Mexico Energy Chatter
September 18th, 2024
Mexico’s oil and gas extraction drop
Oil and gas extraction operations in Mexico experienced a 4.9% year on year decline during the first half of 2024, according to Mexico’s statistical agency INEGI.
The new Mexican federal administration will have to address the current energy policies, which have failed to reverse the country’s chronic decline in oil production, leaving its chemical industry without the feedstock it needs to run its plants at full capacity. PEMEX failed to significantly increase oil production and chemical producers are turning to imports to supply their crackers with ethane
AMLO made PEMEX the center of the country’s energy policy by freezing the energy reforms passed by the previous administration. These reforms allowed companies other than PEMEX to bid on exploration and production leases. The intent of the reforms was to attract outside money and expertise to Mexico’s oil and gas market, which would speed up the recovery of energy production.
While AMLO’s administration honored the contracts issued by the previous administration, it ceased issuing new exploration and production leases to non-PEMEX bidders. PEMEX assumed nearly all of the burden of reversing Mexico’s decline in oil and petrochemical production.
PEMEX did halt further declines in oil production, but it has failed to significantly increase output or even meet its forecasts. Increasingly, PEMEX is posing a risk to the country’s credit rating, according to Mexico’s central bank. If unchecked, PEMEX could become a liability for the government by 2026, consuming more funds than it contributes, according to Fitch Ratings.
PEMEX’s aging facilities are also on the spotlight. At the start of his term in 2018, the president said he wanted PEMEX to increase its output to somewhere above 2 million barrels/day. In 2023, on average, it produced 1.875 million barrels/day, which was nonetheless a 5% increase compared with 2022. PEMEX never got there and, given the difficulty to do so, it stopped publishing the 2 million barrel/day target at some point last year.
To surpass the 2 million barrel/day target, PEMEX needs to heavily invest in its fields and facilities, analysts at Fitch said in April. While other state-owned as well as private oil majors are speeding up their investments in other energies to allow them a future past-oil, PEMEX remains a quintessential crude producer and one which, on top of it all, operates aging facilities. That adds another financial drag on the company as old facilities require recurrent maintenance and, moreover, too often have caused fatal accidents.
CFE could seek hydrogen development partnerships – executive
Mexico City-based Bloomberg Linea reported that electric utility CFE will likely explore the development of a green hydrogen project at one of state producer PEMEX’s refineries.
President-elect Claudia Sheinbaum has said that she has a plan for PEMEX that includes expanding the firm’s kinds of production. Even when she believes that hydrocarbons would remain “indispensable” for PEMEX, Sheinbaum added that diversifying would aid with the debt refinancing.
PEMEX recently released a sustainability plan that seems to correlate with Sheinbaum’s expectations of the firm’s future. Under this plan, PEMEX will prioritize environmental, social and governance (ESG) factors in its analysis of new investments as well as to consider electric mobility and green hydrogen projects. The oil company will commit to improving its emissions counting system as well as reinforcing the engagement with international organizations to elevate its climate standards.
The Mexican hydrogen association (AMH2) estimates that the development of a green hydrogen industry in Mexico could help the country avoid more than 50m tonnes of CO2 emissions before 2050 and contribute $46 billion to Mexico’s GDP, creating 3.2 million jobs between 2025 and 2050.
Industries such as petrochemicals, power generation and mobility in Mexico stand to benefit the most from hydrogen development. Those are also the industries with greater emissions. In the case of the petrochemical industry, there is potential to substitute grey hydrogen for green hydrogen in oil refining while for power generation, Mexico could use existing natural gas infrastructure to mix green hydrogen with natural gas in combined cycle gas turbine (CCGT) plants.
Even when green hydrogen could produce significant benefits for Mexico, the market faces robust challenges as well. Mexico still has long way to go in terms of developing a green hydrogen ecosystem, despite projects like FH2 México.
The industry would require massive investments. According to AMH2’s data, green hydrogen development in Mexico requires almost $60 billion between 2025-2050 and $6 billion just before 2030 to secure momentum. Almost half of that investment will have to go to the acquisition of equipment for power generation, for which hydrogen has great potential. The regulatory outlook in Mexico remains uncertain as the country still does not have a national hydrogen strategy.
US lawmakers send letter to trade representative on Mexico’s judicial reform
Mexico’s judicial reforms circumvent the current US-Mexico-Canada trade agreement (USMCA) and undermine investor confidence in Mexico’s legal framework, a bipartisan group of US lawmakers alleged in a letter to US Trade Representative Katherine Tai and US Secretary of State Anthony Blinken.
These judicial reforms are expected to be followed by changes to regulatory agencies such as antitrust regulator COFECE, energy regulator CRE, and the hydrocarbon regulator CNH, stripping them of legal independence and move them to federal government ministries. Stripping away the independence or diminishing the power of these agencies could lead to questions of noncompliance from the United States and Canada, sparking trade disputes and bringing into question the provisions that permit the USMCA to function effectively, according to an analysis of Washington DC-based think tank Atlantic Council.
Given similar agencies in the US are not legally independent of the federal government (the US anti-trust division sits in the Department of Justice), the legislators and Think Tanks seem to be confusing the legal framework with operational independence, competitive neutrality, and due process. It remains to be seen how Mexico’s judiciary and regulators operate under the new laws, (if confirmed for regulators), but it is their behavior, and not the institutional framework per se that could cause problems with USMCA. The concern is that if the regulator is also responsible for managing the state-owned enterprises, (Pemex/CFE), the conflicts of interests are such that violating USMCA-mandated competitive neutrality (i.e., treating state-owned enterprise in the same way as private companies), is almost inevitable.
Indeed, during AMLO’s administration, many market participants have accused the still legally independent but Morena-controlled CRE of acting against the market’s interest to favor the administration’s policies. Mexico’s energy regulator CRE denied 213 permits related to the power sector between 2019 and 2022, according to a report published by the US-based Tholos Foundation. This contrasts with the only 56 denials from 2016 to 2018. So, just as a legally independent regulator can violate USMCA mandated competitive neutrality, a dependent agency could theoretically act in a fair way, even if the incentives to do so are lacking.
CRE is also denying or delaying permits for operating renewable plants that are already installed. CFE does not have the same issues to obtain these permits. Critics argue these actions go in the direction of the explicit goal of AMLO’s government to gain market share for CFE at the expense of private market participants.
EYES ON ENERGY
North America LNG export capacity to double by 2028 – the US EIA
North America’s liquefied natural gas (LNG) is on track to more than double between 2024 and 2028, according to a new US Energy Information Administration (EIA) analysis.
The region’s current export capacity stands at 11.4 billion cubic feet per day (bcf/d). There are various projects under construction that will take that capacity to 24.4 bcf/d in 2028.
The US EIA estimates that LNG export capacity will grow by 0.8 bcf/d in Mexico, 2.5 bcf/d in Canada, and 9.7 bcf/d in the United States from a total of 10 new projects that are currently under construction in the three countries.
Mexico is expected to become one of the main LNG exporter countries by the end of this decade once the various projects under development come online.
Challenges
Mexico’s US gas-powered LNG export projects could face significant new regulatory and political risks in the coming years, amid the US-Mexico-Canada Agreement (USMCA) undergoing a mandated review by July 2026.
The outcome of this review, driven by the energy dispute launched under the trade agreement by the US and Canada against Mexico, could shape the future of LNG export projects in Mexico. The dispute highlights concerns over Mexico’s favoring of state-controlled entities, such as public utility CFE, which the US and Canada argue violates the terms of the trade agreement. The non-renewal of the USMCA agreement might result in prolonged ambiguity, impacting the timeline and viability of these projects.
Other issues, such as regional labor shortage, are also impacting the progress of these projects.
