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Will Transparency Gains Ensure Petroleum Contract Stability Under Mexico’s New President?

In many resource-rich countries, new governments have tended be skeptical of deals signed with extractives companies under previous administrations. In the last 15 years, incoming presidents in Bolivia, Venezuela, Guinea or Sierra Leone have attempted to renegotiate some or all of them.

In Mexico, where President-elect Andrés Manuel López Obrador won an historic presidential election in June, investors in the recently opened oil and gas sectors are wondering whether the contracts they signed with the country’s hydrocarbon regulator since the first bidding round in 2015 are safe.

They certainly have reasons to be worried. During the electoral campaign, AMLO expressed a very negative view of the energy reform and announced an entirely different approach to the sector. Nevertheless, it’s unlikely that the new administration will take bold steps against oil and gas contracts already signed and investments already made. There are several reasons for this.

First, López Obrador has demonstrated in his previous role as Mexico City mayor that he is a pragmatist willing to work with the private sector to deliver on his promises.

Second, the new government’s biggest challenge is the corruption and violence associated with drug trafficking, and it will not be willing to engage in other political battles at the same time.

Third, rolling back the energy reform and requiring state-owned oil and gas company Pemex to undertake all exploration and production might prove too costly, and would go against the stated objective to increase Mexico’s energy self-sufficiency.

Last, but not least, the bidding rounds themselves and the monitoring of contracts allocated to private investors have followed a very transparent process that would prove hard to challenge.

Every step of the three bidding rounds that have already taken place since 2015 is documented, recorded and published on the National Hydrocarbons Commission’s (CNH) website: which companies participated, who won, what the bidding criteria were, how the process was organized, which government officials were involved and their official declarations of interests. Mexican citizens and international observers alike can follow the contract allocation and monitoring process closely. They can even watch it in a livestream. There is much less space for mistakes or impropriety in such a process.

CNH has even gone further, submitting transparency processes to Mexican civil society organizations. These organizations have demanded additional progress on disclosing the identity of beneficial owners of all companies participating in bidding rounds, more information on social impact assessments, and additional regulatory transparency on Pemex’s activities. While CNH could make further progress on these elements, other countries are impressed enough with the ambitious steps taken by the Mexican regulator that they are trying to learn from their example.

López Obrador has already moderated his language, from more aggressive stances against private investment during the early stages of his campaign to a more conciliatory tone after winning the elections. Hydrocarbon contracts already allocated will be reviewed for graft, according to Alfonso Romo, the head of the president-elect’s transition team and his future chief of staff. The president elect himself has stated that if wrongdoing is identified, his government will appeal to national and international courts to deal with the situation, ruling out expropriations as a response. In turn, in an official reaction, the governing body of the regulatory agency seemed confident its transparency standards and adherence to the law would help it easily comply with the review.

Where the new administration is more likely to break from the previous one is in future allocations. Rocío Nahle, a legislator and López Obrador’s top energy aide, has stated that the new administration would not immediately propose changes to existing laws. But they could slow down the pace of allocating licenses, or stop it altogether, especially where oil exploration conflicts with people’s livelihoods. The exploration of shale resources, which is being piloted by the outgoing energy secretary this year, is a move many activists oppose.

Over the next year, the steps taken by López Obrador’s administration in the energy sector should show the value of transparency in resource contracts allocation for investor comfort and to build citizens’ trust in the process. This will only strengthen a growing global trend in favor of contract transparency and encourage more investors to publicly support high levels of disclosure.

Thomas Lassourd is a senior economic analyst with the Natural Resource Governance Institute (NRGI).