Mexico: CNH Struggles to Secure Independence Despite Compliant Strategy

In recent weeks, the National Hydrocarbons Commission (CNH), the upstream regulator has adopted a non-confrontational strategy toward President Andres Manuel Lopez Obrador (AMLO)’s administration in hopes of securing independence. Acting CNH President Commissioner Alma Porres has decided not to antagonize AMLO in an effort to pave the way for the agency to continue operating with minimal disruptions. This low-profile strategy has allowed Porres to develop a cordial working relationship with AMLO’s energy team, partially mitigating some challenges facing CNH. By contrast, her downstream counterpart, Energy Regulatory Commission (CRE) head Guillermo Garcia, has openly voiced his concerns about the administration’s energy policy.

During the transition period, incoming Minister of Energy Rocio Nahle asked then CNH President Commissioner Juan Carlos Zepeda and CRE President Commissioner Garcia to resign, despite their positions’ formal independence from the president. Concerned about CNH’s legacy, Zepeda agreed to cut short his mandate six months from its end date in May 2019 and become an informal advisor to Nahle on upstream issues. Since then, our contacts report that Zepeda and Porres have actively engaged the administration to shape its perceptions about the upstream regulator. Specifically, CNH commissioners backed the administration’s proposal to streamline drilling processes, thus addressing negative views of the regulator as an overly bureaucratic body responsible for delaying new oil production.

CNH’s low-profile strategy has allowed the regulator to continue fulfilling its mandate but has not completely shielded it from the president’s influence. The streamlined timeframe to approve and modify drilling plans has reduced CNH’s leeway to assess E&P projects from a technical perspective. This has led to a tradeoff between maximizing sustainable profits and increasing oil production in the short term. Porres’ engagement strategy improved CNH’s standing with the administration and reduced political pressure on the agency, yet Nahle still insisted that it give expedited approvals for Pemex’s 20 priority upstream projects. Our contacts also report that the administration is so focused on strengthening Pemex that key officials at the Ministry of Energy (SENER) have called into question the regulator’s very existence. Indeed, SENER Director of Hydrocarbons Extraction and Exploitation Jorge Arevalo has openly suggested that CNH is redundant in the oil and gas industry’s development.

It is highly unlikely that the AMLO administration would disband CNH. That said, we expect to see increased political meddling in the short term regardless of Zepeda and Porres’ efforts to safeguard its independence. Our contacts report that CNH cannot move forward in drafting the new five-year plan for oil tenders without SENER’s inputs and approval. In our assessment, this delay is the result of the administration’s hesitation to continue with oil rounds.

More importantly, our contacts report that in the selection process for new CNH commissioners, the president is drawing on the same shortlist of candidates that he sent to the Senate to become CRE commissioners. Members of this list are loyal to the president rather than experienced hydrocarbons professionals, so their ratification would further increase AMLO’s grip on the sector. It would also demonstrate the limited influence of technical aides who, in an effort to convey stability to investors, are advocating for high-profile professionals to be appointed as energy commissioners.