The Weekly Brief: Mexico

August 21, 2017 edition— NAFTA renegotiation kicked off; medium term power auction released; and Acciona will build Mexico’s biggest wind farm.





Last Week in a Minute or Less


Renewables & Electricity. The first medium term power auction was announced; Acciona will construct the biggest wind farm in Mexico and Vestas will supply the turbines.


Natural Gas & Liquid Fuels. Mexico is regulating natural gas storage; natural gas imports keep growing; and G500 opened its first gas station with its own brand.


Oil & Gas Upstream. Pemex needs partners for exploration projects; the CNH will give Pemex more time to develop Round 0 allocations; and Vista Oil & Gas is set on Mexico’s shallow waters.


Money & Power. NAFTA negotiations opened with a harsh tone from the US; interest rate kept at 7%; and ex-Pemex chief Lozoya was accused of receiving Odebrecht’s bribe.


Déjà vu all over again. Last week’s readers were particularly interested in NAFTA helping raise Mexican wages (English); Moody’s opinion on Mexico’s growth (English); and the auction of the natural gas border pipeline capacity (English).



NAFTA negotiations


NAFTA negotiations started and the US took a battle stance. The Trump administration kicked off the renegotiation by citing failures of the current agreement and demanding “major changes” (English). A Trump official says the US is pursuing an aggressive timeline; Mexico and Canada also have tight deadlines (English) (Spanish).


NAFTA can propel Mexico’s energy reform. Luz María de la Mora, a former Mexican Foreign Affairs Ministry official, said the NAFTA renegotiation could consolidate Mexico’s energy reforms by deepening North American energy market integration (English) (Spanish). De la Mora pointed to the uncertainty generated by Mexico’s presidential and congressional elections in July, 2018.


Mexico announced its official NAFTA negotiators. The federal government published the names of the negotiators in charge of the 32 areas to be discussed in the NAFTA renegotiation (Spanish). US Chamber of Commerce President Tom Donohue advised all parties to avoid dangerous pitfalls and focus on seizing the big opportunities (English).


Canada takes dispute mechanism very seriously. Canada’s foreign affairs minister emphasized the importance of an effective dispute settlement mechanism; the US wants to drop the current system of binational panels (English). Canada says including labor standards, climate change, gender equality, and indigenous rights in the new version of the agreement would improve NAFTA (English).



The Road to Reform


Mexico will hold its first medium term power auction. The Energy Minister, Pedro Joaquín Coldwell, announced Mexico’s first medium term electricity auction will be held in February 2018 (English) (Spanish). Companies using all types of technologies may buy and sell one- to three-year contracts and be shielded from short-term market volatility.


The CRE and CNH had a busy six months. The Energy Regulatory Commission (CRE) and the National Hydrocarbons Commission (CNH) reported real, annual spending increases of  21.2% and 20% in the first semester (Spanish). The CRE was accused paperwork delays, while the CNH became the first commission to report expenses through the transparency institute (INAI) (Spanish) (Spanish).


The Mexican Petroleum Institute is assessing 10% ethanol in gasoline. The Energy Regulatory Commission (CRE) asked the Mexican Petroleum Institute (IMP) to determine the technical viability of using gasoline mixed with 10% ethanol in Guadalajara, Monterrey, and Mexico City (Spanish). The IMP will continue lab tests through the year.


Pemex needs allies and an extension. The state-owned company requires at least 25 partnerships like Trion to finance project development in the next 24 years (Spanish). The National Hydrocarbons Commission (CNH) recommended that the Energy Ministry grant Pemex an extension to develop Round 0 allocations (Spanish).


Mexico is focusing on increasing energy storage. Although Mexico deregulated its electrical grid in 2013, investment in storage has lagged despite a potential for 2,333MW of storage to be developed in ten years (English). Sener will release preliminary plans for a natural gas strategic reserve in September (English).



Political Economy


Ex-Pemex CEO Lozoya was accused of receiving a bribe from Odebrecht. Emilio Lozoya, former Pemex CEO, denied receiving US$10m in a bribe from Brazilian Odebrecht construction company, allegedly paid to win work at the Tula oil refinery (English). Lozoya is considering suing the former Odebrecht employees who accused him for “moral damages” (Spanish).


Pemex looked North for refined fuel. Mexico’s declining production of light crude oil and lower refinery output has been compensated by importing 52% of total domestic fuel consumption from the US (Spanish) (English). A PA Consulting Group energy expert sees an opportunity for investing in refineries in light of the energy reform.


Pemex rewards its union with MXN16.8m monthly. The state-owned company hands over MXN7.8m to its union each month for “administrative expenses” and MXN9m for “travel allowances” (Spanish). The amounts were established in the union contract clause 251 and apply to 73 union leaders, advisors, the general board, and 90 commission members.


Pemex considers doing business abroad. The state-owned company is looking to diversify its exploration portfolio in the United States and in Latin America (Spanish). Pemex is fighting to maintain its oil production at 2 million barrels per day in ten years and the producer awaits the CNH extension to develop 100 allocations in Mexico.



Market Trends


Thanks to Mexico the US is a net exporter of natural gas. Mexican natural gas imports have risen to an average of 4 Bcf/d  (English) (Spanish), making the US a net exporter for the first time in six decades. Mexico’s natural gas imports have more than quadrupled since 2010.


Banxico kept interest rates at 7%. Mexico’s central bank maintained interest rates unchanged at 7% following seven consecutive increases (English) (Spanish). Stabilization of the peso and growth below potential put a stop to the successive rate hikes that started in December 2015, when the interest rate rose from 3% to 3.25%.


Fitch highlights Pemex’s finances. The rating agency ranked the state-owned company as the second Latin American enterprise with the highest growth in net debt in the first semester, posting an increase of US$6.4bn (Spanish). Among the ten companies that most reduced their debt in the second quarter of 2017, four are Mexican.


Mexico’s central bank bet on a 1-month peso hedge. Mexico’s central bank placed US$200m to renew a one-month peso hedge instrument offered in an auction (English). Demand exceeded expectations, reaching US$1.27bn and surpassing by 6.35 times the amount placed (Spanish).



Strategy & Operations


Acciona will build the biggest wind farm in Mexico… The Spanish company will construct a 424MW wind farm in Reynosa, Tamaulipas, commissioned by Zuma Energy (English) (Spanish). The wind farm would be the country’s largest when it opens and will cost US$600m for engineering, construction, installation, and testing.


…and Vestas will supply the turbines. Vestas Wind Systems won the Zuma Energía contract to supply 424MW of turbines for the biggest wind project in Mexico (English) (Spanish). The order included a 15-year service contract. Each turbine will have a capacity of 3.45MW and will be delivered in 2017 and commissioned by 2018.


Vista Oil & Gas eyes Mexico’s fuel projects. The Mexican energy investment firm completed a US$650m initial public offering on Mexico’s stock exchange (English). Vista Oil & Gas will focus on hydrocarbon exploration and extraction projects with low risk returns—onshore and shallow water fields, leaving deep water fields aside (Spanish).


G500 cut the ribbon on its very own gas station. G500 opened its first gas station with its own brand in Tlalnepantla, State of Mexico (Spanish). The group, which manages 1,800 gas stations, reached an agreement with the Swiss company Glencore for fuel supply.


A private transmission line will cross the border. Hunt Power will tender the capacity of its 300MW transmission line which connects the power grid in Nogales, Sonora, with southern Arizona (English) (Spanish). The project could power approximately 150,000 homes with an investment of US$80m.



Old School Social


Events in the world beyond your screen – go see and be seen!


The AEM Luncheon “Energy: a connecting sector between Texas and Mexico” is August 21 in San Antonio.


The CIE Congreso Internacional de Energía is September 4-9 at the Centro de Educación Continua, Instituto Politécnico Nacional, in Mexico City.


The Green Expo is September 5-7 at Mexico World Trade Center, in Mexico City.


The Mexico Summit 2017 is September 7 in Mexico City.



Lateral Thinking


A satellite tracking system could have fallen into the hands of drug cartels. A former Honeywell International employee, Robert Jeremy Miller, was arrested after meeting with undercover agents pretending to be cartel members. Miller was going to exchange secret access codes to the satellite tracking system for US$2m (Spanish).



Quote of the Week


“No hay reglas ni leyes ni tradiciones que se puedan aplicar universalmente… incluyendo ésta.”


“There are neither rules nor laws or traditions that can be applied universally… including this one.”


– Gerardo Murillo (1875-1964), Mexican painter and writer who signed his works, “Dr. Atl”





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