Energy sovereignty, with some flexibility – for locals
Former President Andrés Manuel López Obrador (AMLO) couldn’t completely abolish the 2013 energy reform, in no small part because of the Supreme Court, so he instead proceeded to paralyze the industry during his six-year term. President Sheinbaum finally achieved the constitutional reform left by her mentor, claiming a victory for energy sovereignty – but leaving enough room to seek collaboration with the private sector, as this newsletter has previously discussed.
During the (rather brief) discussion of the new hydrocarbon sector law, experts warned that the new terms of the brand-new mixed contracts with Pemex would mainly be attractive for fields with large reserves, little exploration needs, or already producing thousands of barrels per day – essentially shutting the door to exploration and its inherent risks.
Moreover, it is increasingly clear that the reform seems to aim for mainly domestic companies to partner up with Pemex, providing an opportunity to be close to the government and curry favor with the administration in other sectors. In fact, Pemex CEO Víctor Rodríguez has been open about this preference, stating recently that the company will launch 17 projects, seeking Mexican partners, including Diavaz, Grupo México, Perforadora Latina and Grupo Carso. “We’re not expecting Shell or BP”, said Mr. Rodríguez.
Panelists at a recent event hosted by the Senate’s energy commission confirmed this view. Former hydrocarbon regulator Sergio Pimentel said some of the terms in the new hydrocarbon law could be “challenging” for private-sector companies. “The issue of cost recovery of 30%, and under extraordinary conditions up to 40%, makes it complicated, and that’s already at the law level,” according to Mr. Pimentel. “There are more than 180 contract models, and cost recovery is something that can be considered, but it shouldn’t be mandatory.”
Further complicating matters for foreigners, Mexico ranks low in other issues like security, according to Alejandra León, analyst at S&P Global Commodity Insight. Alberto de la Fuente, president of oil operators trade group AMEXHI and Country Manager of Shell, and Giorgio Guidi, managing director of Mexico’s subsidiary of Italian company ENI, shared this cautious stance. “We must know how the legal framework ends and see the rules where we can hopefully participate and then see what projects because if they are on shallow land, the attraction of companies will be different,” said de la Fuente.
Electricity still seen more favorably
In the electricity sector, companies seem somewhat more optimistic, as the large players are familiar with the Independent Power Purchasers (IPPs) model, a figure created in 1992 and in which CFE tenders a project to build a power plant that will solely sell the electricity to the state-owned utility. With the CFE itself also providing the natural gas, the land and other assets to carry on with the project, the operation is relatively straight forward for the private partner. Importantly for funds and banks, the parties sign a long-term power purchase agreement (PPA) adding to these projects’ appeal.
The mixed contract model where a private-sector company holds 46% of a project and CFE the remaining 54% seems not as clear as the new IPPs. Nonetheless, Sheinbaum’s administration has praised that under this model, companies should basically expect no trouble with the permitting and local communities, as partnering up with CFE has its intrinsic benefits under this new energy model.
In other energy news…
- The Ministry of Finance published its main assumptions (Pre-criterios) for next year’s budget. The government expects lower oil prices in 2026 (down 11.4% to US$55.3 for the Mexican mix, from US$62.4 in this year’s forecast), which would more than offset a slightly higher production, up 0.8% to 1,775.4 mbd. This would bring down federal oil revenues to 2.8% of GDP, down from 3.2% this year.
- The Sheinbaum administration has up to six months to publish the new energy legal framework needed to implement recent constitutional and legal amendments already passed by congress. The government enacted eight new laws and modifications to existing legislation last month, triggering a countdown to draft and publish numerous regulations governing the hydrocarbon and electricity sectors, as well as the new energy transition, biogas and geothermal laws. Each law’s transitory provisions grant the government up to 180 days to create and publish these regulations. For the establishment of Mexico’s new energy regulator, the CNE, Sheinbaum’s team has 90 days to publish its legal framework.
- President Sheinbaum confirmed that Carlos Slim is in talks with the government to participate in one of state-owned Pemex’s largest natural gas fields under new contracts introduced by the recent energy reform. The president also said a company linked to Slim is already working in the Ixachi field, one of Pemex’s biggest discoveries in the last decade.
- Slim is also said to be considering a more direct role in the offshore Zama field. During AMLO’s administration, Pemex and the energy ministry fought for control after the government unified Zama — discovered in 2017 by US-based Talos Energy — with an adjacent Pemex block. Pemex currently holds 50.4% of Zama, while Talos and Slim’s Grupo Carso own 17.4%, and Britain’s Harbour Energy holds 32%. Harbour Energy has expressed interest in operating Zama and is in discussions with Pemex and Talos.
- Most of the staff at recently extinct hydrocarbon regulator CNH have been fired, and only a handful of officers will move to Sener, according to people familiar with the situation. The retained employees are still working at CNH’s old offices, but it is unclear if they will remain there until the lease ends on the building in a few years or move to Sener. Sener wants to hire fewer people to handle the same jobs as at CNH, creating the risk of understaffing, an issue observed at banking regulator CNBV. The cost of regulators was a frequent complaint from both AMLO and Sheinbaum.
- Pemex paid MXN 19.58 bn (~US$974mn) in oil royalties under a new scheme in February, about the same as January’s payment. The new “oil royalty for well-being” scheme was recently created as part of the energy reforms proposed by President Sheinbaum. Pemex’s royalty payments were stable from January, but that month the company also paid the shared income royalty (DUC) and two further taxes related to the exploration and extraction activities. In February, Pemex only paid the new royalty, which has a rate of 30%.
- On a webinar with journalists held this week, Gabriel Casillas, LatAm Chief Economist at Barclays, said that so far, the Sheinbaum administration hasn’t shown a credible plan to fix Pemex’s issues. Analysts are still waiting for a clear plan showing that the state-owned company can survive without constant help from the government.
- Mexico’s new energy legal framework opens clearer options for private-sector investment but could deter companies because of the dominant role of state companies Pemex and CFE and its weakening of the rule of law, ratings agency Moody’s warned. “The new participation schemes offer private generators clearer rules and options for participating in the generation sector after a prolonged period of regulatory interference and ambiguity,” Moody’s analysts wrote in a note this week. “On the other hand, the quality of the rule of law and the strength of Mexico’s judicial system have weakened. Recent reforms to the judiciary and potential changes to regulatory bodies risk weakening Mexico’s checks and balances and its business operating environment”.
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