Mexico defends state-led energy policy as investors look to Biden

MEXICO CITY (Reuters) - Mexico’s president on Thursday forcefully defended his drive to strengthen the state’s role in the energy sector, seeking to temper investor hopes that he might give ground if the new U.S. government under President Joe Biden takes up their cause.

FILE PHOTO: Mexico's President Andres Manuel Lopez Obrador listens to the national anthem as he arrives to address the nation at the National Palace in Mexico City, Mexico, December 1, 2020. REUTERS/Henry Romero

President Andres Manuel Lopez Obrador has worked to bolster state oil firm Petroleos Mexicanos (Pemex) and power utility the Comision Federal de Electricidad (CFE), arguing the previous government skewed the market in favor of private companies.

His interventions have upset some of Mexico’s main allies, including the United States, Canada and major European countries, and angered investors who believe the government is violating their rights under trade agreements Mexico signed.

Industry groups and foreign powers expect the Biden administration to take a firmer line in defending companies’ interests under the United States-Mexico-Canada Agreement (USMCA) trade deal that took effect in July.

Former U.S. President Donald Trump did little to press Lopez Obrador over his energy policy, causing frustration among U.S. lawmakers. Instead, he prioritized making Mexico contain illegal immigration and even warned some companies not to invest abroad.

At a regular news conference, Lopez Obrador said he saw no urgent need for talks with Biden because the two had spoken last month, but noted energy matters would come up at “some point”.

He underlined that he would not change energy policy, and noted Biden on Wednesday immediately revoked the permit needed to build the Keystone XL oil pipeline.

“There’s not going to be a change because we’re not going to continue with the policy of dismantling the nation’s companies,” Lopez Obrador said. “And they shouldn’t be surprised. They, like any country, defend their strategic economic areas.”

Backed by a constitutional reform enacted under the previous government, renewable energy providers have taken Mexico to court over measures to sideline their investments to the benefit of Pemex and CFE, with some success.

But projects have still been held up.

The president noted that Chapter 8 of USMCA underlines Mexico’s ownership of oil and gas, with Canada and the United States recognizing that Mexico “reserves its sovereign right to reform its constitution and its domestic legislation.”

However, Chapter 8 also states that Mexico’s two partners in USMCA offer that recognition “without prejudice to their rights and remedies” under the trade agreement.

That meant Mexico was still bound to respect private sector energy investments under USMCA, said Kenneth Smith, Mexico’s lead technical negotiator during the trade talks from 2017-2018.

Nor, Smith added, had Mexico secured any specific opt-outs of such commitments under USMCA, which was mostly negotiated under the previous government, but was signed off after Lopez Obrador asked for Chapter 8 during his 2018 transition to power.

If Mexico did not grasp the risk of such breaches, it could face heavy penalties, such as costly arbitration settlements or restrictions on trade to its top trade partner, Smith said. The United States alone absorbs some 80% of Mexico’s exports.

Reporting by Dave Graham; Editing by Frank Jack Daniel and David Gregorio