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April 13, 2020 edition—Canceled LNG distribution permits; Pemex’s future; and a third auction plant opened.
Last Week in a Minute or Less
Electric Power & Renewables. A third long-term auction plant is working already; environmental organizations asked AMLO to support wind energy; and CFE worked on its generation capacity.
Natural Gas Mid-Downstream & LNG. Nuevo León leads natural gas demand; the CRE announced the expiration of 156 LNG distribution permits; and natural gas supply is guaranteed.
Liquid Fuels Mid-Downstream. Pemex will focus on refining, not exports; and ethanol is another victim of the oil price war.
Oil & Gas Upstream. AMLO announced Pemex’s crude output with fanfare; analysts suggest Pemex cut back on secondary projects; and the private sector is not that into the energy plan.
Government & NGO. Canada and Mexico are ready to implement the USMCA; Fitch gave a negative outlook to Pemex’s BB rating; and Pemex and CFE’s contractors are allowed to work during the pandemic.
Déjà vu all over again. Last week’s readers were particularly interested in CFE’s turbogas units (El Norte – Spanish); Bravos Energía’s auction (El Norte – Spanish); and Mexico’s interest in nuclear energy (Forbes – Spanish).
Geopolitics & Trade
Canada is ready for the USMCA implementation… Canada informed Mexico and the US that the internal procedures for the operation of the USMCA were completed (El Financiero – Spanish). The USMCA modification protocol includes a written notification to the other parts to inform regarding progress on internal procedures.
…and Mexico followed suit. The Economy Ministry informed the US and Canada that the internal procedures required by the USMCA implementation have concluded (Forbes – Spanish). Mexico asked the US and Canada to grant the automotive industry extra time to adapt to the new rules (Investing – English).
Why is the US still not ready for USMCA? Some point to the pressure of dealing with the COVID-19 pandemic, but Canada and Mexico have provided their notices and are dealing with the crisis. The US seems to be concerned with the new origin rules for the auto sector (The Globe and Mail – English).
Political Economy
Fitch gave a negative outlook to Pemex’s BB rating. Fitch cut the state-owned company’s bond rating to BB with a negative outlook (Reuters – English) (Forbes – Spanish). The new rating and outlook apply to US$80bn of bonds held by investors, ranging from sovereign wealth funds to pension funds.
Barclays expects a 5% contraction for Mexico… Barclays forecasts a 5% contraction for Mexico’s GDP in 2020 due to the economic crisis brought by the COVID-19 pandemic and the government’s late measures to fight it (El Financiero – Spanish). The pressure on the health sector is the main risk of the Mexican economy.
…and Goldman Sachs is pessimistic too. Goldman Sachs cut Mexico’s growth outlook from a 1.6% contraction to a 4.3% contraction (El Financiero – Spanish). The modification was made after President López Obrador announced the support plan to face the COVID-19 pandemic.
Bank of America forecasts an 8% economic contraction. Due to the effect of low crude oil prices and the COVID-19 pandemic, Bank of America forecasts Mexico’s economy to shrink by 8% in 2020 (Reuters – English) (El Financiero – Spanish). The bank expects Mexico’s economy to recover in 2021 with 4.5% growth.
Mexico cut Pemex’s taxes. President López Obrador announced a tax cut of MXN65bn to the state-owned company to cope with the impact of the COVID-19 pandemic and the fall in oil prices (Platts – English) (El Financiero – Spanish). For 2020, Pemex’s tax burden will be 54% of its profits.
Inflation hit the brakes in March. Due to the COVID-19 lockdown and the oil price war, Mexico’s inflation fell to 3.25% from 3.7% in February (Reuters – English) (El Economista – Spanish). A lower inflation rate may allow Banxico to cut interest rates.
Legal & Regulatory
The CRE announced the expiration of 156 LNG distribution permits. The Energy Regulatory Commission (CRE) published the expiration of 156 permits for LNG distribution through transportation other than pipelines due to the failure in the construction of appropriate installations or the halt in operations (DOF – Spanish).
CFE worked on its generation capacity. Generación I, II, and III met and discussed the infrastructure projects to recover generation capacity (PV Magazine – Spanish). Generación I increased generation 2.6% above its goal in February, and Generación II and III focused on maintenance activities.
The private sector is not that into the energy plan. After weeks postponing the announcement of an MXN339bn investment program (Reuters – English), the private sector said that the plan was designed in 2019 and interest in it would depend on the type of contracts the plan will include (La Prensa – Spanish).
Pemex and CFE’s contractors are allowed to work during the pandemic. President López Obrador protected contractors of both state-owned companies, allowing them to continue working during the COVID-19 outbreak (Forbes – Spanish). The goal is to guarantee the continuity of the public, private, and social sector systems.
Market Trends
Banxico placed US$1.59bn in a credit auction. Mexico’s central bank placed US$1.59bn in a credit auction to provide liquidity in the local market, as the peso has suffered the effect of the economic slowdown due to the COVID-19 pandemic (Reuters – English) (El Financiero – Spanish).
Pemex will focus on refining, not exports. The state-owned company announced a cut of 400,000 daily barrels in the volume of crude exports in the coming months, considering low oil prices (El Economista – Spanish). The amount is a third of the average volume of exports in 2019.
Another victim of the oil price war: ethanol. With the fall in gasoline prices, a liter of ethanol is 35% more expensive, so expanding the mixture of gasoline with ethanol would increase fuel prices in Mexico (El Economista – Spanish).
AMLO announced Pemex’s crude output with fanfare. President López Obrador said that crude oil production in the country is close to 1.8 million barrels per day (Reuters – English). However, Mexico’s oil export basket averaged US$18.66 per barrel (Reuters – English).
Natural gas supply is guaranteed. The Mexican Association of Natural Gas (AMGN) assured natural gas supply is guaranteed during the COVID-19 pandemic (Forbes – Spanish). The industry also maintained its commitment to invest in the country and to keep the 4,000 direct jobs that the member companies generate.
Strategy & Operations
A third long-term auction plant is working already. In Chihuahua, Villa Ahumada is the first platform from the third long-term power auction that is starting operations. The plant has a capacity of 150MW and an investment of US$145m (PV Magazine – Spanish).
Nuevo León leads natural gas demand. Nuevo León consumed 12.1% of the total natural gas demand in the country in 2019, or 986.8 million cubic feet per day (El Financiero – Spanish). For 2020, a slight fall is expected as the economy slows down.
Analysts suggest Pemex cut back on secondary projects. Analysts concluded that Fitch’s downgrade of Pemex’s rating will force the company to cut costs and choose exploration projects carefully (El Economista – Spanish). Pemex may have to stop non-essential activities and partner up with the private sector.
Environmental organizations asked AMLO to support wind energy. Civil and environmental organizations urged President López Obrador to boost wind energy projects in the country and to relaunch power auctions for renewables (Forbes – Spanish). Plataforma México Clima y Energía (PMCE) emphasized the need to generate jobs through private investment.
Old School Social Goes Viral
(Editor’s note: For the duration of the COVID-19 outbreak, this section will refocus on announcements of event delays or cancellations, events that are moved online, and scheduled webinars and public conference calls. Stay safe!)
2nd Edition of Shallow and Deepwater Mexico was postponed due to the coronavirus. Date TBD.
MIREC Week has been postponed from June 2-4 to October 8-10 at Centro Citibanamex.
Solar Power Mexico was postponed from March 24-26 to November 18-20 at Centro Citibanamex.
Mexico Assembly was postponed due to coronavirus. Date TBD.
The Mexican Energy Forum is rescheduled for November 17-18 in Mexico City.
The Mexican Petroleum Congress is scheduled for June 24-27 in Monterrey and may be postponed until September.
Lateral Thinking
Banxico is worried about COVID-19 and oil prices. Mexico’s central bank expects the economic outlook to get worse due to the impact of COVID-19 and the fall in oil prices (Forbes – Spanish). The outlook is also negative for Pemex, and that could, in turn, risk Mexico’s public finance and sovereign rating.
Quote of the Week
“El dinero no da la felicidad, ah, pero como calma los nervios.”
“Money does not bring happiness, ah! but how it calms you down.”
-María Félix (1914-2002), Mexican actress, symbol of the Mexican cinema in its golden age.
We hope you have a productive week. Please send any news, comments, or economic effects of COVID-19 to MexicoWeekly@energynarrative.com.
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