MI’s Mexico Energy Chatter – Jan. 22, 2025

How hard can Trump hit Mexico in the energy sector?

The second Trump administration has shown from the start that the world will face a volatile ride. But what could potential tariffs mean for the Mexican energy sector? Oil is of course the most traded good in the sector, even if Pemex crude exports to the US have fallen over the last years, as AMLO directed Pemex to build a new refinery and revamp the existing six. One outcome of this strategy was that the company reduced its crude exports to the US, though Mexican exports still account for around 6% to 8% of the crude refined in the US, which cannot be easily replaced by other crudes, as many Texan refineries are configured for the heavy-sour Mexican crude mix.

Given these constraints, it could actually be more challenging for US companies to adapt to this tariff than for Pemex. The company would of course suffer a hit if the demand for its crude were to fall, but there are other regions in the world willing to take that crude, at a discount. Bad, but not catastrophic.

A different and highly problematic situation would arise if as part of a broader out-of-control trade war the Trump administration decided to impose restrictions to the natural gas and fuel exports from the US to Mexico, (in response for example to Mexico retaliating against US tariffs with its own).  Data from the US Energy Information Administration clearly show that Mexico’s electricity generation would almost come to a halt in just a few weeks if the flow of natural gas stopped, likely provoking a political, social and economic crisis. The serious consequences make it unlikely such a weapon would ever be used, apart from the fact that this would hurt US natural gas companies for whom Mexico has become a key market for their increased shale production.

This interdependence can also be seen in the possibility of renewed US gas exports to Asia. Energy market participants are particularly optimistic about Trump’s pledge to lift the moratorium on permits to export natural gas to countries without a free trade agreement that was imposed by Joe Biden. Crucially, though, these projects include operations in Mexico: natural gas is piped to Mexico, in order to bypass the US western states, where local opposition to such projects makes them unviable. Thus, these producers need Mexican terminals to liquify the gas, which is then shipped to its large Asian end consumers.

By keeping things on friendly terms, Mexico could be the recipient of some of the investments in renewable and green energy that are bound to see their business shrink in the US under Trump. This, of course, would require the Sheinbaum administration to provide an attractive business environment to bring those investments, but if the Mexican president is serious about her ambitious goals, attracting foreign investors will be crucial.

Mexico depends on US natural gas, but the dependency is mutual

Source: US Energy Information Administration.

Plan México aims for electricity, not oil and gas

President Sheinbaum presented a new program called Plan México, showcasing the economic priorities for her term. The government expects to attract USD 277bn in investments, by granting tax incentives for companies relocating their manufacturing lines into Mexico. Among those projects, the administration wants to add 22,000 MW in generation capacity between 2025 and 2030, as well as investing USD 12.3 bn in generation, USD 7.5 bn in transmission lines and USD 3.6 bn in distribution lines.

The plan also provides some details on how the government intends to reach the goal of 45% in clean energy sources, announced last year. Natural gas-powered electricity plants will remain close to 60% of the country’s generation —growing about 30,000 MW in nominal terms but reducing its share slightly from the current 59% to 58% in 2030—, while the share coming from wind should almost double, from 5.8% to 12.9%, according to the document. Solar power will also increase but in a lower magnitude from 5.2% to 8.3%.

The strategy also calls for an investment of MXN 2.07 tn on Pemex over the next six years. The company would need to spend around MXN 345.5bn annually to reach that figure. The projected investment in Pemex seems to be lower than in the previous administration. This is partly due to FX variations and inflation, but also yet another sign that the Sheinbaum administration is moving away from AMLO’s pro Pemex energy policy.

The plan also includes the reconfiguration of the Pemex petrochemical complex La Cangrejera, located in the state of Veracruz, into a refinery and petrochemical complex, a project that was said to be under consideration under AMLO, but that ultimately failed to materialize. This should contribute to the goals of 10% growth for the chemical and petrochemical sector in Mexico starting in 2027, and to reduce imports by $14 bn.

A preliminary draft of the plan circulated during the weekend included a proposal for Pemex to buy a natural gas company in Texas, however, it did not appear in the document released yesterday by the government. Some analysts expect that this proposal will be included in Pemex’s next business plan.

In other energy news…

  • Pemex’s crude royalties payments sank in 2024 as former President Andres Manuel Lopez Obrador allowed multiple tax exemptions in the final months of his term. Pemex paid MXN 153.3bn in crude royalties last year, a 47.5% decline compared to the MXN 291.7 bn in 2023, according to Mexican Petroleum Fund (FMP) data. Pemex was exempted from paying its largest oil royalty, the DUC, for six months, including January-February and June-September. But in October, the first month under Sheinbaum, the company paid MXN 20bn, and MXN 43.8bn in November, almost double the usual monthly payments. In December, Pemex paid MXN 19.6bn. In the first three months of Sheinbaum’s term, Pemex hasn’t received a new tax exemption despite the growing concern around the unpaid debts to suppliers.
  • Norwegian company Borr Drilling got a notice of a temporary suspension on three rigs from state-owned company Pemex, in a contract performing offshore services jointly with Mexican company Opex. “Borr Drilling Limited has received a notice of temporary suspension of operation for its rigs “Galar”, “Gersemi” and “Grid”, operating in Mexico,” according to a note released by the company this month. “The temporary suspension will be for a period of up to 31 March 2025. Based on discussions with our customer, it is expected that some or all of these three rigs may be resuming operation prior to this date.” The company signed a deal with Opex in 2022 to lend five rigs to its Mexican partner that would be performing drilling services for Pemex until 31 December 2025, in a deal valued at USD 715mn.
  • The CFE will restart the project to run the Tula thermoelectric power plant on natural gas this year, in another attempt to resurrect a plan started almost a decade ago. The Francisco Perez Rios power plant, with roughly 2,200 MW of installed capacity, operated by state-owned power utility CFE, produces about 20% of all the electricity consumed by the Mexico City area, according to the energy ministry records. CFE has already converted two of the plant’s five turbines to run on gas and fuel oil. But efforts to supply the plant with natural gas via pipeline have repeatedly been blocked. The first attempt, the Ramal Villa de Reyes-Tula pipeline, faced significant delays because of social conflicts. Residents of a neighborhood in Tula blocked construction, demanding subsidies for perceived damages, according to a 2021 study by CFE’s trading arm. The reconversion of Tula thermoelectric power plant to run on gas faces the opposition of local communities and criminal groups, and it’s a clear example on how difficult it could be building these projects in Mexico.

 

 

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