MEXICO: An Introduction to Energy & Natural Resources

Current Standing and Aims of Mexico’s Energy Sector

Energy transition 

Mexico’s energy transition is a multifaceted journey towards a sustainable future, aiming to diversify its energy mix, reduce greenhouse gas emissions, and promote renewable energy sources. As one of Latin America’s largest economies, Mexico faces both challenges and opportunities in its pursuit of energy security, environmental protection, and economic development.

Due to the drastic alterations of Mexico’s energy policy during the current administration, in 2022 the power generated with a low-carbon footprint amounted to 26.1% of the output. This means a decrease of 1.4% when compared with the previous year. Such a figure is nine points below Mexico’s commitment under the Paris Agreement, which requires that 35% of the country’s power generation should be clean by 2024. Recklessly, the administration has artificially tried to re-define clean energy by including the generation of combined cycles (mostly owned by the state-owned Federal Electricity Commission (CFE)). Such a move has only mounted the concern of the international community regarding Mexico’s real commitment with respect to climate change.

Despite the disputes regarding the reform to the Electric Industry Law (LIE), efforts to reinforce state-owned companies (Pemex and CFE) continue as a priority in the Energy policies of the country. However, energy transition has been part of federal government policies according to the Energy Planning Programme (PRODESEN). Nevertheless, the generation projects proposed to be implemented might not be enough to address the challenge of energy transition. Additionally, despite the good intentions of the federal government towards a low-carbon energy transition, there must be a balance between ensuring energy security and affordability while embracing sustainable practices.

On the one hand, governments have taken significant strides to implement local policies that envisage ambitious projects towards decarbonising certain sectors, such as public transport. In such regard, various public policies have been introduced to develop charging infrastructure and support the establishment of charging stations nationwide. For instance, the States of Jalisco, Mérida, Mexico City, and Nuevo León have implemented electric vehicles for public transport.

On the other hand, due to the lack of approvals for large-scale generation projects, private companies have been implementing the incorporation of solar panels in their facilities. The lack of requirement of a generation permit for Distributed Generation (up to 0.5 MW) has allowed private companies to reduce their operation costs and contribute to achieving sustainable goals.

Generation 

The LIE Reform allows for governmental discretion in generation permit planning. Hence, the Energy Regulatory Commission (CRE) imposed new legal, technical, and financial obligations to generation permits, affecting the execution of private projects.

According to PRODESEN 2023–2027, in 2022 Mexico generated 340,713 GWh of electricity, with 31.2% clean energy and 68.8% fossil energy. It aims for 63.1% clean energy integration between 2023 and 2026, and 89% from 2027 to 2037. The installed capacity expected by 2037 is 157,098 MW. Since 2015, Mexico established the goal of 35% of clean energy generation by 2024 and 43% by 2030, however, according to the latest PRODESEN, these goals have not changed to this date, thereby not complying with the Paris Agreement. Considering the latest PRODESEN, if the Mexican government aims to comply with its NDC, additional private generation projects shall be considered.

Energy supply 

The CFE has shown operational and financial strength to supply electricity to more than 47.4 million users. At the end of Q4 of 2022, an EBITDA of 70,218 mdp was generated, 107.9% higher than the same period of 2021 by 33,777 mdp. In the short term, PRODESEN 2023–2037 estimates 20,425 MW interconnected capacity in the electric system between 2023–2026, and in the long term, 39,658 MW from 2027–2037.

It also estimates a net generation capacity addition of 64,595 MW, with a mix of 70% natural gas and 30% hydrogen expected between 2033 and 2036. It is further expected that by 2037 the net consumption of energy will increase to 479,987 GWh.

Transmission and distribution 

The increase in power demand requires an investment in transmission and distribution infrastructure. Considering the imminent need for investment, PRODESEN and the CFE’s latest business plan foresee an investment of MXN79,567 million for transmission infrastructure and MXN137,160 million for distribution infrastructure.

The Dominance of Mexico’s Oil & Gas Sector 

President Lopez’s administration has been skeptical of private investment, suspending upstream bid rounds in 2018 to this date. However, privates awarded with contracts in previous rounds continue operating fields and conducting secondary market transactions.

This administration has implemented regulatory amendments, affecting market conditions in the midstream and downstream sectors, and strengthening state-owned Pemex. In search of re-empowering Pemex, the government provided USD3.5 billion in fiscal support and a USD39.9 billion budget for six refineries for upgrades and the construction of Dos Bocas Port in Tabasco.

Upstream 

Mexico’s upstream contracts from the 2013 Energy Reform contribute to crude output, which is expected to increase in the coming years. According to the National Hydrocarbons Commission (CNH), private companies have made 15 oil discoveries, resulting in a six-fold increase in proven oil reserves. Although the current federal administration has put upstream liberalisation on hold, it is unlikely to alter private upstream projects’ conditions.

Based on the exploration and production plans already approved by the CNH, private operators and Pemex will increase drilling activities, including ENI’s continued drilling in Area 1 in the Gulf of Mexico, which already produces 25,200 barrels per day (b/d).

Upstream companies face challenges with rig availability. With nine rigs leaving Mexico in the last 12 months and only one arriving, upstream companies are forced to use the same equipment for wells with different characteristics and equipment/infrastructure sharing.

Midstream 

President Lopez’s restrictive policy resulted in the cancellation of permits and denial of authorisations for storage and transportation, affecting gas storage infrastructure. SENER reported in 2022, 86 permits for import and export, lower figures than previous years. This empowered the state-owned companies, Pemex and CFE, with a dominant position.

Another milestone in 2022 involved the SENER issuing an order instructing users that receive natural gas transportation to prove that such supply is received from Pemex, CFE, or its subsidiaries/affiliates. This led to a negative impact on foreign direct investment. In 2022, foreign investment in the energy sector was USD1.334 billion, representing a 27.51% drop with respect to 2021, according to the Ministry of Economy.

Downstream 

The current administration prioritises domestic oil processing to reduce import costs, meaning renewable energies have taken a back place to fossil fuels.

Pemex aims to process 1.1 million b/d during 2023, increasing capacity to over 1.6 million without debt. The government is betting that capacity will increase through the Deer Park refinery, the planned overhaul of six existing refineries, and the start-up of Dos Bocas refinery.

Mexico’s downstream gas market is expected to grow by a compound annual growth rate of less than 1.43% between 2020 and 2025, driven by high demand for natural gas. However, production decline is causing concern for investors, especially when nearshoring is trying to attract new investments.