Mexico Energy Monitor

CFE and PEMEX report Q1 financial results

  • State-producer PEMEX’s crude oil extraction experienced a 2.9% year-on-year decline during the first quarter (Q1) of 2024, according to the company’s data. PEMEX extracted an average of 1.54 million barrels per day during this period; the lowest average rate in more than 10 years. On the other hand, PEMEX was able to increase its production of petroleum products, including gasoline and diesel, which had an increase of 16.3% and 44.7%, respectively, compared with Q1 2023.
  • PEMEX’s Q1 net earnings declined by 92% when compared with the same period of 2023 -from 56.7 billion to 4.68 billion pesos, due to less gains from exchange rate effects. Excluding foreign exchange effects, Pemex continued to lose money in 1Q24, mainly from its refinery business. PEMEX remains heavily reliant on direct support from Mexico’s federal government, which provided $4.5 billion to the company during Q1 2024, as well as forgiving and then cutting royalty taxes.
  • Pemex also published its 2023 annual report (20-F) with the SEC in which it declared “Magement concluded that our internal control over financial reporting was not effective as of December 31, 2023, due to the material weakness in internal control over financial reporting described below.” In 2022, internal control at Pemex was declared effective. Certain Mexican companies faced 2023 audit issues with manual processes related to tax payments due to not having the right ERP modules in place, and that may have been part of Pemex’s 2023 audit problem. (If so, it remains unclear why this was not an issue in 2022). As always, the 20-F contains a tremendous amount of useful audited information on Pemex and highlights the challenges it faces going forward.
  • Credit rating agency Moody’s recently downgraded PEMEX’s rating category to B3 with a negative outlook due to its increasing liquidity needs and to higher capital requirements, as well as the high debt burden it will face in the next two to three years. The firm anticipates that PEMEX will face greater business risks as it continues to expand its refining capacity and seek to increase production. It also concluded that PEMEX is not proactively seeking to improve its ESG standards, which is leading some banks to limit their exposure to the company.
  • Public utility CFE also reported net earnings for Q1 2024. CFE registered a profit of $113.7 million, which represents a small year-on-year decline of 0.7%. CFE’s power sales remained the largest moneymaker for the company, representing 75.3% of the utility’s overall profit.
  • CFE was able to reduce its overall debt burden by 5% in Q1. The utility has been implementing a more aggressive strategy in recent years to improve its financial standing. The firm appears to be transitioning toward a different approach of using financial strategies, such as placing stock traded certificates, known as CEBURES, on the Mexican stock exchange (BMV) to finance pending debt. CFE went through several rounds of CEBURES placement in the BMV in 2022 and 2023.

 

Green energy projects vital for PEMEX’s debt refinancing prospects: Sheinbaum

  • Renewable energy production and cogeneration projects could be strategic in improving state-producer PEMEX’s position to refinance its debt, presidential candidate Claudia Sheinbaum told Bloomberg in a 22 April interview. She also stated that she has a plan for PEMEX that includes expanding the firm’s production.  Even when she believes that hydrocarbons would still remain “indispensable” for PEMEX, Sheinbaum added that diversifying would aid with the debt refinancing.
  • Sheinbaum expects that PEMEX would refinance its debt before a significant portion of its bonds come due in 2025. PEMEX’s debt burden stands around $101.3 billion. Its current financial troubles mean that the business only contributed around 7% of the federal budget in 2023 whilst receiving significant amounts of public resources, down from 44% in 2008.
  • Sheinbaum’s proposal implies that PEMEX needs to experience some sort of internal restructuring in order to allocate resources to new projects. Restructuring such an established company is no easy task, especially when most investors suggest cutting off all weak heads, which includes the closure of loss-making fields and layoffs.
  • PEMEX recently released a sustainability plan that seems to correlate with Sheinbaum’s expectations of the firm’s future. Under this plan, PEMEX will factor in environmental, social and governance (ESG) variables 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.  It remains to be seen how this works in practice, given that Pemex is keen to keep selling its heavy polluting fuel, “combustóleo”,  (that no one wants outside Mexico) to CFE and others, so as to pay the bills. Without those polluting sales, the company would be in even deeper financial trouble.

Mexico expropriates Air Liquide plant

  • Mexico’s government expropriated a hydrogen plant operated by France’s industrial gases major Air Liquide within the facilities of PEMEX’s Tula refinery. The plant, called U-3400, had previously been sold in 2017 to Air Liquide by PEMEX.
  • In February, the Mexican government had already said the Tula refinery, in Hidalgo state, was a public good, paving the way for the hydrogen plant’s formal expropriation. The decree does establish PEMEX is to compensate Air Liquide for the expropriation but does not detail any amount.
  • “The National Development Plan 2019-2024 establishes the programs and projects that constitute the priorities for strategic attention to identified problems. Likewise, the purpose for the present Administration is to rescue the energy sector and Pemex so that it can, once again, operate as a lever for national development,” said the decree this week. “The hydrogen produced by the U-3400 hydrogen production plant is used in the gasoline, intermediate, diesel, and diesel hydrodesulfurization plants, for which demand is increasing every day … Hence, the need to have the direct and immediate availability of hydrogen in Pemex production processes.”
  • The U-3400 plant’s capacity is 2.1 million m³/day of high-purity hydrogen. The U-3400 plant is also essential for producing hydrogen used in desulfurization processes, necessary for producing low-sulfur fuels in compliance with current environmental regulations and sustainable development objectives. It supplies hydrogen to hydrodesulfurization plants for gasoline, diesel, and other petroleum products, whose demand is constantly increasing due to the need to reduce the sulfur content of fuels.
  • Hydrogen is also essential to produce ammonia for fertilizers. In Mexico, ammonia production capacity is expected to increase by nearly 750,000 tons/year in a few years as Proman has secured financing for a project in Topolobampo. Proman is a Switzerland-based energy producer with methanol and fertilizer production facilities in Trinidad and Tobago, the United States and Oman.
  • The government said that this measure is part of the administration’s ongoing efforts to ensure self-sufficiency in fuel production and move towards a more sustainable energy industry that is less dependent on external sources.

CRE-COFECE legal dispute reaches Supreme Court

  • Mexico’s competition regulator COFECE filed a lawsuit on April 16th to the Supreme Court against energy regulator CRE over the jurisdiction to authorize strategic alliances, mergers and acquisitions in the hydrocarbons sector.
  • COFECE is seeking that the Supreme Court overrules a recent CRE resolution that established the standards and protocols to approve alliances, mergers and acquisitions in the sector. COFECE’s lawsuit argues that CRE is infringing on its antitrust and fair market competition promotion mandate.
  • COFECE has been playing a more active role in the energy sector since the regulator recovered full operational quorum in 2023 with the appointment of a new president and two new commissioners. Before that, COFECE was not able to fully perform its antitrust mandate due to several empty commissioner seats. This case will have broad implications for several deals currently under review by COFECE.
  • COFECE has ongoing open investigations about potential monopoly practices in the wholesale electricity market since May 2021; on the conditions of the country’s natural gas; and is also reviewing the “strategic alliance” between state-run utility CFE and Canada-headquartered energy infrastructure builder TC Energy.

 

EYES ON ENERGY

The US EIA forecasts increase in natural gas exports in Mexico

US natural gas pipeline exports to Mexico will maintain an upward trend as several new pipelines become fully operational in 2024–25, the US Energy Information Administration (EIA) said on a recent report. 

The Tula-Villa de Reyes, Tuxpan-Tula, and Cuxtal Phase II started partial service in 2022–23 but have not been operating at full capacity. However, new connections to the Energía Mayakan pipeline on the Yucatan Peninsula will increase natural gas demand from the US, the report added.

US gas exports to Mexico increased 8% year-on-year to 6.1 billion cubic feet per day (bcf/d) in 2023. In particular, pipeline exports to Mexico from Texas increased 9% to 5.6bcf/d in 2023, with most of the growth coming from exports from West Texas, which increased by 20% compared with 2022, the US EIA said. Flows via the Sur de Texas-Tuxpan underwater pipeline are likely to increase slightly in 2024 when it begins delivering natural gas from the US to Mexico’s first LNG export project, Fast LNG Altamira.

New Fortress Energy (NFE) expected the first cargo from its 1.4mtpa Fast LNG Altamira project to load in April 2024. The first LNG was supposed to be produced in March ahead of the first loading. However, NFE failed to meet its own deadline. The company has yet to update the start date for commercial operations for the plant.

A substantial portion of Mexico’s energy mix comes from natural gas and around 70% of that gas comes from the US. Even when Mexico significantly benefits from cheap, accessible US gas, the country developed an overdependence that makes it vulnerable to unexpected market events, including snowstorms and extreme weather.

Mexico’s limited domestic storage capacity exacerbates its susceptibility to supply interruptions. With inadequate infrastructure to store sufficient reserves, Mexico faces challenges in managing fluctuations in demand and ensuring resilience in the face of supply disruptions.

 

 

Articles to Read This Week

This fortnight, we recommend two excellent articles on how building out Natural Gas infrastructure is key to Mexico’s economic and regional development and, thus, to nearshoring, as well as potentially efficient in cutting illegal migration to the USA. Both writers—Regina Reyes Heroles and Warren Levy—are renowned experts on the Mexican energy sector.

Regina Reyes Heroles – La estrategia es pensar en todos, published in Milenio.

Warren Levy – Los gasoductos podrían ser más eficaces que un muro para reducir la inmigración ilegal, published in El Universal.