries already that have joined in creating this new reality. So it's not only words, it's a legal reality, it's an institutional reality and it's an investment reality.”

Carlos de Regules Ruíz-Funes, executive director of the National Agency for Safety, Energy and Environment of Mexico, which is in charge of the industrial safety and environmental protection of the hydrocarbon sector, said: “There is a new energy reality in Mexico. There are $200 billion that are going to be invested in over 100 contracts that have already been awarded. That market is real and that market has long-standing rules for the future."

But should he become president and desire to make changes to energy reform, López Obrador would have other tools at the ready, including simply slowing down the process of granting new contracts and reviewing the deals agreed to under the outgoing administration of Enrique Peña Nieto.

“Just by default, it could grind things down,” said John Padilla, managing director of IPD Latin America, an energy consulting firm.

Polls have also shown the party that López Obrador belongs to, Morena, picking up steam. If that pattern becomes a political reality, the high legislative hurdles to undo energy reform could become less daunting.

“The 2019, 2020 state elections will be important,” said Duncan Wood, director of the Mexico Institute at the Wilson Center. “If he is going to do anything, it would probably have to be in the second half of his administration, let’s say around 2022, 2023.”

So what happens to energy reform if AMLO wins?

Wood said a significant rollback could tempt financial fate at a time when Mexico’s economy is on shaky footing and with NAFTA negotiations stalled.

“There are 107 contracts out there with something like 220 billion barrels of oil,” Wood said. “If you were to mess with those investors and force them to pull out, that oil stays in the ground. Pemex can’t get it out. Pemex doesn’t have the capacity to do that. So you are forgoing oil production, tax revenue, royalties, employment.”

Wood said it could also have impacts beyond the energy sector.

“You start messing around with the investors there, you're going to freak out investors in other areas,” Wood said. “If you see that happening in the energy sector, why would an automobile manufacturer make the decision to come in? Because it sets a worrying precedent.”

Having said all that, there’s also the possibility that López Obrador would not take on energy reform at all — or, at least approach it with a light touch.

“We have an experience with AMLO running things in the past,” said Raul Gallegos, a senior analyst for Control Risks, an international strategic consulting firm. “He was mayor (of Mexico City) and he worked quite well with the private sector during that time. He was arguably somewhat responsible fiscally.”

In Mexico, the president holds one, six-year term. The new president takes office Dec. 1.

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