Congress quietly approves Sheinbaum’s energy bill
The Senate passed without major modifications the package of new energy laws and amendments to existing ones to implement the energy constitutional amendments passed late last year. The new laws largely cement the nationalist, mostly anti-market changes under way in the sector since Andres Manuel Lopez Obrador became President in 2018, but at least give greater clarity to market participants on the rules of the game.
The industry consensus is that Sheinbaum counter-reform likely opens some modest opportunities for the private sector in both the electricity and oil and gas markets (more so in the first former than the latter), even if the new framework is significantly more restrictive than existed under AMLO’s predecessor Peña Nieto. The largest energy industry groups have for the most part avoided joining the public debate, and are now waiting to see how they can capitalize on the new opportunities. Hopes are not high, since the bill gives the government wide discretionary power that is all but certain to be used to favor Pemex and CFE.
In the upstream market, the bill reopens ways for the private sector to invest in exploration and production activities that had been de facto closed (though still technically available) under AMLO. Production sharing contracts will allow private players to inject new capital, without having to wait for Pemex to come up with its share, which had been a major roadblock previously; whether that would make economic sense is not clear at this time. The Senate also made explicit that the private partners will also have the option to take their share directly in the form of barrels, as opposed to a share of the profits, which had not been clear in Sheinbaum’s original proposal.
Regarding the electricity sector, a key improvement in the law is that it opens the door to install in-site plants to power up factories without the need to connect to the CFE grid. This should expedite the process for small and medium-sized industrial players. Some would point out that this is still a regression compared to the Peña Nieto’s standards, while optimists would find consolation in that it’s a notable improvement from the previous sexenio. Could be better, could be worse.
As with everything, how implementation will play out is the key open question at this time. The elimination of the asymmetric rules to address the State’s power in the market, and the creation of a regulator without independence are likely to reduce the appeal of investing in the energy industry, but for those willing to accept President Sheinbaum’s terms, at least there will be some opportunities.
Highlights (and mostly lowlights) from Pemex’s 4Q24 results
It is said that acknowledging the problem is the first step – but then Pemex has a lot more steps ahead of it. In spite of the billions that former President López Obrador poured into the company, the company is somehow in worse shape than under Peña Nieto. Its crude production is at its lowest levels since November 1978, and declining still. Even more concerning, its refineries keep bleeding money. The company posted a net loss of MXN 620 bn (~US$31 bn) in 2024. Even if a big part of that was related to a weaker FX, its operating results were far (very far) from stellar, as explained below.
Revenues were up 2.6% YoY in the fourth quarter, boosted by higher fuel prices. The good news pretty much stopped there. Crude exports fell as the company faced the natural decline of mature fields like Maloob and Zaap, and in onshore field Quesqui, the flagship project of the past administration, as well as in natural gas fields. Costs surged 23.2% due to factors including a higher fixed asset impairment —generally related to unsuccessful wells—, an increase in operating expenses mainly in taxes and duties, as well as materials and spare parts. Pemex Industrial Transformation, which includes the refining business but also petrochemicals and fertilizers, posted an MXN 282 bn operating loss in 2024, essentially eating up all of the gains from the E&P arm of MXN 298bn. The company had an operating loss of MXN 15.7 bn.
Source: Pemex. Figures in millions of pesos.
Somewhat encouragingly, it seems that the company’s management is acknowledging that they are facing a deeply challenging scenario. While they deflected most of the questions from investors during the earnings conference call, at least they opened the floor to questions. Management also painted a more realistic scenario, unlike the unconvincing attempts to convince analysts that the company was in great shape of the previous administration. “Pemex is going through a challenging situation that is different from the circumstances of the past because we face different operational and productivity problems,” said Jorge Alberto Aguilar, Corporate Director of Planning, Coordination and Performance.
Looking ahead, the company expects that new legal framework will help the company reduce its capex requirements through the execution of mixed contracts between Pemex and third parties, though as explained above, how much interest these contracts will find in the private sector remains an open question. Pemex is also moving forward with the corporate simplification proposed by President Sheinbaum.
As part of its new development plan, the company is now working on fields where it will invite the participation of private-sector companies. Pemex and the Energy Ministry are also working on the contract details and conditions, and the plan must be approved by the new Pemex board of directors, said Martinez.
Pemex’s suppliers continue to feel the pain
The company said it is working with the Energy and Finance ministries to come up with solutions to reduce the company’s financial burden and pay off supplier debt. Despite these efforts, short-term debt to suppliers jumped 37% in 2024, now standing at MXN 506 bn (~US$25 bn). International oil service companies like Weatherford and Baker Huge told their investors that the business in Mexico will shrink between 35% to 50% this year. Pemex is a key client for those companies as well as others in the market like SLB, Emerson, Borr Drilling or Paratus.
“The government, the budget, and the leadership team of Pemex is under transition. What is clear is that Mexico’s activity will decline and has already declined,” said Olivier Le Peuch, CEO of SLB, in a conference call with analysts. SLB’s well construction revenues decreased 1% and margins contracted 70 basis points in the quarter, primarily due to lower drilling activity in Mexico and Saudi Arabia.
Meanwhile, international steelmaker Tenaris’ CEO Paolo Roca characterized Pemex’s cuts to activity as “unexpected to some extent and in my view unsustainable”, adding that “Pemex reduced the investment and is reducing its production from a little more than 1.8m barrels per day (bpd) to the present 1.6m bpd. And in recent months, we are losing production at a rate of around 50,000 b/d per month.” Pemex’s rigs count have fallen from 65 to 23 in the last few months, as those equipment are idle on the field for lack of inputs and lack of resources, said Mr. Roca.
“Including our three suspended rigs in January we estimate that approximately 12 rigs or 45% of PEMEX contracted fleet is currently suspended,” said Borr Drilling CFO Magnus Vaaler in a conference call with analysts last month. Despite these challenges, Borr Drilling’s management said there could be interesting opportunities thanks to the law modifications going on in Mexico, as part of the implementation of the constitutional amendments passed in late 2024. However, implementing them could take between six months to one year.
Gasoline prices capped, but at what cost?
Many of non-international Mexico’s gas station owners signed an agreement with the government to keep regular fuel prices at MXN 24 per liter (~US$4.54 per gallon), similar to the agreement signed in AMLO administration to cap LP gas prices during the pandemic. This price cap on gasoline might run afoul of current antitrust regulations, though that would be a moot point once the energy bill is fully ratified. The agreement will last for six months, but industry observers worry about the precedent, fearing that the government will now seek to impose further caps if it believes it’s necessary. And as gas stations presumably will not sell gasoline at a loss, if oil prices spike going forward, the government will have to cut IEPS and take another fiscal hit, or there will be gasoline shortages.
In other energy news…
- The Chamber of Deputies approved one of the laws proposed by President Sheinbaum related to the oil and gas royalties and other tax-related regulation with minimal modifications. Deputies from the official coalition voted 338 in favor versus 127 against from the opposition, which claimed that the modifications could hit public finances. The bill eliminates the DUC oil royalty, previously set at 54%, though Pemex has not paid this rate in recent years because of annual exemptions granted by congress.
- Mexico’s new legal framework for the upstream sector could put more limits on private-sector participation, as it expands the government’s authority and dismantles autonomous regulators, US oil company Talos Energy said. The constitutional amendments passed in October 2024, along with the energy bill President Claudia Sheinbaum sent to congress this year could have a material impact for oil companies, according to its 2024 annual report published this week. The bill would allow Sener to impose or revise requirements for offshore operators in Mexico, it added. “This is intended to allow the state to exercise greater control over the energy industry and, in turn, limit private-sector participation,” the report states. “The ultimate impact of this energy reform and any future regulatory changes is uncertain at this time.”
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