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As US and Canada Threaten to Sue Mexico Over Energy Policies, Mexico “Nationalises” Sizable Chunk of Electrical Grid

Earlier this week, the Mexican government struck an agreement with Spanish energy giant Iberdrola to purchase 13 of its power plants in Mexico. Mexican President Andrés Manuel López Obrador (aka AMLO) hailed the deal as a “new nationalization of the electricity industry,” allowing operational control of the 13 power plants to be transferred to the state-owned Federal Electricity Commission (CFE). With this, CFE will increase its share of the electricity market from just under 40% to 55.5%.

The acquisition was made through a national investment vehicle majority controlled by Mexico’s National Infrastructure Fund (Fonadin), a subsidiary of the National Works and Public Services Bank (Banobras). For its part, Fonadin is managed by Mexico Infrastructure Partners, an asset manager of investment funds in the infrastructure and energy sectors, and it will essentially be leasing control of the power plants to CFE. In other words, there are a lot of moving parts to this “nationalisation” process.

Iberdrola’s CEO, Ignacio Galan, described the deal as a win-win while expressing hard-earned respect for Lopez Obrador’s drive to increase state control over energy:

“That energy policy has moved us to look for a situation that’s good for the people of Mexico, and at the same time, that complies with the interests of our shareholders.”

By agreeing to sell up, Iberdrola has been able to put to rest a raft of lawsuits it was facing in Mexico, which could have cost as much as $800 million in litigation costs. The company will now be focusing most of its attention on the US and European markets, where it hopes to graze on the succulent green energy subsidies offered in the US government’s Inflation Reduction Act and the EU’s REPowerEU plan.

Iberdrola’s decision to divest most of its assets in Mexico, until recently one of its most important markets, is part of a growing trend I warned about back in September 2021, in Why Are Spanish Companies Beating a Retreat from Latin America:

For the past 30 years the region has provided huge money-making opportunities for many of those companies. It has also served as a giant springboard for international expansion as well as a highly lucrative home from home during Spain’s sovereign debt crisis. But in the face of deteriorating economic conditions, rising political uncertainty, depreciating currencies and growing resource nationalism in the region, some firms are now getting cold feet.

Rough Relations

The deal is the culmination of roughly two years of intense — and often not very cordial — negotiations between Iberdrola, Spain’s largest energy company, and the Mexican government.

AMLO has repeatedly likened the power Iberdola holds over Mexico’s energy resources to the Spanish conquistadors of the 16th century. It hardly helps that Iberdrola appointed AMLO’s long-time rival, former President Felipe Calderón Hinojosa, as well as Calderón’s former energy secretary, Georgina Yamilet Kessel Martínez, to its international board. At one point, AMLO even threatened to pause diplomatic relations with Spain over the abuses of its energy and infrastructure firms.

The 13 (mostly natural gas-powered) plants represent around 80% of Iberdrola’s installed capacity in Mexico. Their combined electricity generation capacity is 8,539 megawatts (MW), with almost 99% of that amount coming from the 12 combined-cycle natural gas plants. A major player in the global renewables sector, Iberdrola is — or at least was — the largest private participant in Mexico’s electricity industry.

The company landed in Mexico in the late 90s, lured by the opportunities offered by then President Ernesto Zedillo’s electricity reforms. It expanded rapidly during the following six-year terms of Vicente Fox, Felipe Calderón and Enrique Peña Nieto. Mexico quickly became a key market in its aggressive international expansion strategy. By 2020 it was the largest private electricity producer in Mexico, with a market share of around 20% (compared to 39% for CFE).

Peña Nieto’s energy reform bill of 2014 gave even freer rein as well as generous government subsidies to foreign companies in the energy sector. By the time AMLO came to power in late 2018, private companies, almost all of them foreign-owned, controlled more than half of Mexico’s electrical grid. They also enjoyed huge sway over the country’s civil service, regulatory bodies, and judicial and legislative branches.

Different Government, Different Rules

But all of that changed when AMLO came to power in late 2018. For the first time in 30 years Mexico had a government that was not only determined to halt the privatisation and liberalisation of Mexico’s energy market but to begin dialling it back. Allegations of corrupt practices and price gouging by Iberdrola and other energy companies became a popular talking point at AMLO’s morning press conferences. The juicy contracts began drying up. Instead, a range of obstacles began forming, from disconnections to nonrenewal of permits and fines for price gouging.

The times of plenty had come to an end. And not a moment too soon.

At the rate things were going, the CFE would be generating just 15% of Mexico’s electricity by the end of this decade, says Ángel Barreras Puga, a professor of engineering at the University of Queretero; the rest would be generated exclusively by private, foreign companies.

“Who was going to control prices in the market? Foreign companies, with all that entails. Behind the foreign companies are their national governments. And we have seen how the US government, the US Ambassador and US legislators came to Mexico to try to pressure AMLO to change his policies. Ultimately, they are all lobbyists of private companies.”

There are few better examples of this than US Ambassador to Mexico Ken Salazar, as Ken Hackbarth reported for Jacobin at the time of Sakazar’s appointment in 2021:

Upon leaving (the US Interior Department] in 2013, Salazar went through the revolving door to work for WilmerHale, a law and lobbying firm with close ties to the Trump family, whose roster drilling- and mining-related clients included none other than — you guessed it — BP. From his lucrative new perch in the private sector, Salazar used his clout to support the Keystone Pipeline and the Trans-Pacific Protocol (TPP), whose “investor-state” provisions would let corporations challenge environmental regulations in private tribunals; fought against ballot initiatives that would limit fracking and distance oil wells from buildings and bodies of water; opposed climate lawsuits against the fossil fuel sector; and, in a highly questionable skirting of ethics rules, provided legal counsel to the same company, Anadarko Petroleum, that benefitted on multiple occasions from his stint in government…

The fact of sending an oil and gas lobbyist to lecture Mexico on renewable energy — one, moreover, representing an administration that just opened 80 million acres for drilling in the Gulf of Mexico and is approving drilling permits on public lands at a faster rate than Trump — would be comical if it were not so revealing of the ugly underbelly of US-Mexico relations.

More to Come?

The AMLO-Iberdrola deal has raised concerns in business circles that other foreign energy companies could face a similar fate as the Spanish utility, as AMLO government pushes to expand the state’s role in the energy sector. Bloomberg describes it as a warning shot for international energy companies.

“The choice of words and messages is deliberate,” said John Padilla, managing director of energy consultancy IPD Latin America, adding that such moves could be intentionally sending a warning to foreign companies amid protracted trade disputes with the USA on energy policy. “The main message for private sector investors, at least on the electricity side, is certainly not a good one.”

Mexico’s nationalist energy policies have already stoked the ire of its North American trade partners, Canada and the US, which argue that they violate the USMCA regional trade agreement by discriminating against Canadian and US companies. As Reuters reported a week ago, the Office of the United States Trade Representative (USTR) is considering making a “final offer” to Mexico negotiators to open its markets and agree to some increased oversight.

Failing that, USTR will initiate a dispute settlement against its southern neighbour. If the panel rules against Mexico and the Mexican government refuses to rectify its behaviour, Washington and Ottawa could impose billions of dollars in retaliatory tariffs on Mexican goods.

Others see the Iberdrola-AMLO deal as potentially easing pressure on private energy companies. After all, the purchase of Iberdrola’s operations gives Mexico’s state-owned Federal Electricity Commission (CFE) a dominant market position with 55% of total energy generation, thus fulfilling AMLO’s electricity agenda. AMLO’s proposed constitutional-level energy reform bill sought to grant CFE at least 54% of the nation’s energy supply. It fell at the final hurdle. But through his purchase of 80% of Iberdrola’s operations, AMLO has achieved the same goal.

But that goal, of restoring a strong role for the state in Mexico’s energy and electricity sectors, is precisely what US, Canadian and European energy lobbies have been desperately trying to avert. As such, escalation is the most likely scenario in the incipient North American energy war.

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Mining Corporations Are Up in Arms Over Mexican Government’s Potentially Game-Changing Mining Reform Proposals

Mexico is the world’s largest silver producer, accounting for roughly one out of every five metric tons of the precious metal mined in 2021. It is also among the top ten global producers of 15 other metals and minerals (bismuth, fluorite, celestite, wollastonite, cadmium, molybdenum, lead, zinc, diatomite, salt, barite, graphite, gypsum, gold, and copper). For the past 31 years the country has functioned as a veritable paradise for global mining conglomerates, serving up some of the laxest regulations in Latin America. But that could all be about to change.

The Mexican parliament’s lower chamber on Monday (April 17) began debating a proposed overhaul of the country’s mining law. Also under debate are proposed amendments to the National Water Law, the General Law of Ecological Equilibrium and Environmental Protection, and the General Law for the Prevention and Integral Management of Waste. This comes just two months after Mexican President Andrés Manuel Lopez Obrador (aka AMLO) signed a decree handing over responsibility for lithium reserves to the energy ministry, after nationalizing the country’s lithium deposits in April 2022.

The main objectives of the reforms are threefold, Mexico’s Economy Minister Raquel Buenrostro told a private meeting of legislators on Monday (April 17): to restore state control over Mexico’s mineral and water resources; to regulate the granting, maintenance, supervision and termination of mining concessions; and to protect human rights, the environment and human health.

What Makes (Made?) Mining in Mexico So Special?

One thing that sets Mexico apart from most, if not all, other resource-rich countries in Latin America is the extreme preferential treatment it grants to the mining industry. In the country’s 1992 Mining Law, mining activity took precedence over all other industries and activities. Article 6 of the law reads:

The exploration, exploitation and beneficiation of the minerals or substances referred to in this Law are public utilities and will have preference over any other use or utilization of the land, subject to the conditions established herein, and only by a Federal Law may taxes be assessed on these activities.

Thanks largely to this bizarre four-line paragraph, the claims of the mining industry on Mexican land have had greater import than not just all other industries but all other human activity. For the next 31 years Mexico’s federal government has been bound by law to act against the interests and rights of both private landlords and local communities in order to guarantee mining companies access to the lands upon which a concession is granted.

“No other mining law on the continent grants preferential access over any type of land use,” Jorge Peláez Padilla, a professor of law at the Autonomous University of Mexico (UNAM), told the investigative journalist website Contralinea in 2013. The result has been rampant expropriations of private — and in some cases communal or even protected park — land, for the sake of private mining operations.

The duration of the concessions granted can also be uncommonly long. The 1992 Mining Law allows concessionaires to explore or exploit Mexican land for 50 years, and up to one century if the interested party requests an extension.

The law was the brainchild of Carlos Salinas de Gortari, who served as president of Mexico between 1988 and 1994. As I wrote in my 2014 Wolf Street piece, Slimlandia: Mexico in the Grip of Oligarchs, in those six years Salinas set Mexico’s economy upon a path of rampant privatisation, deregulation and liberalisation:

During his… presidency Salinas not only signed up to NAFTA, but he also embarked on a privatization spree, selling off mines, banks, railways, electricity networks and, of course, Telmex, the national telephone company. Salinas relied on a relatively small group of Mexico’s oligarchy to supply him with campaign (and perhaps personal) funds, in return for the sale of state assets at favorable rates and terms…

Just as happened in Yeltsin’s Russia, the “liberalization” and privatization of Mexican markets has given rise to a new über-caste of oligarchs. More than half of the 11 Mexican tycoons featured on Forbes’ 2012 Rich List (who between them controlled a total wealth of $129.7 billion) are or once were owners of former state-run enterprises. They include owners or important shareholders of mines (German Larrea and Alberto Bailleres), telecoms companies (Carlos Slim, Ricardo Salinas Pliego and Emilio Azcárraga) and banks (Roberto González Barrera, Alfredo Harp Helú and Roberto Hernández Ramírez).

Unhappy Miners

Unsurprisingly, mining companies, both Mexican and foreign, are not overly happy about the prospect of losing the preferential regulatory treatment to which they have grown accustomed. The Mexican association of mining engineers, metallurgists and geologists (AIMMGM) warned in a statement that the proposed reforms represent an existential threat to the industry by drastically altering the procedures for obtaining mining concessions, the exercise of investors’ rights and compliance with regulatory obligations, as well as the penalties for failing to do so.

“This could generate large-scale capital outflows from a mining industry that directly employs over 400,000 people and generates more than 2.5 million indirect jobs,” it said.

The US ratings agency Moody’s cautioned last week that the proposed measures could present a number of credit risks to Mexico’s mining sector. “If approved as proposed, the changes will be credit negative for the mining sector, increasing the regulatory burden on producers and raising the risk of early termination of their current concessions,” said a Moody’s Investors Service report.

Besides eliminating the Mexican Constitution’s preferential treatment for mining exploration and exploitation, the AMLO government’s proposed mining reforms would, among other things:

• Shorten the length of mining concessions from 50 years to a maximum of 30, with a first term of 15 years and the possibility of a single renewal. Currently, 11% of mining concessions are for up to 100 years. With regard to existing mining concessions, the reforms provide that their current term (50 years) would remain unaffected.
• Tighten rules for water permits and require miners to disclose the environmental and social impacts of their operations. The recipient of a new concession in an area with an existing population would also have to pay a minimum of 10% of the profits obtained from the mining activity to the local community.
• Ensure that licenses can only be granted through public tender and letters of credit. The reforms propose eliminating the current “first come, first served” approach to granting mining concessions. Instead, to qualify for a new concession, an applicant would have to compete in a public bidding process. If chosen, it would then have to provide a letter of credit guaranteeing compliance with the measures established in the corresponding Social Impact Study.
• Expand the grounds for cancelling licenses, including lack of planning for closure and handling of waste.
• Allow for the suspension of activities if workers or communities are found to be at risk.
• Ban mines from using unauthorized water sources or from digging deep wells that threatening water for others. Concessions to use local water supplies would be subject to availability and would be valid for five years.
• Ban the granting of mining concessions on protected parkland. Currently around 7% of all mining concessions are on protected land, according to a recent government report.
• Restrict licenses to a specific mineral instead of any type of mineral discovered within the boundaries of the licensed territory, as is currently the case.
• Make Illicit extraction and trafficking in minerals and failure to protect workers criminal offences.

In total, 11% of Mexico’s territory (20,853,928 hectares) has been licensed for mining exploration and exploitation. Of that, some 188,320 hectares are actually being actively mined by a grand total of 874 mining projects, according to a study carried out by the non-profit civil organization CartoCrítica. More than 80% of those projects operate without reporting the damages they cause or the pollutants they emit into the water, air, or land as a result of their operations, according to the study. Also, many do not report the volumes of minerals they extract from each project or how much water they use.

“Given the potentially toxic nature of contaminants associated with metal mining, such as cyanide and heavy metals, these results are especially alarming,” said Manuel Llano, a geographer with CartoCrítica.

The AMLO government’s new mining reforms are supposed to change this. The president insists that the reforms are not about expropriating mining companies’ assets but rather looking after the environment. But they also represent a rebalancing of power between the government and mining companies. They also form part of a growing resurgence of resource nationalism, not just in Mexico but across Latin America, that could have major repercussions for global supply chains, as I wrote about in February last year, in Resource Nationalism on Rise in Latin America, As Fever for “White Gold,” aka Lithium, Grips the World:

More and more governments in Latin America want greater control over the increasingly valuable raw materials that underpin their economic models (as well as the so-called “green” energy revolutions being pursued by governments in North America, Europe, China and elsewhere), which is perfectly justifiable and long overdue. But in so doing they are pitting themselves against some very powerful interests.

They include the US and Canadian mining conglomerates that hold a combined 87% of licenses in Mexico as well as their investors. According to the president of Mexico’s Mining Chamber (Camimex ), Jaime Gutiérrez , if the initiative is approved in its current form, Mexico will lose more than $9 billion in investments, with direct repercussions on 70 economic sectors, including the automotive, pharmaceuticals, chemicals and construction industries.

In recent months the Biden administration and US military have been disarmingly candid about their designs on Latin America’s natural resources, particularly lithium, of which Mexico has abundant deposits. Meanwhile, tensions between the US and Mexican governments continue to rise on a number of fronts, including, most recently, the fentanyl trade, with some Republican lawmakers ominously calling for direct military intervention in Mexico.

Both Washington and Ottawa have already threatened to take Mexico to dispute resolution settlement over the AMLO government’s energy reforms and proposed ban on imports of GM corn. Now, the AMLO government wants to radically change the rules of the game for Mexico’s hugely lucrative mining sector, which is a major source of industrial metals and other minerals for global manufacturers.

In other words, one can expect fierce resistance to the proposed reforms as they make their winding way through the legislative branches. In Mexico, every attempt will be made to dilute their impact while the US and Canadian governments will no doubt escalate the threats of reprisals on Mexico’s economy. The question is (and this is well above my pay grade): given how integrated Mexico’s economy is with the economies of its two northern neighbors, could those reprisals end up backfiring just as EU sanctions on Russia have?

(Nick Corbishley writes about financial, economic and political trends and developments in Europe and Latin America. Both articles courtesy: Naked Capitalism, an American financial news and analysis blog that “chronicles the large scale, concerted campaign to reduce the bargaining power and pay of ordinary workers relative to investors and elite technocrats”.)