Implementing the energy reform: a preview of the secondary laws
With the threat of US tariffs dominating the news cycle these past days, little attention was paid to President Sheinbaum’s announcement of the highlights of the new laws to implement the constitutional energy amendments approved in late 2024. Broadly speaking, her administration wants to keep open the door to private-sector investments in the oil and gas sector as well as in the electricity sector. However, Pemex and CFE will be front and center of production, generation and distribution, as has been widely communicated. Below we present the main highlights, noting that there could be further changes. (Please see here for the latest version sent to the Senate.)
Pemex implications
A draft on the new hydrocarbon law shows that the government wants to give Pemex the power to select its partners directly in some upstream projects, while the Energy Ministry will launch oil tenders to find partners for the state-owned company. The Energy Ministry will now designate “entitlement” areas so Pemex can perform upstream activities with or without a partner. In case that the ministry allows Pemex to partner up under a “mixed-development entitlement,” the state-owned company will have the power to sign a contract with private-sector companies and share a portion of the profit on the project up to 60%.
Furthermore, the Energy Ministry will prioritize awarding Pemex with new areas under the entitlement regimen; however, the ministry will also have the option to conduct tenders to designate areas to private-sector participants. In those cases, the government can set a requirement to give Pemex a share in the projects, or the state-owned company can participate with other companies to win the auctions. The current law, enacted in 2014 as part of the Pact for Mexico energy reform, mandates that the hydrocarbon regulator conduct oil tenders to award blocks for the exploration and extraction of hydrocarbons, and to partner up Pemex in farmouts.
The proposal also includes a legal provision to effectively end Pemex asymmetric regulation in the LPG and fuel wholesale market, per the draft. Those rules were imposed to tame the market power of the company in those markets after the 2013 Energy Reform.
The bill also proposes to install a new board of directors with eight members, one of whom will come from the Energy Ministry, with a tie-breaker vote power, and one each from the ministries of Finance; Environment and Natural Resources; and Science, Humanity and Technology; in addition to the CEO of CFE and three independent directors. This distribution will give more representation to the federal government than the current board, which has 10 members, five from the government and the other five independent.
CFE implications and further investment plans
A draft of the new electricity industry law states that the CFE will generate at least 54% of the electricity injected to the grid in a year, as previously reported, as the company will return to being the center of the electricity market. In general, the proposal feels like a combination of the law proposed by AMLO in 2021, the 1992 electricity law and the current law approved in 2015.
A contract model called “long-term production” states that private-sector companies must fund the construction of the power plant by themselves and CFE will buy the electricity. CFE will not be responsible for funding the project and at the end of the contract it will have the option to acquire the asset. Also, the power plant will not be able to expand its capacity and sell it through the wholesale market.
Under a second model called “mixed-contract”, CFE can partner up with a private-sector company to build a power plant that can sell electricity to its own CFE or through the wholesale market, as long as CFE holds 54% ownership on the project.
The bill on the electricity sector includes new legal provisions prioritizing the electricity dispatch reliability, allowing CFE and the administration to “prevail” in the market to provide the service. The proposed law also increases the threshold capacity to install in-site electricity production without a permit from 0.5 MW to 0.7 MW, and also for self-consumption power plants that can inject their energy surplus to CFE grids but without a payment.
Energy Secretary Luz Elena González emphasized during today’s presidential morning press conference that the state-owned utility has played a key role in supplying electricity for decades but was weakened by the 2013 energy reform, which increased private competition without an adequate framework and tools for CFE. President Andrés Manuel López Obrador implemented measures to rescue the company, and now, the new legislative package aims to reverse the effects of the 2013 reform. The initiative seeks to improve operational efficiency and expand access to electricity while maintaining competition.
Moreover, CFE has outlined a large-scale investment plan to increase its generation capacity. The company currently operates with 45,000 MW and plans to add close to 7,000 MW from 10 new projects, backed by $5.9 billion in funding.
Additionally, 16 hydroelectric projects will contribute 535.6 MW with a $1.55 billion investment. A major expansion includes 13,000 MW from combined-cycle plants, as part of a broader $22.4 billion investment across 51 projects. Clean energy, particularly wind power, is a priority, with $4.2 billion allocated to generate 3,211 MW.
Beyond electricity, the CFE is driving nationwide connectivity. The “Internet for All” program has installed 3,824 communication towers, 108,607 free WiFi points, and 27,284 kilometers of fiber optic cable. By 2030, the initiative aims to cover 97.85% of the country, benefiting over 129,000 communities. The company is also optimizing its thermal power plants and collaborating with Pemex and private firms to enhance energy generation. Meanwhile, $3.6 billion will be invested in expanding power distribution networks, ensuring universal access to electricity, with a focus on underserved areas like Nayarit, Chiapas, and Oaxaca.
New regulatory framework
The Energy Ministry will oversee the market with the extinction of the CNH. The proposal will transfer to the ministry the duties to approve the activities of Pemex and the other participants in the upstream market. However, it does not specify how Sener is going to carry on with these new activities, said a regulatory source. For its part, the new National Energy Commission (CNE) will grant permits on electricity generation and commercialization, establishing rates for all power services, to monitor the wholesale electricity market, and all permits in the fuel, and petrochemical production, transportation, and commercialization chain. It will also have the power to grant permits in all the natural gas chain except its extraction.
The new regulator will keep carrying on with the activities of the energy regulator CRE, but it will rely on Sener’s approval for its annual budget, according to the draft. The new regulator will be led by a general manager appointed by the President, with the Senate’s consent. This new general manager will also be part of a “technical committee” that will partially replace some of the duties and decisions taken now by CRE’s commissioners, said the energy regulator. The new committee will be integrated by eight members, including the general manager, who will have a tie-break vote, two Sener officials, the heads of the hydrocarbon and electricity units inside this new regulator, and three independent members also appointed by the President and ratified by the Senate.
What if? Further thoughts on implications for Pemex from a potential tariff war with the US
Investors breathed a sigh of relief after the US agreed to pause for at least a month the much-threatened tariffs that were set to come into force on Monday, in what has been widely lauded as a triumph of President Sheinbaum. High-level talks will continue, with a yet unclear endgame. But, what if tariffs actually happen later on? Below we expand on the previous edition of this newsletter, where we discussed some of the potential repercussions.
The first reaction shared among experts is that Pemex could bypass Trump’s 25% tariff by selling at discount that output to other nations, especially in Asia. Pemex exported 806,240 barrels per day (bpd) on average in 2024, down 22% compared to 2023. Of this, the company sold 57% in the Americas —mostly to the US, but also to other countries like Canada or Brazil—, 22% to Europe and 21% to Asia. US refineries in the Gulf Coast would feel the most pain as their complexes were designed to process Pemex’s type of heavy-crude oil, as they have the capacity to further process fuel oil, a low-valued byproduct, into more valuable products like jet fuel or diesel. Those refineries could process lighter crude barrels, but their utilization rates would fall as they wouldn’t be processing fuel oil.
Pemex is not bound to sell the crude at a fixed price or amount. “PMI CIM has entered into several contracts for the sale of crude oil on the international market to foreign companies,” according to the 2023 annual report filed with the SEC. “The terms and conditions of these contracts are specific to each client, and their durations may be indefinite (evergreen contracts) or they may contain a minimum obligatory period (long-term contracts).”
Pemex can set the volume and price under those contracts —the company sets the price of its types of crude monthly—, and buyers decide whether to take them or not. Under a potential tariff, the importer would be responsible for the 25% tax; were they to reject the shipments, the crude could be shipped to Asia or Europe. In such a case, players in those regions would in all likelihood ask for a discount, but it would be much less than the 25% tariff.
However, Pemex trade with the US is not exclusive to third parties. It is unclear what would happen to Deer Park, its refinery in Texas. As others in the region, it was built to further process fuel oil, so it needs Pemex’s heavy-crude oil to operate at capacity. Would Pemex simply pay the 25%, sell it elsewhere at a discount, or find a half-way solution?
An additional issue would be Pemex’s fuel oil. Over the past six years, the company has found a market in the US for a big chunk of this byproduct, increasing exports from 89,780 b/d on average in 2018 to 203,919 b/d in 2024. Pemex sells those barrels to Texan refiners at a discount to the price of the Mayan heavy-crude oil, and it only has three refineries fit to process fuel oil. Locally, the company sells its output to CFE; however, CFE has reduced its fuel oil consumption over the last decade as it is much more costly and polluting than natural gas. Further complicating matters, transporting fuel oil is much more complicated than crude due to its high viscosity.
Pemex woes impact global oil service companies…
- Baker Hughes: In the fourth quarter of 2024, Baker Hughes reported an adjusted profit of $0.70 per share, surpassing analysts’ expectations of $0.63. This performance was driven by strong demand for natural gas equipment and services, which helped offset weaker sales in North America, where the company posted a 5% decline in its oilfield services revenue (compared to a 1% decrease internationally), reflecting challenges in Mexico.
- Halliburton: Halliburton announced a net income of $615 million, or $0.70 per diluted share, for the fourth quarter of 2024. The company highlighted a 7% sequential decrease in North America revenue, primarily due to reduced stimulation activity. This decline aligns with the broader downturn in Mexican oil production, which has affected service providers operating in the region. It is now waiting for Pemex to reset its activity, as Halliburton’s growth was hindered by the deceleration in Mexico, said the company’s CEO Jeff Miller. “It’s hard for me to imagine that they don’t find their footing as we work through the year. And we have a fantastic market position in Mexico,” said Miller during the Halliburton conference call with investors to present its 4Q24 results, impacted by Pemex woes
- SLB (Schlumberger): SLB reported fourth-quarter 2024 revenue of $9.28 billion, a 1% sequential increase. The company noted a 4% sequential increase in North America revenue, driven by higher digital sales and increased drilling activity. However, SLB acknowledged reduced drilling activity in Mexico and Saudi Arabia, which contributed to a 1% decline in its Well Construction segment revenue.
- Norwegian company Borr Drilling got a notice of a temporary suspension on three rigs from 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. “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.”
- Norwegian driller Paratus Energy is factoring overdue receivables from Pemex at a discount rate, as the Mexican company only made small payments in late 2024, restricting the company’s cash flow. Paratus Energy will receive USD 209m from an unnamed international bank that agreed to take those overdue invoices at a discount rate that is “well below 10% of the gross amount”, said the company in a note to investors. In December, Paratus Energy received a notification from Pemex to suspend some of its activities in Mexico. Paratus Energy’s subsidiary in Mexico, Fortis, will receive the payment, and will “significantly improve” the company’s cash position. The subsidiary still has USD 140m in unpaid invoices from Pemex as of December 31, 2024.
…as its own production reaches historical lows
- The liquid hydrocarbon production of Pemex continued its free fall in the last month of 2024 as the company has restrained its budget in the beginning of the Sheinbaum administration. Crude and oil condensates extraction ended at 1,618,689 barrels per day (bpd) in December, 12.4% lower compared to the same month of 2023. This is the lowest since November 1979.
- The company has lost 228,270 bpd in liquid hydrocarbon production in the last 12 months, almost half of that only between October and December. On a monthly basis, Pemex liquid hydrocarbon production fell 3.3%, losing 54,692 bpd between November and December.
- Pemex crude extraction recorded 1,354,900 bpd in the last month of last year, down 13.2%, and the lowest output since November 1978. On a monthly basis, crude output decreased by 3.7%.
Pemex crude and condensates production has collapsed over the past 18 months
Source: Pemex. Figures in barrels per day.
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