OGV Energy’s May Mexican Energy Review

Neither the oil price war, nor the global pandemic of COVID-19 has changed the course of the energy policy that President Andrés Manuel López Obrador established for the country. With a strong ideology focused on energy sovereignty, the strengthening of Pemex, the increase in oil refining capacity, the rehabilitation of existing refineries, and the construction of the Dos Bocas refinery continue to be proposed as the way forward.

Aligned with an energy sovereignty ideology, President Andrés Manuel López Obrador has based his national development strategy on Petróleos Mexicanos (PEMEX), which is one of the main axes of his government. However, the state-owned enterprise is one of the most indebted oil companies in the world, according to international rating agencies such as Moody’s and Fitch. Besides, for a decade, it has faced a sharp drop in its production levels of hydrocarbons, especially crude oil. López Obrador undertook a strategy to rescue Pemex with a formula that consists of increasing the injection of public resources and restricting the participation of private capital. Likewise, it has presented projects highly dependent on hydrocarbons, such as the combined cycle projects in Yucatan, and the construction of the Dos Bocas Refinery in Tabasco, which will have an investment of US$ 8 billion. According to the calculations of the government, Dos Bocas will avoid the import of fossil energy resources, which is expected to boost the political and economic independence that the President is seeking.

In 2019, the international trade war between China and the US, in addition to the changes made to the legal framework of the energy market promoted by the current administration, caused an increase in nervousness and uncertainty among investors. In this way, the drop in GDP and the fragility of Pemex marked the first year of government. Coupled with this, is the current crisis caused by the COVID-19 outbreak, which impacted the country at a critical moment since the pandemic was announced not even two weeks after Pemex reported losses of US$ 18 billion in 2019 due to the decrease in sales and in crude oil production.

Given the devastating drop in oil prices caused by the current crisis, OPEC proposed a historic multilateral deal to lower global oil production at 10 MMb /d, a measurement that would apply for May and June, with the expectation of maintaining low levels of extraction for two years. Negotiations between energy ministers had been fluid until Mexico’s representation team, led by Rocio Nahle, Ministry of Energy, refused to reduce national production by 23 percent, equivalent to quit production of 400 Mb/d.

Through a Twitter post, Rocio Nahle announced, “In the agreement to stabilise the price of oil at the @OPECSecretariat, Mexico has proposed a reduction of 100Mb/d over the next two months. From 1,781MMb/d of production we reported in March 2020, we will decrease it to 1,681MMb/d,” which is far less than the target proposed by the group. This statement made OPEC consider not to include Mexico in the agreement, which would have caused great harm to the position of the country within the group of oil-producing countries.

“Mexico can and should join the international community in stabilising the oil market,” said Aldo Flores Quiroga, who served as former Mexican deputy oil minister from 2016 to 2018 in the OPEC deals negotiations. “The production cut is both necessary and possible. It’s the responsible thing to do domestically and internationally,” he added.

Given this, the President of the US, Donald Trump, said that he would produce fewer barrels of oil to help Mexico comply with OPEC’s agreement to curb the drop in prices, support that Mexico will repay in the future. Donald Trump explained in a press conference that “this means reducing US production, it is a large amount (of barrels) for Mexico, but for us, it is little.”

Bad news for PEMEX continues. On April 18th, Fitch Ratings announced that it reduced the long-term international ratings in foreign and local currency for PEMEX and the Federal Electricity Commission (CFE). For Fitch, this decision “reflects the direct link of these companies with the sovereign ratings of Mexico.” In the specific case of Pemex, its credit rating fell from “BB” to “BB-,” while CFE went from “BBB” to “BBB-,” the outlook for both changed from stable to negative.

According to Fitch, PEMEX has “limited flexibility to face the challenges of the industry, given the high tax burden on its income, the high levels of debt, the increasing costs of extracting crude oil and the high need for investment in maintaining production and replenishing reserves.” It also ensures that “the corporate governance of the state company is weak, as the government constantly interferes in changes in strategy, financing, and administration.”

As previously mentioned, the country’s current energy policy has generated that even though Mexico has great potential in internationally competitive renewable energy sources, its energy matrix is based mainly on hydrocarbons. In this scenario, the drop in oil prices has highlighted the weaknesses of the energy transition in Mexico. “Energy sovereignty is completely desirable, but currently energy sovereignty will be renewable, or it will not be, since it will not be through oil and we cannot have sovereignty over electricity generation with gas because we do not have enough,” highlighted Pablo Ramírez, climate and energy expert at Greenpeace Mexico.

According to UNDP-Mexico, the national GHG emission made during electricity and heat production line is derived from the consumption of fossil fuels by the Federal Electricity Commission (CFE), the Independent Power Producers (PIE), and the power plants of self-sufficiency. Regarding this topic, the Ministry of Energy (SENER) points out that “In this sense, the fuels used to produce electricity by these entities are mineral coal, fuel oil, diesel, and natural gas.”

Both private producers and CFE are responsible for GHG emissions; therefore, both actors should play a central role in the gradual but effective solution to reduce GHGs. One of CFE’s alternatives in this matter is to begin a reconversion of its plants and carry out a process of promoting and adopting electricity generation technologies that use renewable energy sources. This transition process was slowed down by the public auctions cancellations, as well as by the changes in the regulatory framework related to the issuance of Clean Energy Certificates (CELs).

However, the Mexican renewable energy market is not based on just one scheme. On the contrary, companies are looking for alternatives in the electricity market. “As project developers are adjusting to the emerging policies of the current administration, growth in renewable energy will continue,” said Calixto Mateos, managing director of the North American Development Bank. Following this trend, a wide range of national and international companies have detected the enormous potential of Mexico in terms of renewable energy generation and, under different risk and income schemes, have adopted options for buying and selling energy among privates.

Under schemes such as Power Purchase Agreements (PPA), Distributed Generation, and Merchant Projects, the energy industry has promoted the development of the clean energy sector. In terms of financing PPAs, at the moment there is a shortage of off-takers with a high credit rating to sign the long-term agreements, due to the fact that most of these agents already have signed contracts. Therefore, generally, off-takers have an interest in signing short-term contracts.

Likewise, German-Mexican Energy Partnership affirms that opening to different mechanisms than Long-Term Auctions (SLP) implies that generators and suppliers must identify new schemes for project development. According to data published by the National Commission for Energy Control (CENACE), the SLP process attracted an investment of US $ 8.6 billion in both wind and solar energy, reaching competitive prices with a weighted average rate of US$ 43 / MWh in the first SLP, decreasing by 30 percent in the second SLP to reach US$ 33 / MWh and falling by 40 percent in the third SLP with prices of US$ 20 / MWh. As far as today, Mexico has more than 260 clean energy plants, which represent 30 percent of the installed capacity; however, it represents 21 percent of the total national generation. To achieve the goal of 35 percent clean generation by 2024 is necessary to generate an additional 68 MWh.

On the other hand, the investment costs of solar and wind projects have decreased thanks to developments in technology and its availability.

So far, although the supply chain in both solar and wind depends on imports from China and Spain, the stock of existing spare parts in Mexico is vast, and the current lockdown caused by COVID-19 has not had a drastic impact on the operations of EPC companies or in the O&M processes of the country’s photovoltaic parks and wind farms. Meanwhile, Víctor Ramírez, spokesman for the Mexico, Climate and Energy Platform, recommended to those companies that are quoting the installation of photovoltaic equipment, to do it in dollars and not Mexican pesos, to avoid economic losses due to the pesos volatility.

Read the latest issue of the OGV Energy magazine HERE.