INSIGHT: Mexico’s emissions, energy policy and Pemex main challenges for new president

SAO PAULO (ICIS)–Mexico’s new – and first female – president Claudia Sheinbaum will have to decide soon into her term whether she changes course in two key aspects: energy policy and greenhouse gas (GHG) emissions, and the support for state-owned, indebted and underperforming energy major Pemex.

The resounding victory obtained by the governing party Morena, whose candidate Sheinbaum was hand-picked by the current president Andres Manuel Lopez Obrador, may allow Sheinbaum to change course and free herself from the previous administration’s commitments.

As of 09:00 local time on Monday, with more than 82% of votes counted, Sheinbaum was on course to reach 60% of the vote in the presidential election. At nearly 30 million votes, she more than doubles the center-right candidate Xochitl Galvez. Turnout stood at 60%.

But Morena’s victory for the presidency was widely expected, and focus is now on the results to Congress, where the party has also obtained a resounding victory and could be on course to obtain a ‘supermajority’: two-thirds or more of seats in Congress which would open the door to one-party constitutional reforms.

Investors, however, are not as impressed as Mexico with Morena candidates, and have never been too friendly towards a political party which by nature wants to expand the role of the state in the economy, which often leads to more taxes for companies and households.

On Monday morning, the main bourse was down 5.5% at the opening.

Sunday’s elections showed once again how investors’ concerns are often far from those of the voters, who gave Morena another chance as the economy has performed relatively well and despite insecurity, Mexicans’ main concern, still rising and taking dozens of lives daily: in 2022, the last full-year statistics available, a total of 42,888 homicides were registered, 1,000 up from 2021.

PEMEX
One of Sheinbaum’s main challenges soon after taking office will be Pemex, the most indebted global crude oil major with debt commitments of around $100 billion, and whom has only managed to financially get by with cash injections from the Federal government, while the company’s performance remains lackluster.

Pemex could become a liability for the Federal finances and for Mexico’s sovereign debt ratings if continued – and increasing – Federal Budget support is needed, according to analysts at the major US credit rating agencies Fitch and S&P.

In the private sector, that would be considered a loss-making company and be either turned around or shut altogether. In Lopez Obrador’s Mexico, it has been ‘energy sovereignty’ and his cabinet has never questioned the large sums of public money – $4.0 billion in the 2023 budget – the company requires to pay for its commitments. For 2024, $8 billion was put aside.

The cabinet has always responded to any criticism regarding Pemex arguing the company remains Mexico’s largest income generator, as it accounts for around 7% of the Treasury’s income, and argued the financial support to meet debt obligations was indispensable to keep that income coming.

The financial support has mostly been used to cover debt obligations, but not expansions or overhauls to make the company fit for the future. Equally, Pemex’s debts with its own suppliers – smaller companies in Mexico who create thousands of jobs – have been widely reported, and only partially addressed by Lopez Obrador’s administration.

Pemex’s aging facilities are also on the spotlight. At the start of his term in 2018, the president said he wanted Pemex to increase its output to somewhere above 2 million barrels/day.

In 2023, on average, it produced 1.875 million barrels/day, which was nonetheless a 5% increase compared with 2022. Pemex never got there and, given the difficulty to do so, it stopped publishing the 2 million barrel/day target at some point last year.

To surpass the 2 million barrel/day target, Pemex needs to heavily invest in its fields and facilities, analysts at Fitch said in April.

While other state-owned as well as private oil majors are speeding up their investments in other energies to allow them a future past-oil, Pemex remains a quintessential crude producer and one who, on top of it all, operates aging facilities.

That adds another financial drag on the company as old facilities require recurrent maintenance and, moreover, too often have caused fatal accidents.

“Policy continuity will largely prevail, although Sheinbaum is likely to face greater scrutiny of the public finances and she is likely to be less supportive than her predecessor of the oil sector,” analysts at Capital Economics said on Monday.

“One key area of difference with the AMLO [acronym widely used for the president’s name, going by his initials] Administration is likely to be energy policy. While Sheinbaum said that she will promote ‘energy sovereignty’, perhaps a nod to (for now) continuing to provide support for the state oil company Pemex, her environment-friendly credentials shone through as she called for a focus on renewable energy.”

10 YEARS DIFFERENCE BUT WORLDS APART
Sheinbaum has repeatedly said she aims to keep the welfare state expansion policies of her predecessor, but she has showed more openness to change in the energy sector as private investments are disinvited by Pemex’s state-backed dominance while the country lags in renewables implementation.

Sheinbaum is 60 years old, and Lopez Obrador is 70, which in principle would not sound much of a difference, but between the two there seems to be an actual generational gap.

Lopez Obrador spent decades on the fringes of the Latin American left – with repeated and failed attempts in the 1990s and 2000s to win the presidency – until Mexicans’ tiredness with the traditional political parties finally gave him that chance in the 2010s.

Sheinbaum started her career as environmental secretary for the City of Mexico in 2000. Analysts say her green credentials are real, and she will put them into practice. Her last public post was, until 2023, that of Mayor of Mexico.

Morena has become Mexicans’ favorite party as the economy has performed relatively well in the past five years, pandemic shock in between included, and jobs have been created. Nearshoring of North American companies is set to prop Mexico’s industrial sectors in coming years.

However, it is easy to think that many Mexicans will not miss one thing: ‘Las Mañaneras’ (The Matinal Shows), the president’s daily – and at times running for three hours – press briefings where he speaks “directly to the people” about anything and everything.

However, Lopez Obrador has always been reluctant to talk about security – Mexicans’ main concern, as homicides continue increasing.

Judging by her personality and more discreet tone, most doubt Sheinbaum will put aside two hours of her daily schedule to ‘talk to the people’. She may just use X, formerly Twitter, like most politicians do in 2024 or hold press conferences where journalists can challenge her on her commitments.

EMISSIONS REDUCTION URGENT
However, over time Lopez Obrador’s term may not be remembered by the failure to make Pemex a functioning energy major, or by ‘Las Mañaneras’, but for the increase in GHG emissions, which are causing climate change.

Mexico signed the Paris Accord in 2015 under the administration of Enrique Peña Nieto. Initial attempts to get on track during his presidency were practically ignored by Lopez Obrador or even overturned.

According to the Climate Action Tracker (CAT), a non-profit scientists’ organization which tracks countries’ progress on reducing emissions, Mexico has not only stalled but gone backwards. Its latest assessment about the country makes obscure reading (see here).

“Mexico’s climate policies continue to go backwards, as fossil fuel use is prioritized and climate-related policies and institutions dismantled. Mexico’s updated 2030 target (NDC) submitted in November 2022 results in higher emission levels than the targets from 2016, breaching both agreements under the Paris Agreement and Mexican Law – where governments committed to improve their targets over time,” said CAT.

“The updated NDC lacks transparency and disguises its lack of ambition by counting forests differently in the base and in the target year. Mexico will meet the unambitious target with already implemented policies as emissions continue to rise through 2030. With this update, the CAT’s rating of Mexico’s climate targets and action worsens from ‘Highly insufficient’ to ‘Critically insufficient’.”

In that regard, Sheinbaum is not the Lopez Obrador type who feels more comfortable talking about crude oil being a nation’s sovereign right as opposed to talking about humanity’s biggest challenge, which ultimately must lead to a world without oil.

Moreover, the partial success of other Latin American countries – Brazil and Petrobras come to mind – to make their energy major successful global companies has not been replicated in Mexico.

The company lags on greener energies, and its own financial reports show how it is behind in adapting to the green economy. Pemex’s role continues diminishing and without bold action it may never get to be a ‘green energy provider’, as other oil majors see themselves in the coming decades.

Notably, how much of the corruption in Mexico’s system is to blame is also food for thought: Pemex is unique in publishing in its financial reports a section about “theft subtraction”.

Sheinbaum has daunting challenges ahead, but she has also obtained the biggest mandate from voters ever in a presidential election.

How she will use that mandate, how she could fly free – or not – from Lopez Obrador’s policies, and how her predecessor may try – or not – to influence her thinking will be one of the fascinating stories in Latin American politics for the next five years.

Front page picture: Claudia Sheinbaum in an archive image
Source: Shutterstock

Insight by Jonathan Lopez