MEXICO: An Introduction to Energy & Natural Resources

Current Standing and Aims of Mexico’s Energy Sector

Energy transition 

As the world struggles with climate change and the imperative to transition towards sustainable energy, Mexico has encountered both challenges and opportunities in charting its course towards a greener future. This year, Mexico stands at a critical juncture in its energy policy. The country’s energy sector has been in the main agendas of political debates, driven by forces and factors ranging from economic interests to true environmental concerns.

One of the most heavily criticised aspects of AMLO’s (Andrés Manuel López Obrador’s) energy policy is the prioritisation of fossil fuels, particularly oil and coal, over renewable energy sources, and the lack of respect to existing foreign investment in the renewable sector. Despite global momentum towards decarbonisation and renewable energy adoption, Mexico has – as a consequence of AMLO’s interference – seen a resurgence of investment in fossil fuel projects during his administration. Critics and detractors argue that this approach may undermine Mexico’s long-term sustainability goals.

According to its latest Energy Planning Programme (PRODESEN) 2023–2037, in 2022 the power generated with “clean energy” amounted to 31.2% of the output. Such a figure is four points below Mexico’s commitment under the Paris Agreement, which requires that 35% of the country’s power generation should be clean by 2024. Other sources accounting a stricter definition of clean energies show around 26% for that same year – nine points below the Paris Agreement commitment. On the one hand, local governments have taken significant strides to implement policies that envisage ambitious projects towards decarbonising certain sectors, such as public transport. However, the clean generation projects proposed to be implemented might not be enough to address the challenge of energy transition, as efforts to reinforce state-owned companies (Pemex and CFE) continue as a priority in the energy policy.

On 2 June 2024, presidential elections in Mexico will determine the direction of the country’s public policies. Voters will choose between continuing Morena’s governance or transitioning to the opposition coalition, Frente Amplio por México. The outcome will influence economic sectors differently. Under Morena, we can expect a push for clean energy amidst slow bureaucratic processes, and challenges in the extractive and manufacturing sectors due to social and security issues. Energy policy will have to centre on balancing the urgent need for renewable energy with the current reliance on fossil fuels, emphasising decarbonisation of public transport and ensuring energy regulators like CRE and CNH operate independently. The next administration will need to prioritise energy transition technologies and strategies that align with Mexico’s socio-economic landscape.

Generation 

The LIE Reform allows for governmental discretion for the granting of generation permits. In so doing, the Energy Regulatory Commission (CRE) continues to impose further legal, technical and financial obligations to generation permits. New generation permits are not being granted with the ease and pace as during the previous federal administration.

According to PRODESEN 2023–2027, 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, in terms of advancing towards meeting them, thereby not complying with the Paris Agreement. If the Mexican government aims to comply with its Nationally Determined Contribution (NDC), additional private generation projects shall be considered. In such respect, on 1 March 2024, Sonora inaugurated the USD137.5 million Tastiota Solar Park, becoming Mexico’s leading clean energy provider. With 298,500 solar panels, it can generate 100 MW/AC, cutting greenhouse gas (GHG) emissions by about 170,000 tonnes of CO2 yearly, advancing the state’s sustainable energy ambitions.

Energy supply 

The CFE (Comisión Federal de Electricidad) has shown operational and financial strength to supply electricity to more than 47.4 million users. For the first time in four years, the CFE had a net income of MXN116.5 billion. Its total revenue grew by 3.8%, but its cost of sales decreased 13.4% compared to the previous period. 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 foresees 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.

Midstream 

President Lopez’s restrictive policy resulted in the cancellation of permits and denial of authorisations for storage and transportation, affecting gas storage infrastructure. This empowered the state-owned companies, Pemex and CFE, with a dominant position. However, recent reports indicate that Mexican import rates of natural gas from the US have increased, while local production has declined and demand has grown. Much of the demand growth has emerged from Mexico’s electric power sector, with domestic demand increasing from 6.5 Bcf/d (Billion cubic feet per day) to 8.4 Bcf/d during the last decade.

Some relevant advancements include projects like the USD1.3 billion Altamira LNG project by New Fortress Energy and the Sierra Madre pipeline by Mexico Pacific. Altamira, designed to liquefy gas from the Texas-Tuxpan pipeline, can process 0.18 billion cubic feet of natural gas daily into 1.4 million tonnes of LNG annually. Meanwhile, the Sierra Madre pipeline, a 500-mile conduit to the Saguaro Energia facility in Sonora, will transport up to 2.8 billion cubic feet of natural gas per day.

Downstream 

As mentioned, the current administration prioritises domestic oil processing to reduce import costs. Following a series of accidents that affect the production flow, Pemex refineries have been operating at their lowest use rate since 2020. Nevertheless, Pemex aims to process 1.05 million b/d during 2024, thereby increasing its operation rate by 60%. 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, which commenced production in 2023, and aims to process full capacity by the end of 2024 or early 2025. Sizable and proven crude oil discoveries in the south-east can expect to produce around 500 million barrels, which can create further opportunities for the new refineries within Mexican territory.

Mexico’s downstream gas market is expected to grow by a compound annual growth rate of less than 1.43% between 2020 and 2025, augmented by growing consumption of natural gas. Ascending investment in refineries and LNG Terminals (both onshore and offshore) is fostering the market growth. In so doing, Mexico has encouraged the increase of domestic natural gas production by inviting private companies to participate in bidding processes on new natural gas storage and pipelines facilities for imported US natural gas.