Thought April 19, 2022 / 04:44 am UTC

Mexico’s Energy Sector: Safe at Last, or Safe for Now?

By Priscila Robledo

The latest developments in Mexico's energy sector are positive for the sector and the country as a whole. They speak well of Mexico's institutions. We warn, however, that investors will likely remain wary of committing resources to the country, as it is clear that President Andres Manuel Lopez Obrador will keep trying to change the rules of the game at the expense of the country's competitiveness. 

  • On Sunday, April 17, Mexico’s Lower House rejected Lopez Obrador’s energy counter-reform, as we had expected. The reform proposed granting state-owned electricity company Comision Federal de Electricidad (CFE) a 54% market share in electricity generation, eliminating the possibility of self-supply energy generation, canceling licenses and contracts previously granted to private companies, and eliminating the energy regulatory bodies. The reform had negative implications for Mexico’s competitiveness, so the fact that it didn’t pass is positive. 
  • Earlier this month the Supreme Court started to discuss whether a different law, proposed by Lopez Obrador in February 2021 and approved by Congress shortly after, was in breach of Mexico’s constitution. The discussion finished on April 7. The Supreme Court did not invalidate the law, but the outcome of the resolution keeps the door open for litigations to continue. In our opinion, the resolution of the Supreme Court was not the best possible outcome, but neither was it the worst.

It’s worth making the distinctions between the law proposed in February 2021 and frozen by Courts after its enactment, and the Constitutional reform rejected by Congress on Sunday. The law contained some elements of the reform, but the latter was wider and, in our opinion, more damaging in terms of competitiveness. The reform was a backup attempt by Lopez Obrador to nationalize the energy sector, as it was proposed after the February 2021 law was held up in courts. Unlike the law, the reform required a qualified majority to be approved. The government’s party failed to get enough support from the more unified opposition. This speaks well of Mexico’s institutions by showing that checks and balances remain in place. 

  • With high suspicion that the reform was not going to be approved, Lopez Obrador sent his “plan B” (or rather plan D) to Congress on Sunday, during the reform discussion. This is a mining law whose main purpose is to nationalize the lithium industry by establishing that lithium exploitation and production are exclusive of the State. The House approved the bill on Monday and the Senate will likely do the same in a matter of days. Mexico does not yet produce lithium. At 1.7mn tons, the country’s estimated lithium resources are much lower than its best-endowed regional peers (21mn tons in Bolivia, 19.3mn tons in Argentina, 9.6mn tons in Chile) or Australia (6.4mn tons) according to the United States Geological Survey. Experts say most of Mexico’s lithium is in clay deposits that are complex to extract. Therefore, the short- and medium-term implications of this bill are limited. 

Although these recent developments are on balance positive for Mexico’s energy sector and the country as a whole, we warn that investors will probably remain wary of committing resources to the country, as it is clear that Lopez Obrador will keep trying to change the rules of the game. 

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Analyst Certification
I, Priscila Robledo, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.