Mexican election could tip balance for energy policy

Victory for the ruling party in Mexico's midterm elections this month could further erode the country's draw for international investment after recent energy reforms have led to a wave of lawsuits and complaints.

On 6 June, Mexicans will elect all 500 members of the lower house of congress, 15 of 32 state gubernatorial seats, and thousands of local lawmakers. President Andres Manuel Lopez Obrador's Morena party is trying to increase its current simple majority in the lower house to a two-thirds majority, which would allow it to modify the constitution — including the 2014 energy reform.

Recent reforms by the ruling party have already hurt business confidence. Companies in industries from energy to food to automotive are taking both domestic and international legal action.

"Certainly, the administration's rollback of some of the energy reforms made under the prior administration should raise some concerns with investors, not only in the US but throughout the world," said Jon Barela, chief executive of the Borderplex Alliance, an economic development group in the El Paso-Ciudad Juarez region.

Unsteady outlook

But Morena's chance of a sweep is less solid than it once looked.

Morena is likely to lose its legislative majority amid growing social discontent and the president's declining popularity, political risk company Control Risks said last month.

The party has faced harsh criticism for its handling of the May collapse of a section of an elevated metro line in Mexico City — built during the city administration of Lopez Obrador allies — that killed at least 23 people.

Morena could lose its simple majority and win only 227 seats in the 500-seat lower house — down from the 256 it holds — while opposition parties PAN and PRI could increase their numbers to 81 from 77 and 61 from 48, respectively, according to pollster Oraculus.

But others disagree. The decline in Covid-19 cases and gradual reopening of the economy will work in Morena's favor, countered JPMorgan's Mexico economist Gabriel Lozano, and likely allow the president's party to at least retain the simple majority in the lower house.

"We believe Morena/[Lopez Obrador] will consolidate its power, and will continue to move forward with a populist agenda," Lozano said.

At the state level, Morena is expected to win between six and nine governorships — up from the six it currently holds — while the PRI party that oversaw the 2014 energy reform is forecast to lose seven.

But final results could vary between 10-47pc given a high number of undecided voters in many states, polling companies said.

Fuel for the fire

Election results could help determine the fate of recent changes to the refined products markets that courts have deemed unconstitutional. The government will decide whether to fight challenges in the courts or send new proposals to the next legislature after the election, energy minister Rocio Nahle has said.

The reforms could lead to fewer players in the market, limiting competition, pushing up prices, and increasing state-owned Pemex's market share and power, Mexico's competition watchdog (Cofece) has warned.

Yet the fuels sector could also have an impact on the mid-term election.

Mexico's president has understood the weight of fuel prices on voters, as some of the country's biggest protests in recent years came in response to the lifting of price caps in 2017. He vowed that fuel prices will not rise above inflation, but during April regular gasoline prices increased by 35pc from the same period of 2020, pushed by increases in international prices. That is much more than the inflation for that same period that rose 6.1pc. The government has not been entirely clear on the timeframe it uses to measure this pledge.

The president further highlighted his drive toward fuel self sufficiency recently with Pemex's deal to buy Shell's majority interest in its joint venture 340,000 b/d refinery in Deer Park, Texas, on 24 May — 13 days before the election.

Power upstream

The election could help decide similar legislative challenges for power and gas, and provide hints on upstream policy.

Lopez Obrador's incremental approach to re-establishing Pemex and CFE monopolies — initially timid regulatory changes and directives to energy regulators to favor state companies where possible — have been thwarted by legal action.

Amid the failure to assert his policy aims within the existing legal framework, Lopez Obrador launched a fast-tracked electricity reform in February that sought to definitively establish CFE's market dominance and revoke a number of private-sector generation permits. The law is now subject to more than 30 private sector injunctions and several supreme court challenges.

If courts permanently throw out the new electricity law, Lopez Obrador's only remaining option would be reforming constitutional energy provisions.

A majority could also embolden Lopez Obrador to take steps to reduce existing private sector participation in the upstream industry. The president has vowed to respect the 111 exploration and production contracts awarded in the three upstream auctions, but attempts to revoke existing contracts in the power sector have rattled investors.

The election "is an inflection point for Mexican politics," said Barela of Borderplex, who was formerly New Mexico's economic development cabinet secretary. "I can only assume that pragmatism will ultimately win out and that the leaders of the Morena party will realize the business sector is not their enemy. It is in fact the sector which will generate the revenue that they will need to provide the social benefits that they so desperately want to distribute."

By Rebecca Conan, Jens Erik Gould and Sergio Meana