MI’s Mexico Energy Chatter – Oct. 16, 2024

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Energy Reform: The Resurgence of State Control – can private investors still be lured in?

Claudia Sheinbaum has promised to lead the country to the energy transition over her six-year term, a notable turnaround compared to her mentor, former president Andres Manuel López Obrador (AMLO). Along with the security and social programs, Sheinbaum’s inaugural presidential speech remarked on her commitment to renewable energies, which she claimed will reach 45% of Mexico’s energy share by 2030. The target now seems a huge stretch, given solar and wind power sources account for only around 15% of the electricity generation in Mexico, and hydropower which can add more than 10% in a good year, but with adverse weather conditions, such as experienced between 2021 and 2023, this can drop to less than 5%.

However, the sector is far more concerned about business than weather conditions in the next six years. With the judicial reform now in the secondary legislation phase, President Sheinbaum and Congress have also advanced in AMLO’s energy counter-reform. The Lower Chamber has already given its approval to the constitutional changes, which empower state-owned companies Pemex and Comisión Federal de Electricidad (CFE), and limit private electricity generation to a maximum 46% of total (and CFE to a minimum of 54%).

The law will modify both Pemex and CFE’s legal status from “state-productive companies” to “public companies.” While this change in wording might sound almost superficial, it has deeper implications, as it will give the Mexican government more control over the companies, freeing them from their for-profit status and from having to comply with corporate governance standards.

Implications for CFE

In the case of CFE, it seeks to make reality the 2021 reform that was approved by Congress but ultimately thrown out by the Supreme Court earlier this year. That bill proposed to dismantle the current model of electricity dispatch that prioritizes the most efficient and economic plants (mostly private) over the older, costlier power plants (mostly CFE-owned). The constitutional amendments are not quite a replica of the 2021 reform, but they do open the door to a CFE-centric model, in which its plants will have priority, regardless of their costs.

Moreover, it is expected that the secondary legislation that will follow would allow CFE to buy electricity without having to hold a long-term auctions, as it was required during the Peña Nieto administration, which critics have long alleged translated into subsidies for private players. This change could be a game-changer for CFE, as it would now be able to finance some of its power plants under project-finance schemes, backed by a long-term contract between the power plant and CFE’s distribution subsidiary.

Implications for Pemex

Rating agency Fitch has explained that the bill opens at least three scenarios. In one, the link between Pemex and the Finance Ministry will be stronger; a second scenario in which the government finally decides to directly guarantee Pemex’s bonds; and a third one in which the state partially guarantees the company’s debt. The first scenario would have a minor positive effect on Pemex rating without impacting the sovereign, however, the other two would give a major boost to Pemex rating, at the potential expense of Mexico’s investment grade (IG) rating. Is President Sheinbaum contemplating doing what even AMLO’s administration avoided, and back Pemex’s $80bn worth of international debt?  Congress might just give her that tool.

Further complicating matters, Congress has yet to act on the rest of AMLO’s 20 constitutional reforms presented in February. Morena’s leader in the lower house, Ricardo Monreal, said a couple of days ago that the bill to eliminate the independent regulators would be passed before December.

President Sheinbaum wants to lure the private sector to reach her ambitious energy transition plan, to be announced soon, as mentioned in her inauguration speech. How that will be accomplished, with the ongoing overhaul of the judicial power, a new legal framework to empower Pemex and CFE, and the elimination of independent regulators as backdrop, will keep our attention over the coming weeks and months.

Other Energy News

— Pemex’s new CEO Victor Padilla faced his first crisis when a gas leak of in the company’s Deer Park refinery, located in Texas, caused the death of two workers, injured 35, and caused panic around the complex. Energy minister Luz Elena Gonzalez assured that the refinery will quickly resume operations, but inspections after accidents in the US will likely take longer than in Mexico.

— Mexico’s Energy Ministry appointed three new technically competent undersecretaries to oversee the hydrocarbon, electricity and energy transition sectors. The appointments underscore that the Energy Ministry will likely take the key strategy and political decisions regarding Pemex and CFE, the Finance Ministry the key financial decisions, while CFE and Pemex top executives will take responsibility for day-to-day operations.

Juan Vidal Amaro was named as the new undersecretary of hydrocarbons. Vidal is an engineer in renewable energies from UNAM, and worked at the transition energy office of the local Economy Ministry while Sheinbaum was major, and González was head of the local Finance Ministry. Previously he worked as an energy transition consultant and in academia, according to his Linkedin profile.

José Antonio Rojas Nieto was appointed as undersecretary of electricity. Rojas was CFO at CFE between December 2018 and 2020. Rojas graduated in Mathematics from ITESM and holds a master’s in economics from the UNAM.

Jorge Islas Samperio was appointed undersecretary for Planning and Energy Transition. Islas, who studied Physics at UNAM, was one of Sheinbaum’s lead advisors during her campaign. Islas also holds a masters in Energy Engineering and a PhD in Economics.

— CFE’s board of directors appointed five new directors and six deputy directors that will work under new CEO Emilia Calleja, all of them with significant operating experience but limited to non-existent public profiles.  The board named Eugenio Amador Quijano as CFO. Amador worked as the finance coordinator of CFE’s subsidiary CFE Calificados under the prior administration. Liliana Barrera Jiménez is the new director for Commercial Business. Barrera worked along with Calleja in CFE’ subsidiary CFE Generación I.  Hector López Villareal is the new head of the Operations office. He previously worked as the head of CFE’s nuclear division. Yésica Luna Espino is the new director for Administration, after previously working in Mexico City’s Finance department during the Sheinbaum administration. Rafael Narváez Ávila will be the next head of the Strategic Planning office. He was previously deputy manager of the same office.

—Pemex board of directors approved Nestor Martinez Romero as the new head of Pemex Exploración y Perforación (PEP). Martinez was a commissioner at the Comisión Nacional de Hidrocarburos (CNH) between 2012 and 2023. He previously worked in different positions at PEP between 2004 and 2010. Martínez holds a master’s and PhD in oil engineering from UNAM.

— The board also appointed Juan Carlos Carpio Fragoso as new CFO. Carpio was part of Luz Elena González’s team when she was head of the Finance department in Mexico City. Carlos Armando Lechuga Aguiñaga was named new director of Pemex Transformación Industrial (PTRI). Lechuga held multiple positions at Pemex’s logistic arm between 2016 and 2024, and also in PEP between 2008 and 2013. Marcela Villegas Silva was designated director of Pemex corporate and administrative service office, in charge of the acquisition of goods and services at a national and international level. Villegas was director of Mexico City’s main wholesale market (Central de Abastos).

— With so much happening in the energy sector over the last 15 days, this news might have gone unnoticed.  Mexico’s Supreme Court ruled in favor of antitrust watchdog Cofece over energy regulator (CRE) in a case regarding authority over market competition in energy transactions.

— The court’s second chamber ruled that CRE does not have the authority to assess the competitive impact of transactions in the energy sector, a responsibility exclusive to Cofece. In a 3-2 vote, the justices invalidated rules established by CRE in early 2023 concerning transactions involving companies operating in multiple energy markets. The dispute between the regulators started in 2021 when CRE denied a request by international trader Trafigura to integrate its NGL Equipments and Siadsa subsidiaries with its stake in TP Terminals — a joint venture with Sempra Energy that was building a 2.2mn bl fuel storage terminal in Manzanillo —despite Cofece’s approval.

— Although the deal ultimately fell through, the case made its way to the supreme court. In 2022, the court ruled that CRE must defer to Cofece’s competition analysis. But CRE later introduced rules to assess competitive impacts in cases involving companies holding permits in multiple markets, such as fuel storage, trading or distribution. The supreme court has now reaffirmed that Cofece is the sole authority on competition matters, while CRE’s role is limited to addressing technical aspects of transactions. If the government finally eliminates CRE and Cofece, these are the kinds of disputes that could be settled by the Energy Ministry on its own, instead of a deeper legal analysis by the Supreme Court.

— With all that is going on, the departure of former Finance undersecretary Gabriel Yorio so far seems to have had only a minor impact on investor perception. Yorio had been a key link between banks, investors and bondholders and Pemex over the last few years. President Sheinbaum said he would remain in his position a few weeks before she took office, but two days before that, Yorio decided to step down, apparently due to policy and personality differences with Rogelio Ramirez de la O, the Finance Minister.

— His place will be taken by Edgar Amador, former Mexico City finance chief between 2012-2018, and mentor to (and both former boss of and then advisor to) Victoria Rodriguez, the Central Bank Governor.   Ramírez, AMLO’s third Finance Minister, remains as head of the Ministry with the task of bringing down Mexico’s budget deficit from the 6% expected to reach this year, the highest level in more than 40 years, to around 3% in 2025.  Investors expected that Ramírez would have material influence in Pemex and CFE; however, Sheinbaum’s picks to run both companies are closer to her and to Luz Elena Gonzalez than to the Finance Minister.

—Energy Secretary Luz Elena Gonzalez acted as a moderator for a lecture leftist Italian American economist Mariana Mazzucato gave at UNAM. González said that President Sheinbaum’s economic view and proposed policy reflect some of Mazzucato’s pro-industrial policy ideas. Mazzucato, like Nicolas Kaldor, Paul Baran, JK Galbraith, Andre Gunder Frank, and Celso Furtado a generation or two before her, has become a darling of the emerging world left for her views on state-led industrial development. She is generally not considered a top-notch economist in the neoliberal lecture halls of the UK and USA, where critics accuse her of lack of rigor, and cherry picking anecdotes to support her argument that government intervention is essential for fostering innovation.

 

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