The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Mexico’s energy and mining agenda faces domestic and international challenges

The Mexican government is facing the consequences of increased state intervention in the extractives industries. Paired with a volatile domestic landscape, investors will need to adapt to evolving challenges and scrutiny.

By Mauricio Escalante, Associate, and Caitlin Purdy, Senior Manager

Changes affecting Mexico’s energy and mining sectors invite increased scrutiny from key stakeholders

Dynamics in Mexico’s energy and mining sectors are rapidly evolving due to shifting political and economic challenges stemming from President Andres Manuel Lopez Obrador’s (AMLO) resource nationalist agenda. Recent developments have created friction with the US, raised questions about how Mexico will be able to successfully commercialize its lithium deposits, and underscored emerging geopolitical tensions around minerals development.

Resource nationalism in the energy sector has created friction with the US

AMLO’s administration has systematically dismantled the historic 2013 energy reforms, which allowed for foreign investment in Mexico’s beleaguered energy sector for first time in the country’s history. This has created uncertainty for investors and strained relationships with the US.

  • AMLO’s government has acted against private sector investors in the energy sector, progressively dismantling former President Enrique Peña Nieto’s liberalisation reforms and effectively freezing all new contracts in the sector. In pursuing a resource nationalist agenda, AMLO has situated his government as fighting against exploitation by foreign interests and corruption, citing both as effects of the liberalisation of the energy sector. This ideology, which dates to the year 1938 when Mexico’s government first nationalised the energy sector, is seen as a source of pride among the president’s allies who are keen to restore a past where Mexico’s nationalised energy sector was one of the largest sources of income for the country.
  • Most notably, the legislature passed the Electricity Industry Law in 2021. The law prioritizes state-generated power over private production, even where the latter is cheaper, more efficient, and cleaner. This contravened constitutional provisions and created legal and political ambiguity, causing Mexico’s Supreme Court to rule that key parts of the law were unconstitutional in April 2022. In response to this, AMLO pursued a constitutional reform to take electricity and energy back into state control, but the reform failed to get the necessary votes in the legislature, representing a significant defeat for his administration.
  • Moreover, the Electricity Industry Law may also contravene the United States, Mexico, and Canada free trade agreement (USMCA), as signatories committed not to favour domestic firms over foreign ones. In July 2022, the US initiated actions against Mexico through its Office of the United States Trade Representative (USTR), demanding dispute settlement talks under USMCA. This move comes after sustained pressure on the Biden administration from bipartisan lawmakers, private investors, and business interest groups to push back against Mexico’s nationalist energy policies. One of these cases involves the operatorship of Zama oil field, one of the largest shallow-water oil discoveries in recent years, which US company Talos Energy lost to state-controlled company Pemex, sparking a dispute between the two companies. In a worst-case scenario, if consultations fail to produce favourable results for foreign interests, the US could pursue arbitration or potentially impose tariffs or sanctions on Mexico in response.

Mexico’s planned nationalisation of lithium further underscores AMLO’s nationalist resource agenda – but will likely impede the development of the sector

Andres Manuel Lopez Obrador

Andres Manuel Lopez Obrador

In the context of his failure to completely gut the 2013 energy reforms – widely viewed as a major political defeat – AMLO turned his attention to lithium, “the new oil.” In April 2022, he signalled his intentions to nationalize the industry. This does not position the country well to capitalize on a surge in demand – and price – for lithium. The government lacks the financial resources and technical expertise to develop projects, while existing projects slated for development by the private sector are now subject to new risks and overall uncertainty.

  • Mexico holds an estimated 1.7 million tons of lithium, ranking 9th globally among countries with the largest reserves. In the context of rising global demand for the mineral, which is a crucial component of most electric vehicle (EV) batteries, prices for lithium are widely expected to rise. AMLO is keen to capitalize on this, viewing lithium as a strategic asset like oil. He has repeatedly told reporters and supports “the lithium is ours,” a hark back to “the oil is ours” refrain during Mexico’s 1938 expropriation of the oil industry from foreign companies. In April 2022, AMLO’s administration introduced a reform to the Mexican Mining Law effectively nationalizing lithium. The bill passed in the legislature with the unanimous support of his MORENA party. This reform effectively designates lithium as a public utility and gives the state full control exploration and supply chain. In August 2022, Mexico announced it would create a state-run company to mine lithium, Litio para Mexico (Lithium for Mexico).
  • However, the government is likely to struggle to bring lithium production online. Observers are sceptical of the government’s moves into a high-risk, capital-intensive sector, particularly given it is likely to struggle to establish an effective state-run venture without expertise or access to the newest technology and with limited funds for exploration and project development. The government has not shared any information on how the company will operate. Further complicating matters, Mexico’s lithium deposits are clay-based, which are much more difficult and expensive to mine than brine-based deposits found in the lithium triangle of South America.
  • Moreover, the nationalization strategy has created a high degree of uncertainty for existing private sector projects. AMLO initially stated that no existing lithium contract will be cancelled, but then said in April 2022 all contracts would be reviewed. There are some encouraging signals that the government intends to respect the existing rights of private investors. For example, the government allowed China’s Ganfeng Lithium to proceed with its acquisition of Bacanora’s Sonora Lithium project in late 2021, which was then under construction. However, there is legal uncertainty surrounding how the private sector and the state-run sector will co-exist while the government exerts full control over lithium concessions and the supply chain. Even if existing projects are technically green-lighted by the government, developers may be unwilling to assume the risks of further investment to bring projects into production given Mexico’s capricious approach to private investment in natural resources.
  • Recent developments around lithium also raise questions about whether the government may seek increased participation in other mineral sectors. Mining has historically been less politicized than energy in Mexico, though the potential for a critical minerals boom to fuel the energy transition may change this dynamic. Mexico is also a major copper producer, demand for which is anticipated to rise by 50% by 2040. Mexico’s copper sector is dominated by influential domestic conglomerates – notably Grupo Mexico – and these entrenched interests would make moves for greater state participation more difficult. The state may, however, seek greater restrictions on mining. For example, following the August 2022 accident at the Pinabete coal mine, AMLO reinforced his government position on halting mining concessions.

Mexico’s aspirations for sovereignty over its strategic resources is in tension with broader geopolitical competition for critical minerals, including lithium

It is unclear how AMLO’s government will balance its resource nationalist agenda with cooperation with the US to build out mineral supply chains. As dynamics in the sector evolve, a wildcard play by China in Mexico’s lithium sector – such as funding for the state-backed lithium venture – could increase geopolitical competition between Beijing and Washington.

  • The Biden administration is working to develop domestic battery supply chains, including by onshoring the mining of minerals needed to manufacture these batteries, as well as by friend-shoring (developing projects in countries with good bilateral relationships with the US) and nearshoring (developing projects in countries near the US). The Inflation Reduction Act (IRA) incentivizes and supports these efforts. Notably, the act extends and expands the existing electric vehicle (EV) subsidy of up to $7,500 but conditions the tax credit on the sourcing of the mineral content of the battery. At least 40% of the critical metals in the battery (lithium, nickel, cobalt, and manganese) must come from the United States or a Free Trade Agreement (FTA) partner. This rises to 80% in 2026.
  • Mexico is an obvious target for these efforts in the lithium sector, given it is an FTA partner near the US. The US remains Mexico’s largest trading partner and Mexico’s share of exports to the United States amounted to 78 percent of its total exports as of 2021. On 12 September 2022, the Biden administration dispatched Secretary of State Anthony Blinken to Mexico to engage in high-level economic dialogue with his Mexican counterparts. As part of this, aligning the US’s semiconductor industry with Mexico’s lithium production was reportedly discussed.
  • China’s Ganfeng controls Mexico’s only late-stage development lithium project. China controls almost two-thirds of global lithium activity and is seeking to consolidate its control over the upstream. While it remains unclear if Mexico’s lithium reserves may be a target, China’s economic involvement in Mexico is growing, despite remaining fairly limited compared to its investment in the rest of Latin America. Foreign Minister Marcelo Ebrard visited China in 2019, with the aim of securing more trade and investment and improving economic relations. China is also involved in several of AMLO’s “Fourth Transformation” (4T) anti-poverty and anti-corruption projects, including AMLO’s landmark Maya Train (Tren Maya) project.