MEXICO: An Introduction to Energy & Natural Resources

Navigating the Future: Mexico's Energy and Natural Resources Sector

As Mexico approaches the 2024 electoral cycle, the energy and natural resources sector anticipates the outcomes with keen interest and heightened anticipation. This key industry, fundamental to the Mexican economy, stands at a crossroads of significant transition and challenge. The outcome of the 2024 presidential election will be critical, with its evolution poised to have profound implications not only domestically but also on the global energy landscape.

Current Economic and Political Conditions

Three candidates are competing for the presidency in Mexico, with elections scheduled to take place on 2nd June 2024. Claudia Sheinbaum the candidate for the coalition “Together We Will Continue Making History”, by the ruling National Regeneration Movement party (Morena) and supported by the Labor Party (PT), the Green Ecologist Party of Mexico (PVEM), has publicly reiterated her intention to follow the policies of the current administration, trying to strengthen the governmental entities (PEMEX and CFE), with a friendlier stance on renewable projects. Xóchitl Galvez Ruiz candidate for the “Force and Heart for Mexico” coalition, made up by the Institutional Revolutionary Party (PRI), National Action Party (PAN) and Democratic Revolution Party (PRD), has publicly claimed that, if elected, they will open the energy sector to private investors – both national and international. Jorge Álvarez Máynez is the candidate of the Citizen’s Movement Party (MC), he has publicly defend the investment in renewables to allow for a better use of Mexico’s resources, as well as to avoid causing further damage to the health of the people; his plan is to establish a deadline for phasing out the use of fossil fuels, including by replacing current national fossil fuel revenues with revenues from lithium, wind and hydropower production.

Industry Dynamics 

The energy sector's landscape is in a state of rapid evolution. In the oil and gas domain, the emphasis on acquiring existing contracts and launching new midstream and downstream projects indicates a proactive stance towards sector expansion and modernisation. The electricity sector's gradual shift towards renewable sources, exemplified by the rise in "Generación Distribuida" projects, mirrors a strategic realignment towards sustainability, furthermore, given the lack in development of new energy generation projects in Mexico, we have seen a lot of interest in acquiring controlling stake in brownfield projects in Mexico by foreign firms who are trying to break into Mexico’s electric industry. This shift is necessitated by the growing demand for modernised electrical infrastructure, a critical component in accommodating the nearshoring trend.

PEMEX's dominance in the oil and gas sector, coupled with the halt in upstream bid rounds since 2018, has impacted new ventures in this sector. Nevertheless, there is some interest by foreign and national investors, to acquire participation in existing bid round contracts.

Mining, another cornerstone of Mexico's natural resources strategy, faces a defining moment with the nationalisation of lithium. Given lithium's pivotal role in the burgeoning battery production and electromobility sectors, this development casts Mexico into the spotlight, raising significant questions about its prospective role in the global supply chain and collaborative efforts in lithium extraction and processing. This maneuver aligns with broader sectoral trends advocating for sustainability and stringent environmental compliance.

Legal Developments 

Since AMLO took office in 2018, he enacted a policy shift by resuming Government control of Mexico’s energy industry, quoting sovereignty and national security concern and the government unsuccessfully attempted to revise the 2013 Energy Reform.

With the 2024 elections drawing near, substantial legislative changes remain uncertain until the new president and federal congress are elected.

The future legal landscape of the energy sector will largely be influenced by the outcome of the upcoming presidential election, which may herald new strategies, although dramatic deviations from the current path are unlikely. If Claudia is elected, we can anticipate a continuation of policies favorable to state-owned enterprises (PEMEX and CFE), provided that, we foresee a friendlier approach towards renewables. Conversely, should Xochitl or Jorge prevail, it is likely that the market will open up to private sector participants. This pivotal election will therefore play a critical role in shaping the regulatory environment for energy.

Furthermore, on the background on any relevant substantial legislative changes resulting from the presidential election, the 2023 amendments to the Securities Market Law and subsequent secondary regulation, as well as the new regulations on batteries and electromobility, currently under review by the National Commission for Regulatory Improvement, indicates a clear focus on ESG principles for the sector's regulatory future.

Potential Hurdles 

The primary challenge for the incoming administration will be the fervent tackling of renewable energy and climate change – areas ripe with potential for Mexico to assert leadership but also fraught with considerable hurdles.

The prominence of environmental and indigenous compliance issues is expected to rise, reflecting a global shift towards more sustainable and socially responsible energy production practices. The manner in which Mexico navigates these challenges will be instrumental to the sector's future growth and sustainability.

Conclusion  

At this pivotal moment, Mexico's energy and natural resources sector is navigating a complex maze of economic, legal, and political forces. The industry's resilience and capacity to adapt and innovate will be vital. As the 2024 elections loom on the horizon, stakeholders are encouraged to remain vigilant and proactive, prepared to adjust to an evolving landscape. The future of Mexico's energy and natural resources sector is delicately poised, with significant implications for the national economy and the broader global energy market awaiting on the other side of these transformative times.