MEXICO ENERGY CHATTER
MIRANDA’S PERSPECTIVE: PEMEX, CFE’s hurdles hinder Sheinbaum’s energy goals
During her inauguration speech, Sheinbaum announced that her administration would soon release an “ambitious program” for an energy transition that includes strengthening PEMEX and CFE and improving energy transmission, distribution, and generation, with CFE producing at least 54% of electricity and allowing 46% from private generation. Sheinbaum added that developing renewables, aiming for a 45% share of the grid by 2030, and increasing petrochemical and fertilizer production are also critical components of her administration’s approach to the energy sector.
Challenges for PEMEX
On the positive side, PEMEX’s recently stated sustainability plan aligns with Sheinbaum’s vision, prioritizing ESG factors, electric mobility, and green hydrogen projects. The company plans to improve its emissions counting system and engage with international organizations to elevate climate standards. However, implementing such changes will not be easy culturally and will cost money, which Pemex does not have. For example, Moody’s anticipates minimal shifts in PEMEX’s business model under the new administration, underlining the intricate dance between operational realities and ambitious sustainability goals.
PEMEX’s new director, the respected academic Victor Rodriguez, has emphasized collaboration with Mexico’s finance ministry to stabilize the company. He supports Sheinbaum’s proposal to use renewable energy and cogeneration projects to refinance PEMEX’s debt. But it will not be easy to overcome the challenges.
CFE’s Role and Challenges
Sheinbaum indicated that CFE might explore green hydrogen projects at PEMEX refineries. According to data from the Mexican Hydrogen Association (AMH2), green hydrogen development in Mexico requires nearly $60 billion between 2025 and 2050, with $6 billion needed before 2030.
It is still unclear how CFE would secure appropriate project financing structures for such projects. In recent years, the utility has been implementing a more aggressive strategy to improve its financial standing. CFE has transitioned toward a different approach to using financial strategies, such as placing stock-traded certificates, known as CEBURES, on the Mexican stock exchange (BMV) to finance pending debt.
CFE must also invest in transmission and distribution projects. The utility reported a net loss of $3.8 billion in the year’s first half, driven by unfavorable exchange rates and debt commitments. Power sales, representing 74.6% of CFE’s profit, remain its largest revenue source.
In 2022 Mexico updated the climate goals it adopted after the Paris climate agreement from 22% to 30% in conditional reduction and from 36% to 40% in unconditional reduction of greenhouse gas emissions. The new administration will likely want to put Mexico in a better position to meet these commitments. Some of the initial steps can be very easy and fast, considering that there are many renewable power projects that are already built waiting for final permits to enter the market.
Many issues will require the involvement of the private sector, which will open business opportunities. Rebalancing the centralized versus distributed generation mix, commercial opportunities emerging from cyberthreats and increased demand for energy supply and demand optimization solutions, are just some of the areas that will require an “open for business” mentality from the new Mexican federal administration. Private market participants could position themselves to capitalize on these needs.
MARKET INSIDER: Cautious optimism over Sheinbaum’s energy sector appointments
Market insiders are cautiously optimistic about President Claudia Sheinbaum’s recent energy sector appointments. The lists of appointees for critical positions in the energy ministry SENER, state producer PEMEX, and public utility CFE reflect a mix of experienced professionals and new faces.
For example, the new Head of Planning at SENER is an academic who has been closely working with Sheinbaum. The appointment for hydrocarbons is a young professional with experience primarily in photovoltaic projects. While these appointments bring fresh perspectives, market observers note that their lack of extensive industry experience could pose challenges.
The new CEO of PEMEX Victor Rodriguez is an academic with a background in energy policy, known for his nationalist views.
Nestor Martinez Romero, the new head of PEMEX Exploration & Production, is considered by market insiders to be a serious and academic figure. He is well-regarded as a previous commissioner of hydrocarbons regulator CNH, but his operational capabilities are questioned after being out of PEMEX for some time.
The return of technical expertise to PEMEX is seen as a positive sign, but the lack of executive experience at the top raises concerns. Market insiders remain cautiously optimistic, recognizing the potential for positive change but wary of the significant challenges ahead. The evolving landscape offers a mix of risks and opportunities, with a keen eye on regulatory developments and the operational effectiveness of PEMEX and CFE being crucial for future success.
Number of the Week: $1.49 billion
FIEMEX’s bond offering in international capital markets
The transaction consisted of $1.49 billion of 7.25% senior secured notes due 2041 offered for sale in the US. FIEMEX intends to use a portion of the net proceeds to repay and cancel an existing bridge credit facility incurred to fund its $6.2 billion acquisition of combined-cycle gas turbine plants and a wind farm from Iberdrola, the law firm Cleary Gottlieb said in a statement.
Cleary Gottlieb represented FIEMEX in the transaction.
The offering is the largest single-tranche project finance bond issuance in the Mexican energy sector and one of the largest project bond issuances in Latin America to date, the law firm added.
FIEMEX is a special entity created by Mexico’s National Infrastructure Fund (FONADIN) and managed by Mexico Infrastructure Partners (MIP) to seek additional capital financing from banks and institutional investors. MIP is a Mexico City-based manager of energy and infrastructure funds working in areas such as water supply, telecommunications and power generation.
Under the current conditions announced to the public, CFE would be contracted to operate these plants but it would not own them. This purchase scheme may have been designed to avoid additional debt pressures for CFE as well as to attempt to avoid potential violations of antitrust regulations.
Financial issues cloud NFE’s first Mexico LNG exports
US-New Fortress Energy’s (NFE) Fast LNG export plant offshore in Altamira sent out its first full cargo on 30 September, according to a NFE press release.
Fast LNG Altamira sent out a partial cargo in August.
This development comes after months of delay from an initial expected start date of late 2023. Though a month or two delay is not unusual for a new project, NFE has faced uncertainty around this project because the technology is so untested.
Fast LNG units are built on floating platforms, which can be relocated as needed, offering flexibility in meeting demand. The technology aims to reduce costs and timelines associated with LNG production.
FINANCIAL ISSUES
NFE raised $400 million through a public offering of shares and is attempting to refinance its debt after low capital liquidity threatened to bring closer scrutiny from the company’s lenders.
After taking on $7.8 billion in debt for energy projects including Fast LNG Altamira, NFE’s high ratio of debt has strained its balance sheet as it attempts to develop and build more LNG infrastructure.
NEXT STEPS IN MEXICO
NFE is planning to install two additional Fast LNG units onshore in Altamira by 2026. However, technical delays in the first phase put a spotlight on the company’s timeline for the other two units. For Fast LNG 2 and Fast LNG 3, NFE will have to deal with both the technology and ongoing negotiations with Mexico’s state-run utility CFE, which include acquiring a power supply under preferential conditions.
NFE announced on 23 July that it had secured a $700m loan for its second Fast LNG unit.
EYES ON ENERGY
Is Mexico carbon tax functional? – Think Tank
Mexico City-based think tank Mexico Evalua published a paper examining the effectiveness of Mexico’s carbon tax.
The document explores whether the tax has successfully incentivized industries to reduce greenhouse gas emissions or if it merely serves as a revenue-generating tool.
In Mexico, the carbon tax was introduced in 2013 as part of the Special Tax on Production and Services (IEPS). The article concludes that while the tax has potential, its effectiveness depends on its integration with broader climate policies and the appropriate use of the revenue generated.
In 2016, Mexican authorities implemented new regulations to allow the use of carbon credits from UN-approved projects as payment for this tax. Mexico also has a voluntary carbon market where companies and individuals can buy credits to offset emissions.
Despite progress, challenges remain in transparency and regulation, highlighting the need for better structure and education to optimize the market’s impact, the paper concluded.
Read as PDF: MIEnergyChatterOct92024