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Analysis: Mexican president's energy reform threat faces U.S. reality check

Dave Graham
·4-min read
FILE PHOTO: Mexico's President Lopez Obrador addresses to the nation on his second anniversary as President, at the National Palace in Mexico City

By Dave Graham

MEXICO CITY (Reuters) - Mexico's government is coming to realize that with a new president entering the White House on Wednesday, overturning a reform that opened Mexican energy markets to foreign investors might not be as straightforward as it thought.

President Andres Manuel Lopez Obrador's pledge to strengthen the state's hand in the energy sector faces a reckoning as Joe Biden assumes the U.S. presidency, committed to upholding a trade deal that limits Mexico's room for maneuver.

Lopez Obrador has threatened to overturn a 2013-14 constitutional overhaul by the last government that opened the energy market to private capital if he cannot find another way to rework the rules to help Mexico's two big state energy firms.

Outgoing U.S. President Donald Trump's prioritization of curbing illegal immigration left Lopez Obrador free to intervene in the energy market, angering U.S. lawmakers, who have complained to the White House that Mexico is undermining the new United States-Mexico-Canada Agreement (USMCA) trade deal.

"(Lopez Obrador) has reached a kind of dead-end where he will have to decide," said Kenneth Smith, Mexico's lead technical negotiator in the USMCA talks from 2017-2018. "There can't, for practical purposes, be a change in the constitution that would reverse the (energy sector) opening without violating (USMCA)."

The energy reform is widely seen as a litmus test of the leftist Lopez Obrador's respect for private sector contracts.

The president's office did not respond to a request for comment on this story.

Biden is expected to adopt a more rules-based approach to government than Trump, and to champion renewable power generation, which has been sidelined in Mexico by Lopez Obrador's support for state oil firm Petroleos Mexicanos (Pemex) and power utility the Comision Federal de Electricidad (CFE), a consumer of Pemex's fossil fuels.

Lopez Obrador has cast the energy reform as the work of corrupt politicians skewing the market in favor of private companies, many of which argue he is not respecting USMCA.

Nevertheless, officials are mindful of the risks to investment that undoing the reform could create, and Lopez Obrador has hinted he might be retreating from the threat.

Having embraced USMCA as vital to reviving Mexico's economy after the coronavirus pandemic, he has publicly signaled apprehension about flouting the accord.

On Jan. 7, the president mused about eliminating Mexico's telecoms regulator, the Federal Telecommunications Institute (IFT), to save costs.

Soon afterwards, the economy ministry, which oversees trade, advised him that doing so could contravene USMCA, Economy Minister Tatiana Clouthier told Reuters.

He took note.

On Jan. 8, Lopez Obrador said he had been told the IFT should not be abolished because it was in USMCA. The matter would be analyzed, he said, adding: "We can't do anything that breaches the law."

Clouthier pointed to his comments on the IFT when asked how she would view any move by the government to repeal the energy reform, given the risks of flouting USMCA.

Another official, speaking on condition of anonymity, was adamant the reform "would not be canceled." Mexico would pursue its goals working within the existing constitutional framework and through negotiation, the official said.

PARALYSIS

Lopez Obrador says he is willing to talk with companies who feel aggrieved by his shake-up of the market, which has called into question billions of dollars worth of investment.

Frustrated, U.S. business groups are lobbying the incoming Biden administration hard to defend them under USMCA, a senior industry source said.

Biden has described USMCA as a better deal than its predecessor, the North American Free Trade Agreement (NAFTA), which he voted for as a senator in 1993.

Underpinning most of Mexico's exports and foreign direct investment, USMCA entered force in July. But it only takes effect in earnest with Biden in office, one diplomat in Mexico argued.

To defend Lopez Obrador's energy vision, Mexico has hinted it will use other issues as bargaining chips.

Economy Minister Clouthier said the government could raise concerns over potential U.S. barriers to agricultural exports in any USMCA-related dispute over energy.

While the constitutional reform limits the president's ability to help Pemex and CFE, his interventions are slowly reshaping the energy sector by delaying, frustrating and discouraging private investment.

Backed by the reform, judges have overturned many of the administration's measures on appeal. Those rulings have so far persuaded most companies not to haul Mexico before international arbitration panels, said Derek Woodhouse, a lawyer at global law firm CMS, which has represented affected investors.

Arbitration proceedings can drag out over 2-3 years, and most companies would rather avoid direct confrontation with the government if possible, Woodhouse said.

But the grind is taking its toll.

"Regulatory paralysis" is raising the cost for investors to stay in Mexico, which may allow the government to gradually squeeze out some and pick up their assets cheaply, he said.

(Reporting by Dave Graham; Editing by Marguerita Choy)