Economics: Energy policy pressured on all fronts

MEXICO - Report 09 Nov 2020 by Mauricio González and Francisco González

Pemex presented its results for the third quarter of 2020 on October 28. In essence, they reveal a deepening of the company’s extended operational and financial decline. Its gas and oil output continued to fall, most of the oil fields it has prioritized for development have significantly underperformed the company’s targets and it is behind schedule in related investments. To make matters worse, as part of an extended decline in petrochemical output, Pemex reported that the sector fell another 45% yoy in the most recent quarter.

Pemex’s financial situation also shows signs of further eroding: total revenues decreased 31.8% alongside reductions in both gross and operating income. The company’s contribution to public finance as of the third quarter of 2020 narrowed to a scant 0.6% of GDP as opposed to the 1.1% level of the same period of last year. Its debt has risen, and its liquidity problems continue to deepen.

But the national oil company is not the only point of concern in the field of energy. There have been a number of events in the electric power industry that have negatively impacted the CFE and the broader electric power sector. CFE’s financial results show a cumulative loss as of September, including an additional 6.84 billion dollars in costs to the CFE related to its renegotiation of pipeline contracts, and it has suffered a number of setbacks from Mexican courts and the London Court of International Arbitration.

In this context, the IMF is stepping up its warnings that the government of President López Obrador needs to change course dramatically in energy policy, and a bipartisan group in the US Congress, analysts, and stakeholders are warning that Mexico may be in violation of the USMCA, and that recent government actions threaten U.S. energy companies’ investment and market access.

The USMCA is incompatible with a policy of granting preferential treatment to Pemex and the CFE above its competitors as the treaty obligates Mexican officials to favor a competitive environment. Furthermore, USMCA Articles 22-E and 22-F, which apply to State Productive Enterprises (“SPEs”) prohibit the government from granting such companies advantages over other market participants, so we can expect official energy policy to be the focus of much more litigation, at home and abroad, for some time to come.

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