UK: International Investment In Mexican Energy: In Or Out?

Energy reforms in Mexico have made it an excellent target for international investment in recent years, but the election of a new left-wing president, Andres Manuel Lopez Obrador, has cast doubts about the future of Mexico's flourishing energy market.

While AMLO's political stances raise the possibility that Mexico will row back its reforms, the realities of the energy market may force AMLO to take a more pragmatic approach.

A market for international investment

Mexico's 2013 Energy Reforms (the "Reforms") moved to bring Mexican energy into the global market. Under the Reforms, private and foreign investors were permitted to participate in Mexico's previously-nationalised energy market, albeit with the state retaining overall control. The Reforms also included an attractive tax regime for investors and increased government efforts to combat corruption within Pemex, the state-owned petroleum enterprise. These changes capitalised on Mexico's unique geographic location, which allows for effective exploitation of natural resources both on and offshore, as well as historic ties to the large energy markets of the United States and South America.

The Reforms were especially beneficial for renewables, with initiatives for clean energy encouraging expansion into solar and wind. The government introduced production targets of 35% clean energy by 2024 and 40% by 2050, which the International Energy Agency called "one of the most ambitious, comprehensive and well-developed reforms undertaken in the world since the 1990s".1 Mexico's capacity for renewable energy is promising; a 2013 report by IRENA, an intergovernmental organisation promoting renewable energy, found that Mexico had the ability to generate 280 terawatt-hours from renewable resources (46% of its electricity for the year) by 2030, including 30GW each from solar and wind and 4.5 GW from geothermal.2

A promising future in question

Recent political changes in Mexico, however, have put some of the energy market's positive developments at risk. On 1 July 2018, Andres Manuel Lopez Obrador (or 'AMLO', as he is commonly known) won the Mexican presidency in a landslide victory. Echoing Donald Trump's success in the United States, AMLO campaigned on a platform of radical change, with nationalism and anti-corruption at the forefront of his promised 'Fourth Transformation' (the previous 'transformations' of Mexico being significant periods of change such as independence from Spain and subsequent revolutions). An inveterate left-winger, AMLO criticised the Reforms during his campaign, especially foreign investment in the energy sector. His election has thus raised concerns that Mexico might see a restriction of its recent investment expansion efforts and a return to a fully state-controlled energy sector. AMLO also seems to support a movement away from renewable energy, instead proposing the construction of new oil refineries, including a new refinery in AMLO's home state of Tabasco, to combat the losses the country incurs when selling crude oil to be refined in the United States.

Since coming into office on 1 December 2018, AMLO's actions have not quelled these concerns. His cancellation of the construction of the Mexico New International Airport due to allegations of corruption has worried investors that projects funded by overseas investment may be curtailed by AMLO's political motivations. More worryingly, AMLO's three-year suspension of auction bid rounds suggests he may follow through on his nationalistic agenda and prioritise the development of state-owned Pemex at the expense of foreign investment opportunities.

A place for cautious optimism

While AMLO may be inclined to create obstacles for foreign investment in Mexican energy, his ability to undo the Reforms in their entirety should not be overstated.

In the first place, the Reforms are codified constitutional changes, which means that AMLO must secure a two-thirds Congressional majority to repeal them.3 Despite this constitutional obstacle, however, AMLO could theoretically prevent foreign investment in oil and gas, as the Mexican government has control of the private auctioning process – and indeed he has already done so with his three-year suspension of auction bid rounds. As such, while the constitutional status of the Reforms should give investors some comfort about their longevity, AMLO could effectively and commercially undermine the Reforms for the duration of his six-year term. Nonetheless, wind power capacity is expected to triple within the next six years thanks to existing bids, according to President of the Mexican Association of Wind Power, Leopoldo Rodriguez Olivé4; the Congress of Mexican Wind Power, which will be held in late March, may give some indication of the future of the sector.

Still, even if AMLO theoretically has the power to frustrate the Reforms, his plans may simply prove impractical. Fears over the future of Pemex, which currently has debts of USD 100bn, are a serious concern. While AMLO has provided Pemex with a USD 580m/year tax break for capital expansion5 and the Mexican government has raised USD 2bn in bonds from the global debt market6, Pemex is still widely regarded as highly corrupt and inefficient. A comprehensive overhaul of Pemex might in theory be a positive step, but Mexico will need to move quickly, as much of Pemex's debt matures in 2022.7 AMLO's latest rescue efforts for Pemex, an additional $5.5bn injection, has been strongly criticised as an insufficient bailout, with Fitch Ratings downgrading Pemex's debt to just above junk.8 Moreover, Pemex's financial woes mean it is not well placed to exploit its rich resources, including deepwater reservoirs in the Gulf of Mexico, which could hold over 60 billion barrels of oil but will not yield oil until 2025.9 Such exploration would rely on foreign investment, at the very least in the form of joint ventures between Pemex and foreign oil companies. While shallow water and onshore exploration is possible, it could still risk stretching beyond Pemex's limited means. If Mexico wants to increase its energy production – both for domestic use and as an export – it seems likely that AMLO will need to bring foreign investors into the fray.

AMLO's first few months in office do not bode particularly well for his ability to meet the considerable challenges facing Pemex. Early this year, concerns over petrol theft from pipelines moved AMLO to shut vulnerable pipelines and transport petrol instead by truck: a painstaking, expensive, and inefficient process. This decision caused nationwide fuel shortages, resulting in fuel shortages and hours-long queues at petrol stations. The shortage made international headlines when over 79 people were killed in a pipeline explosion while collecting fuel from an illegal tap during the fuel crisis. The extent to which AMLO will want – or be able – to push his policies against these obstacles remains to be seen, but there is good reason to be optimistic that AMLO will ultimately adopt a more pragmatic approach, especially as he has recognised the importance of private sector participation in some of his recent speeches.

In the meantime, fuel theft and general political instability will remain a concern of insurers looking at underwriting projects in Mexico. It is expected that increases in the frequency and severity of fuel theft in recent years will cause Pemex's loss rating to deteriorate and its loss record to increase. This will inevitably impact premiums, and potentially even the attractiveness of underwriting Pemex risks at all, particularly when coupled with its unstable solvency status. Nevertheless, while recent politics have cast some doubt on both Mexico and Pemex's advancements in the international energy market, its geography and natural resources mean it should remain of great interest to energy investors - and their insurers.


1 'Mexico Grows as World Leader on Energy Reform and Renewables', Renewable Energy World, 11 April 2018

2 Renewable Energy Prospects: Mexico, IRENA, May 2013,

3 Michael Schwartz 'The Future of Mexico's Energy Industry is in the Air',

4 El Economista, "México triplicará capacidad instalada eólica al 2024: Amdee"

5 Jude Webber 'Mexico to ease Pemex tax burden', Financial Times 29 January 2019

6 Jude Webber, 'Mexico raises $2bn from bond investors in boost for new president', Financial Times 18 January 2019

7 Michael Schwartz 'The Future of Mexico's Energy Industry is in the Air',


9 Jude Clemente, 'Mexico's Renewed Focus on Oil and Natural Gas', Forbes, 30 December 2018

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