WASHINGTON – Foreign energy companies that began flocking to Mexico six years ago after the government opened energy markets and ended a nearly century-old state-run monopoly are finding themselves increasingly unwelcome.
Even after tens of billions of dollars in investment, U.S.-branded gasoline stations in Mexico are being cited for minor or nonexistent infractions, while fuel from U.S. refineries is being held up at the border, the trade group American Fuel and Petrochemical Manufacturers says. Government officials are withholding permits on fuel storage facilities without explanation. Laws have been changed to favor the state-owned oil company Pemex.
Mexican President Andres Manuel Lopez Obrador has never been shy in expressing his displeasure with the 2014 energy reforms, making the case that Pemex and Mexican workers should be the beneficiaries of the nation’s energy industry, not foreign companies.
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Such protectionist policies helped Lopez Obrador win election two years ago. Since then, he has scaled back lease sales in the Gulf of Mexico to foreign oil and gas companies and undermined other energy reforms put in place by his predecessor, Enrique Pena Nieto.
Those reforms were enacted through a constitutional amendment, so Lopez Obrador, for now, is powerless to overturn them outright. Instead, he has thwarted foreign energy companies through the federal bureaucracy.
Last year, the Mexican Energy Regulatory Commission did away with a rule blocking Pemex from selling gasoline below market rates and undercutting its competition. This summer, a new law required fuel distributors to maintain at least five days of fuel in storage even as government officials held up applications for new storage facilities — forcing foreign companies to pay Pemex to use its facilities.
The bureaucratic roadblocks represent a threat not only to future U.S. investment in Mexico but also to what some estimate to be close to $100 billion already invested by foreign energy firms, including Texas companies such as the refiners Phillips 66 and Valero.
“Essentially it’s been a slow rolling expropriation done through Mexico’s regulatory bodies, and that’s making it increasingly difficult to do business in the country,” said Antonio Garza, former U.S. ambassador to Mexico and an attorney in Mexico City. “Coupled with weak rule of law and a slowdown in the economy due to Covid-19, there are some real concerns.”
U.S. energy companies operating in Mexico, including Phillips 66 and Valero, declined to comment. But Chet Thompson, president of the American Fuel and Petrochemical Manufacturers, said U.S. companies are growing increasingly “frustrated” and exploring legal options.
“The Mexican government encouraged these investments. We made them, and now the (Lopez Obrador) administration doesn’t share the same philosophy,” he said. “It’s pretty clear this is an effort to try and marginalize the U.S. assets that have been built up in Mexico.”
Mexico’s Secretariat of Energy did not respond to requests for comment.
Just two years after the signing of the United States Mexico Canada Agreement, which updated the 1990s North American Free Trade Agreement, U.S. oil executives are trying to make the case that Lopez Obrador is violating at least the spirit of the deal in favoring Mexican firms over American ones.
In June, the American Petroleum Institute, the oil industry’s largest lobbying group, reached out to members of the Trump administration, including Secretary of State Mike Pompeo, requesting diplomatic intervention. That prompted a letter from Energy Secretary Dan Brouillette to Mexican Energy Secretary Rocio Nahle, cautioning that “business uncertainty leads investors to delay or change their plans, and without investment an economy cannot grow.”
But problems have continued, Thompson said. In July, the Mexican government ordered Talos Energy to work with Pemex in developing a massive oil field in the Gulf of Mexico, which the Houston firm had discovered three years earlier after winning what had appeared exclusive drilling rights at a government auction.
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“The government is sending the message even if you make a big discovery you’re not going to be able to develop it without Pemex,” said Ben Cahill, senior fellow at the Washington think tank Center for Strategic and International Studies.
In October, members of Congress, including Texas Senators John Cornyn and Ted Cruz, wrote to President Donald Trump asking him to intervene. They have yet to receive a response, said Rep. Vicente Gonzalez, D-McAllen, one of several Texas congressmen who also signed the letter.
“He’s pretty disengaged right now,” Gonzalez said of Trump. “If Mexico continues down this path we’re going to have to respond somehow. We were trying to do it diplomatically.”
Lopez Obrador, a leftist former mayor of Mexico City, has shown no sign of backing down, telling reporters that he would continue to support Mexico’s state-owned energy companies to protect jobs and keep domestic energy prices low.
“We need to rescue Pemex (and other state energy companies), ” he said, according to the Mexican newspaper Reforma. “If that is not possible under the current legal framework, I will send, if necessary, an initiative to reform the Constitution.”
Such a move would return Mexico to where it was before the energy reforms, with Pemex regaining its monopoly over the production, processing and distribution of oil and gas within Mexico. For now, Lopez Obrador doesn’t have the votes in Mexico’s General Congress to begin amending the Constitution, but next year’s mid-term elections could deliver them.
But returning Mexico’s energy sector to monopoly control poses economic risks.
Mexico nationalized the oil industry in 1938, part of a wave of expropriations that swept South America and the Middle East. But as the decades wore on, Pemex struggled to keep pace with the advancing oil and gas industry, drawing criticism it had become bloated and inefficient and prompting the market reforms.
In recent years, the nation’s oil production and refineries have declined at a rapid rate, as Pemex failed to adopt technologies such as deepwater drilling and hydraulic fracturing.
Last year, Mexico produced 1.9 million barrels of oil and petroleum products per day, a decline of more than 30 percent from a decade ago. Pemex refineries are not only aging and inefficient,
But there’s plenty of skepticism that Pemex can pull it off.
“I can’t see them getting all that built. Capital is scarce right now, and with the current administration it’s going to be tough,” Auers said. “They’re not capable of building a new refinery or running the refineries they have.”
That would be good news for U.S. refiners, which have come to rely on Mexico as fuel demand at home has leveled off with increasingly efficient vehicles. Last year, the United States exported more than 170 million barrels of gasoline to Mexico, more than double what was shipped five years earlier.
U.S. companies were banking on taking a much larger share of the Mexican energy market, not just exporting fuel to Mexico but also transporting it around the country and selling it through U.S.-branded gasoline stations — displacing Pemex as the lone purveyor of fuel in Mexico.
After opening its first station in January, Valero had 50 locations around Mexico as of August and plans to begin operating three new fuel terminals by next year.
How long U.S. companies can continue to expand in the face of hostility from the Mexican government is unclear. For now, there is little sign Lopez Obrador’s brand of populism is going away.
“There’s been 70 years of state control, and a lot of people in Mexico share Obrador’s skepticism of private investment and so-called liberal policies,” said Cahill, from the Center for Strategic and International Studies.. “In situations like this, companies generally try to keep a foothold and hope for better times.”