Plenty of uncertainty but some reasons for optimism in 2025
The Sheinbaum administration enters 2025 with plenty of uncertainty in the energy sector, with major budget cuts to both Pemex and CFE, and a constitutional reform whose implementation is expected to reshape the sector for years to come.
Sentiment among market participants is decidedly mixed, with some slowly coming to terms with the fact that the free-market model overseen by independent regulators has indeed come to an end. While this will translate into some international companies staying out of Mexico for the most part, there will still be plenty of companies (and funds) that will maintain or even step up their investments in the Mexican market. After all, the lack of clarity might act as a deterrent, but the country has some of the most attractive growth prospects in energy for the upcoming years and shortage of capital can mean higher profits for those that take the risk. As Carlos Slim’s recent purchase of a controlling interest of Talos Energy’s Mexico operations indicates, savvy investors often find the best opportunities when there is uncertainty, and the potential returns of capital rise to more than offset the risk.
Pessimists might dismiss Sheinbaum’s promises about pushing hard for an energy transition as empty words without much substance so far. But optimists would point out that those promises are more than what former president Andres Manuel Lopez Obrador offered during his term; the private sector, they would say, is confident that the new administration understands the need for public-private engagement to provide the Mexican economy with the electricity it requires to grow.
The foreign investment in electricity plunged during AMLO’s term, declining more than 50% from USD 8.3 bn in 2013-2018 to USD 3.5 bn in 2019-2024. The decline would have been steeper if not for projects signed during the Peña Nieto administration and executed during AMLO’s term.
FDI in electricity plunged after peaking in 2018
Source: Ministry of the Economy. Figures in USD mn. * 2024 figures as of the third quarter.
Conversion of Tula plant to natural gas
President Sheinbaum does not have that cushion of previously agreed projects, inheriting instead all the issues from AMLO’s energy policy. This lack of ongoing projects is likely part of the reason why she has pushed for projects like the reconfiguration of CFE’s power plant in Tula, in the state of Hidalgo. The president has promised that CFE will resume the long-delayed project this year to fully convert the thermoelectric power plant from fuel oil to cleaner natural gas. Located some 50 miles from the capital, it has an installed capacity of 2,200MW and generates about 20% of the power for the Mexico City area, according to energy ministry records. But the plant has faced criticism for contributing significantly to air pollution in Mexico City due to its use of Pemex’s polluting fuel oil.
The environmental case for a conversion is overwhelming. Fuel oil in Mexico often contains sulfur levels as high as 4%, far exceeding international standards. When burned, this releases significant amounts of sulfur dioxide (SO₂), a key driver of acid rain and respiratory problems. Additionally, the inefficient combustion of heavy fuel oil generates harmful particulate matter (PM2.5) and black carbon, which pose severe health risks and exacerbates climate change. The oil also contains heavy metals like vanadium and nickel, which are released into the atmosphere during combustion, further compounding its environmental impact. Nitrogen oxides (NOₓ), another byproduct of burning fuel oil, contribute to smog and respiratory issues. The geography of the Tula region, surrounded by mountains, traps these pollutants, worsening air quality for nearby areas, including Mexico City.
Replacing fuel oil with natural gas at the Tula plant could significantly reduce pollution. Natural gas contains almost no sulfur, eliminating SO₂ emissions. It also burns much more cleanly, producing minimal particulate matter and black carbon. Greenhouse gas emissions would decrease substantially, as natural gas generates 50-60% less CO₂ than fuel oil. Additionally, the absence of heavy metals in natural gas would eliminate another source of toxic pollution. Although nitrogen oxides are still emitted, the levels are much lower compared to fuel oil.
The original project to convert the plant to natural gas would have thus materially reduced both environmental impacts and operating costs of Tula. The project has been in CFE’s pipeline for over a decade; CFE lost an international arbitration case in 2021 against Canadian ATCO, as the company couldn’t deliver the full pipeline mainly because of social conflicts. Former CFE officials say that the 17 km pipeline that would bring the natural gas was missing about half a mile to be completed.
There have been no more details about how CFE intends to continue either with this pipeline or the construction of another pipeline that would bring natural gas from the marine pipeline that runs from Texas to Tuxpan. But if the plan succeeds, it would be a major win for Sheinbaum, both in terms of the environment (cleaner air for Mexico City residents) and the economy.
The question remains: what will Pemex then do with its fuel oil that has been going to Tula? Due to its heavy sulfur content, it is not possible to export this fuel oil anymore. Pemex would thus see a hit to its finances by losing an important source of revenue. The impact on Pemex, as well as the complexity of putting in place natural gas infrastructure, is presumably the main reason the Mexican government hitherto has not been able to move ahead of the much-needed conversion.
Waiting for the secondary laws, looking for silver linings
As the Mexican political landscape continues to evolve following the approval of many significant reforms in the final months of 2024, energy industry participants continue to wait for a major piece of the regulatory puzzle: the secondary laws. President Sheinbaum has promised to present the bill as soon as Congress returns to work in February. In the meantime, private players will remain in the dark. As a silver lining, the energy ministry is taking the lead in drafting these new laws, and is expected to take a broader view of the industry, a welcome change from the AMLO administration, when CFE’s former CEO Manuel Bartlett drafted the regulation with the primary goal of strengthening CFE’s monopoly.
Some idle projects like solar or wind parks that were paralyzed by AMLO’s energy policy against renewables might now benefit from schemes proposed by Sheinbaum’s administration. Moreover, industry sources say that there could companies willing to take risks in announcing investments before all the legal framework is finalized, as a way to curry favor with the new administration. With the government now a stronger driving force in the industry, being close to policy makers will be crucial, their thinking goes.
Smaller projects to generate electricity in situ could also pick up next year as long as some companies would be still attracted to offer renewable sources for companies lured by the nearshoring trend, said another source. Given Sheinbaum’s ambitious goals — 45% of clean energy share by 2030 — the need for private investments is clear.
Despite Pemex’s cuts, LatAm to be an E&P bright spot in 2025
The sharp decline expected in Pemex’s 2025 expenditures will weigh on Latin America’s overall exploration and production (E&P) spending, analysts at Barclays said. Nonetheless, the region will once again be the fastest-growing in the world, forecast to rise by 7% in 2025, driven by Petrobras. “With oil revenues critical to state budgets, Latin America has become the new marginal barrel, at the leading edge of global upstream spending”, said analysts at the British bank. Petrobras plans a 27% increase in spending next year, more than offsetting a 15% decline anticipated for Pemex’s budget, the report notes. Argentina’s YPF, another state-run firm, is projected to boost its spending by 13% in 2025.
Pemex developments
- Pemex crude output declined for a sixth consecutive month in November, dropping by 10% to 1,385,000 barrels per day (bpd) from a year earlier, the lowest since December 1978 according to CNH historical data. The decline occurs as the state-owned company announced budget cuts for the last quarter of 2024. The company’s oil output could continue declining in December and January, and end up losing 200,000 bpd.
- Pemex increased crude and fuel exports to Cuba in 2024 as reduced supply from Venezuela to the Caribbean island continues to cause fuel shortages. From January and September, Pemex’s subsidiary Gasolinas Bienestar acquired and exported to Cuba 31,300 bpd of crude and 2,900 bpd of refined products, according to a Pemex report sent to the SEC last month. The total cost of these products was MXN 9.3bn (~USD 500m). These shipments accounted for 2.9% of Pemex’s total crude exports and 1.5% of its total oil product exports, according to Pemex. Transactions between Pemex and Gasolinas Bienestar are made under peso-denominated contracts at market prices, the company said.
- President Sheinbaum promised that Pemex would begin paying overdue invoices to its suppliers between December and February. “Part will be paid in December, another part in January and the rest in February,” Sheinbaum said during her daily press conference on December 23. No further updates have been given at this time.
In other energy news…
- Cuitláhuac García, former governor of Veracruz, has been appointed by President Sheinbaum as the new head of the National Center for Natural Gas Control (Cenagas). Cenagas, created in 2014, oversees the transportation and storage of natural gas in Mexico. The agency plays a critical role, as 70% of the country’s energy depends on natural gas, and its main clients include CFE and Pemex. Mexico is heavily reliant on U.S. imports, receiving over 6.5 billion cubic feet of gas daily in 2024. While Sheinbaum praised García’s credentials as a mechanical-electrical engineer, his political ties to Morena and limited experience in the energy sector have raised concerns. Critics worry that this appointment prioritizes political loyalty over technical expertise, potentially jeopardizing Cenagas’ ability to manage rising demand for gas in Mexico’s industrial and energy sectors.
- Mexico’s energy regulatory commission CRE is said to have laid off high-ranking officials and other staff shortly after congress approved constitutional amendments to eliminate independent regulators.
- Mexico’s hydrocarbons regulator CNH also laid off around 90 officials in December — approximately 24% of its workforce — following a 30% budget cut approved by congress for 2025. CNH commissioners had requested a 6.5% budget increase for 2025, but the lower house instead opted for a significant reduction.
- After years of disputes with state-owned Pemex and the Mexican government, US oil company Talos Energy will reduce its ownership in Talos Mexico —the entity holding the Zama field, one of the country’s largest crude discoveries in decades— to 20% from 50.1% after selling a controlling stake to Mexican billionaire Carlos Slim. Slim’s Grupo Carso previously had acquired a 49.9% stake in Talos Mexico in 2023, nearly a year after Talos lost its bid to operate the field it discovered in 2017. Talos will receive USD 49.7 mn in cash at closing, with an additional USD 33 mn contingent on first commercial production. The agreement also ends the dispute between Talos and Slim, who was considering a hostile takeover of the company.
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