MEXICO: An Introduction to Energy & Natural Resources

Mexico: Energy & Natural Resources  

Introduction By David Enríquez, Erika Roldán & Jorge Sandoval

Goodrich, Riquelme y Asociados  

Mexico City 

Considering the results of the mid-term elections of 2021, the current energy policy in Mexico shall be analysed in the context of future investments and market behaviours towards the end of the presidential six-year term.

Despite previous announcements by President López Obrador stating the aim of keeping the Energy Reform intact, the National Development Plan 2019-2024, along with certain policies and rules, recently issued by the federal government, changed the direction of the Mexican energy sector. This, in connection with the promotion of relevant reforms to the Hydrocarbons Law and the Electricity Industry Law during 2021, which tend to strengthen the state-owned companies PEMEX and CFE, have the goal to substantially change the way in which the Energy Reform is being implemented. At the same time, the efforts towards centralising the decision-making processes have seen the regulatory agencies on the energy sector (CRE and CNH, for their acronyms in Spanish) suffer reductions in their budget allocations and personnel in favour of the Ministry of Energy.

Data reported by the Ministry of Economy reflects that at the end of 2020, PEMEX closed with 7,468 service stations, representing a decrease of 37% since 2016, its best year in this aspect. Additionally, 49% of diesel imports have been lost (74,630 barrels per day out of 145,700). In comparison, 30% of gasoline imports were accounted for by 14 private companies that imported 106,670 barrels per day and 5,600 barrels per day of turbosine, which impacted 25% of all of the above since the private sector has now concentrated on this market since 2016, when the 2013 reform allowed the entrance of private entities to the sector. In order to reposition PEMEX and CFE’s market participation, current reforms have an aim of strengthening the state-owned companies. From the political standpoint of the current federal administration, these state-owned companies have been economically affected by the Energy Reform of 2013. Therefore, to rescue them from the adverse effects and economic losses, the new reform grants them benefits without imposing a monopolisation of the industry.

Regarding the oil and gas sector, on 4th May 2021 a reform of the Hydrocarbons Law was published, which in general terms affects midstream and downstream transportation. Remarkably, this reform envisages, among others, the following aspects: i) to obtain operation permits the interested party must demonstrate sufficient storage capacity; ii) CRE and SENER (Secretaría de Energía) can suspend permits that have been granted to private entities and allows state-owned companies to temporarily take over the private operations of the permit holders, for the cause of preserving “…the national security, the energy security or to benefit the national economy”.

On the other hand, bidding rounds to award E&P contracts remain suspended. However, private parties that were awarded contracts on previous rounds remain operating their fields, and secondary market transactions are being conducted among IOCs.

With respect to PEMEX, its established goal is to generate 2.65 million barrels per day (MBD) in 2024, growing from 1.6 (MBD) in 2018, all without generating additional debt to the company. As for the refineries, between 10 and 12 billion pesos are invested annually to improve the maintenance of the facilities to sustain and increase the production of gasoline and diesel. As a result, in February 2021, PEMEX refineries reached 44% capacity utilisation, a significant advancement compared to previous years.

The downstream oil and gas market in Mexico is expected to have a compound annual growth rate (CAGR) of less than 1.43% in the period from 2020 to 2025. This is due to the high demand for natural gas and substantial investments in LNG terminals, such as refineries. However, the persistent decrease in production in the country has investors worried.

Regarding the energy sector, on 9th March the decree that reforms the Electric Industry Law was published in the Official Gazette. The main amendment consists of giving priority to CFE-owned generation, starting with hydroelectric facilities, followed by its thermal plants, and finally privately-owned wind. Photovoltaic energy and privately-owned combined cycles are given the last priority. Experts and private investors have concluded that this reform is directly intended to strengthen CFE's market participation. The reform proposes additional relevant changes: i) the elimination of CFE’s obligation (in its role as Basic Services Supplier) to purchase power only by means of auctions. In other words, CFE is now allowed to determine on its own the means and methods to purchase power; ii) the issuance of Clean Energy Certificates does not depend on the commencement date of commercial operations of power generation facilities, which affects the incentive of investing in new generation plants since the Certificates’ economic benefit inherent to new infrastructure has disappeared; and iii) instructs Mexico's Energy Regulatory Commission to revoke self-supply generation permits.

Some experts have mentioned that the referred reform is negatively changing the rules of the Mexican electricity market by limiting free competition and favouring CFE. In doing so, various Mexican agencies and trade associations have expressed their concerns and have initiated domestic legal action.

Certainly, the current federal government set of reforms seem to favour traditional sources of generation. However, the judiciary has been in charge of confirming the acquired rights and non-discrimination of renewable technologies for participants in the sector in Mexico. Thus, the almost 100 new players, including private generators from more than ten countries, who arrived in the country after the energy reform, combined cycle plants together with solar generation and wind farms, will continue to face growing demand.

Although the effects of the reform remain suspended, due to the current analysis of its constitutionality and pending the Supreme Court’s resolution, there are numerous areas of opportunity throughout the value chain to be considered. For instance, there is a tendency to hire qualified suppliers since they would offer price certainty in the electricity sector through long term power purchase agreements.

Furthermore, it is relevant to consider the current capacity of the generation of Mexico. Up until 2020, according to the Energy and Climate Partnership of the Americas, 58.9% of the generation in Mexico was of combined cycles, 16.9% of other fossil fuels, 6.3% of wind, 4.3% of solar PV, 8.6% hydroelectric and 3.5% nuclear.

On the other hand, despite the decrease of the oil price during the COVID-19 pandemic, during May 2021 the Mexican blend reached the price of USD75 per barrel. The International Monetary Fund has projected that the Mexican economy will grow 5% in 2021 and grew 3% in 2020.

All this, in addition to the economic recovery expected for the fourth quarter of 2021, keeps expectations open for the resurgence of investment opportunities in the Energy sector in Mexico. Although not in the traditional sense that emerged from the 2013 reform, the sector's evolution is a condition for the stabilisation of the post-pandemic Mexican economy. Thus, the private sector and large investors are keeping an eye on the development of the Mexican market for the coming months.