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MEXICO: An Introduction to Mexico

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Mexico’s 2013 Energy Reform amounted to an unprecedented game changer due to its scope and depth. In essence, it created a market ecosystem under the umbrella of robust and independent regulators. Its magnitude deserved global recognition, including that of specialised agencies such as the OECD’s International Energy Agency.

Despite the above context, President López Obrador (AMLO) does not necessarily have the same view as the Energy Sector. Before jumping into further granularity, it is worth suggesting some general guidance regarding AMLO’s first year in office.

On the one hand, we see the merits of the government’s decision to keep the Energy Reform practically intact, in both legal content and institutional design. Such stability has provided assurances to private players of various nationalities already active in the country. On the other hand, we regret the fact that despite Pemex (NOC) and CFE (electricity company)’s financial and operative weaknesses, the government decided to cancel plans to increase the private ecosystem by means of E&P rounds, Pemex’s farm-outs and power generation auctions for the benefit of CFE.


Mexico’s upstream momentum is hybrid. The good news is that private companies (with a critical mass of over 100 CNH licences and PSCs awarded by CNH) are exploring, evaluating and even developing fields primarily in shallow and deep waters. Accordingly, over 200K of BOE are expected to be added to the country’s production by the end of this administration. Naturally, the maturity of CNH’s rounds will take place in terms of relevant new production far beyond the AMLO administration.

The bad news, however, is that Pemex is experiencing a rather dramatic decrease in production of approximately 10% per year. In fact, Pemex’s upstream activity would require US$25B annually. In contrast, it gets less than US$10B as a budgetary allocation. Notwithstanding the above, AMLO seems to be enthusiastic about escalating oil production from 1.7M to 2.4M before the end of his term without the need for partners (i.e. farm-outs or equivalent mechanisms), relying instead on discrete and integrated services contracts. The so-called CSIEE is the new service tool that will be used for over 20 of Pemex’s most sizeable fields, starting this year. Although the CSIEEs might be reasonably successful for certain fields already in the production phase, the E&P community struggles to consider that a service environment is the solution to the deep decline in production and reserves that Pemex faces. Any robust benchmarking demonstrates that although integrated services might be useful for specific fields, the only way to efficiently share major risks and heavy investments is by teaming up with the best of the industry, either by farm-outs or by other contractual arrangements that truly align their interests.

Regarding midstream, we observe strong activity towards the finalisation and commissioning of various reception and storage facilities all over the country. CRE recently revealed that over 50 new storage permits have been issued already. However, despite the criticism as to the way in which the new administration has attacked gasoline theft, the fact is that such criminal conduct has been reasonably reduced until now.

In under seven years, the gas pipeline network has increased by over 70% to nearly 12k kilometres. However, some of the most needed new gas pipelines are suffering non-technical risks before being duly operational. In this context CFE, as the main user of the new transport capacity, wishes to renegotiate certain terms and conditions that were included in EPC tenders. Industries from all sectors and combined-cycle generation plants are already desperate, as the gas shortages are already critical. Ironically, the natural gas basins situated just across the northern border are amongst the largest and the natural gas that flows from them is the cheapest on the planet.

The downstream arena has attracted media attention, as AMLO made a campaign promise to build a meaningful refinery during his tenure. Although the credit rating agencies have made clear that such a project would further jeopardise Pemex’s ability to navigate its own enormous financial crisis, the government seems optimistic that the new 400K BOE refinery will be built on time (3-4 years) and in budget (US$8B). It remains to be seen whether such a large-scale project is achievable on time and in budget, as well as in a sustainable manner, considering the flooding that typically occurs in the area.

Finally, the gasoline/diesel retail business is experiencing a handsome transformation in terms of competition and quality products for the consumer. As a result of the Energy Reform, there are nearly 70 new brands in the country. In under five years, private operators already have gained a 30% market share that will increase, particularly as a result of an effective implementation of a few IOCs’ approach towards the retail sector in Mexico.


As in the case of the hydrocarbons sector, the Energy Reform provided for a major transformation of the electricity sector with a deep change by creating a wholesale electricity market with mechanisms to foster the generation through renewable sources, such as the long-term auctions.

The goals were clearly identified: to generate reliable energy while ensuring a more economically competitive and environmentally friendly supply. In order to meet such goals, high levels of investment are required; according to the Ministry of Energy, and pursuant to planning mechanisms (i.e. PRODESEN 2018-2032), said requirements amount to more than US$100B in the next 15 years (approximately US$7B per year) to update the national generation, transmission and distribution systems.

The new administration is seeking to transform Mexico’s electricity sector by prioritising state enterprises. One of the first energy policies was to cancel the long-term electricity and power auctions and transmission tenders, which implied the cancellation of the fourth long-term auction and the Oaxaca HVDC transmission line. It is worth mentioning that - against all fears - the new administration has not cancelled any contracts entered into by the government in the context of the past federal administration.

The PRODESEN 2019-2033 was issued with the objective of providing a fresh (government-oriented) status of the National Electricity System (SEN) in terms of power generation, transmission and distribution. While aiming to provide grounds for the new sector, the PRODESEN has severely criticised the Energy Reform, concluding the following:

• CFE’s operative and financial capacities were reduced by the Energy Reform.

• All the agreements entered into by CFE and private entities created a basis whereby CFE assumed all the costs and risks.

• CFE’s power plants capacity was reduced from 86.65% in 2015 to 76.89% in 2018.

• Since 2017, the electricity tariffs showed an increase of 17.06%.

• A new energy policy should be implemented founded on the principle of public interest in order to rescue CFE.

• The document foresees 18 projects for the extension of the electric grid and 6 projects for its revamp.

• The demand for electricity will grow by between approximately 2.8% and 3.6% in the next 15 years.

In the above context, the industry struggles to understand why, instead of using public money on new CFE generation plants (that can be built and operated efficiently by the private sector), the government has not yet taken the decision to better invest in the much-needed upgrade of transmission lines all over the country.

Despite these new policies and conclusions, according to ASOLMEX, from December 2018 to June 2019, solar energy in Mexico grew by 32% due to the operational launch of ten solar developments that added 982 MW to the grid. An equivalent situation should be considered regarding wind power plants.

Finally, although the auctions have been cancelled, it is interesting to observe how not only the merchant portion of the market has been evolving (contractual prices and duration) rapidly, but also how the participants in the wholesale electricity market are designing their own private solutions, without the need for CFE in the middle.


As highlighted in our introduction, after a far-reaching reinvention of the energy sector back in 2013, Mexico -once again - is in great need of sound policy-making. Such soundness and stability are the natural ingredients to secure investments in a capital-intensive industry such as the energy sector.

Mexico’s economy can only grow and distribute social benefits if the new administration acknowledges that its sectorial productive companies (CFE and Pemex) require technology, experience and cash from best-in-class operators from all over the planet.