The future would certainly be bright for Mexico’s oil industry, after years of production decline, if not for politics. After a slow start Mexico’s energy reform is bearing fruit. Interest in the latest oil and gas licensing rounds has jumped significantly from the earlier ones despite continuing low oil prices. Major international oil companies (IOCs) have now won blocks in deepwater Gulf of Mexico, while a substantial new discovery has already been made in its shallow waters.

But Andres Manuel Lopez Obrador — called AMLO — a left-wing populist politician opposed to energy reform, is the frontrunner for Mexico’s 2018 presidential election. His chance of becoming president is all the more likely if U.S. President Donald Trump, a right-wing populist, follows through on his anti-Mexican rhetoric.

The Mexican government enacted legislation in 2013-14 to reform the country’s energy sector. Two state-owned monopolies, Petroleos Mexicanos (PEMEX) and Federal Electricity Commission (CFE), had become increasingly bloated, inefficient and corrupt over the years. In addition, PEMEX had long been the federal government's piggy bank, negatively affecting its ability to invest in new projects and technologies.

As a result, Mexican oil production (including NGLs) had fallen from a high of 3.83 million bpd in 2004 to 2.88 million bpd in 2013 and 2.46 million bpd in 2016. The goal of Mexican energy reform is to liberalize the petroleum and electricity industries to encourage foreign capital, companies and technologies to revive them.

The Mexican energy ministry is planning to auction more than 500, mostly offshore blocks over a five-year period. The first oil and gas exploration round, in July 2015, which included 14 blocks in the shallow waters of the Gulf of Mexico, was widely regarded a flop. There were bids for only two of the blocks, and the companies bidding in consortium were no more than local and foreign minnows.

It was not until the December 2016 auction for deepwater blocks in the Gulf of Mexico that Mexico’s reform efforts finally began to take off. Eight of 10 blocks were awarded, with major IOCs such as ExxonMobil and Total and China’s state-owned CNOOC snagging blocks. As of now, 66 companies, either alone or in consortium, have won the right to explore and develop oil and gas resources on land or offshore Mexico. According to Pedro Joaquin Coldwell, the country’s energy minister, these contracts could bring in up to US$59 billion of investment over the life of the projects.

Ironically, one of the two winning bids in the “flop” of a first round struck the fifth largest oil discovery in the world in the past five years. On July 12, the consortium of Houston-based Talos Energy, Mexico’s Sierra Oil and Gas and Premier Oil of the U.K. announced that the “wild cat” Zama well — the first privately drilled well in Mexico since the oil industry was nationalized in 1938 — has discovered a field that could contain 1.4 to 2 billion barrels of light oil in place.

The increasingly successful exploration bid rounds, along with the impressive strike by the Talos Energy consortium appear to be good first steps in turning around Mexico’s more than decade long oil production decline. But it will take years to bring new production from the Gulf of Mexico online, with the Zama field, for example, at least five years away from first oil, and a large number of successful projects both offshore and onshore required if production is going to rebound to even its previous peak.

In the interim, a lot can go wrong, especially if President Trump continues with his anti-Mexican agenda. The Mexican ruling parties this century, President Enrique Pena Nieto’s Institutional Revolutionary Party (PRI), and the National Action Party (PAN), are widely blamed for relatively slow economic growth, serious security issues in the country, and endemic corruption. President Pena Nieto promised five per cent annual growth when he enacted his energy and telecommunications reforms, whereas growth has been more like three per cent per year, barely enough to raise living standards in a country with a rapidly rising population.

In addition, the Mexican drug war led by President Pena Nieto and his PAN predecessor, President Felipe Calderon, has been an abject failure. Drug lords continue to run rampant, with homicides in Mexico hitting a record high of 2,234 in June — the latest month reported. Finally, the Organization of American States estimates that corruption in Mexico accounts for 10 per cent of GDP, compared to a global average of two per cent.

Mexican political commentators have argued that President Trump’s anti-Mexican rhetoric has already contributed to AMLO’s lead in presidential public opinion polls, given his impeccable populist and nationalist credentials. If President Trump was to go ahead and “tear up” NAFTA, push through mass deportations of illegal Mexicans and build the BIG wall between the two countries, it could supercharge AMLO’s campaign.

AMLO also benefits from the first-past-the-post system for selecting a president in Mexico, especially as the number of major political parties, and hence presidential candidates, has increased. Mexico has traditionally had three major political parties. The two previously mentioned right-wing parties, PRI and PAN, and the Party of the Democratic Revolution (PRD), a social democratic party.

PRD has since split into two, with AMLO, the presidential candidate for PRD-led coalitions of parties in 2006 and 2012, creating the National Regeneration Movement (MORENA) in 2014. As a result, it has been estimated that AMLO now needs only around 30 per cent of the vote on 1 July 2018 to win the presidency.

And a key plank of AMLO’s presidential campaign is a public referendum on Mexico’s energy reform. But even if the Mexican people vote against the reform, he would require approval of the two houses of Congress — Chamber of Deputies and Senate — to alter or reverse it.

The widespread belief has been that AMLO will not be able to garner majorities in the Mexican Congress, even if he wins the presidency. It is more difficult for a single party to win a majority in each of the two houses, as seats are apportioned through a combination of first-past-the-post and proportional representation.

But AMLO’s MORENA is already gaining momentum, having come a close second to PRI in the June governorship vote for the State of Mexico, the main bastion of support for the PRI. Supporters of AMLO’s old PRD are already talking of strategically voting for MORENA in the 2018 federal elections in an attempt to push it to majority status. This sort of thinking also increases the possibility of a MORENA-PRD alliance in Congress, despite their recent split, assuming this would give these ideologically simpatico left-wing parties a majority.

If AMLO was unable to garner a majority in the two houses of Congress to alter or reverse the energy reform, he could still resort to a number of other measures to at least slow its momentum. These measures include cancelling scheduled licensing rounds, increasing minimum bid requirements, and creating “regulatory hell” for oil companies.

To conclude, the potential for Mexican oil production again appears bright, but Mexican — and indirectly American — politics could still throw a wrench into the energy reform on which this future is based.

This obviously would be bad news for Mexico and its oil industry, but good news for western Canadian producers as it would mean less competition for the lucrative U.S. Gulf Coast refining market.