The Weekly Brief: Mexico

December 11, 2017 edition— Exxon imported fuel; 40 farmouts in sight; and the decisive sixth NAFTA round.




Last Week in a Minute or Less


Renewables & Electricity. Cemex and Progreso will open solar farms; the Sener offered the Mexicali-Hermosillo line; and Acciona demands more control over CFE’s power auctions.


Natural Gas & Liquid Fuels. The CRE said that gasoline prices will remain stable; Exxon was the first to import and sell gasoline; and gas station owners invest in storage terminals.


Oil & Gas Upstream. Pemex will offer 40 new farmouts and the SEMAR and the CNH signed an agreement to improve the security of hydrocarbon exploration and extraction.


Money & Power. The sixth NAFTA round will be key; Mexico cut expenses; and AMLO proposed amnesty for drug traffickers.


Déjà vu all over again. Last week’s readers were particularly interested in CRE’s new power tariffs (Spanish); La Bufa wind park inauguration (Spanish); and Meade’s resignation (English).




Nafta negotiation


Goldman Sachs expected US announcement of NAFTA withdrawal. According to Goldman Sahchs, the approval of the tax reform does not mean a successful end in NAFTA renegotiation (English). Goldman Sachs expects the US to announce the intention to leave the agreement.


NAFTA’s fate will be decided in the sixth round. The next round in Montreal will be key to knowing the future of the NAFTA negotiations (Spanish). Ministers will have to evaluate how the process is advancing and the challenges to concluding negotiations or transforming the most conflictive proposals from the US.


Tree growers fear NAFTA’s end. Demand in Mexico for Northwest-grown firs is high and the US surplus propelled US tree exports over four years to US$22.6m in 2015 (English). If the US withdraws from NAFTA, Mexico could impose a tariff on the US export and switch to Canadian tree suppliers.


NAFTA may be at a breaking point. On Nov. 29, Mexico’s Economy Minister left a meeting with Trump’s team, saying, “the domestic content” proposal is not viable (English). The US Trade Representative said, “we have seen no evidence that Canada or Mexico are willing to seriously engage on provisions” to rebalance the agreement.


Canada’s negotiator listed the US proposals that will not pass. Steve Verheul mentioned the five US proposals Canada will not accept: 50% US content in autos, limits on the amount of government procurement available to Canadian and Mexican suppliers, the dispute settlement proposal, the sunset clause, and lifting Canadian tariffs on dairy and poultry (English).



The Road to Reform


Sener offered the Mexicali-Hermosillo line.  The Energy Ministry (Sener) will prepare a bidding for the 400-km line that will connect Mexicali to Hermosillo with an expected investment of US$1.1bn (English) (Spanish). The line will connect Baja California’s isolated power system with the National Interconnected System (SIN) (Spanish).


The SEMAR and the CNH signed an agreement. The Navy (SEMAR) and the National Hydrocarbons Commission (CNH) signed a cooperation agreement to use naval technology to strengthen security in hydrocarbons exploration and extraction (English) (Spanish). A CNH multidisciplinary team will monitor oil drilling and extraction using satellite images.


Free fuel prices remained stable… Gasoline prices increased by 0.24%, up 4 cents per liter for consumers, in the last regions to be liberalized (Spanish). More than 30 distributors lost the benefits of selling high volumes of fuel to Pemex because the price liberalization requires Pemex to offer every distributor the same tariff (Spanish).


…and the CRE pledged prices will not skyrocket. The head of the Energy Regulatory Commission (CRE) said that liberalizing gasoline prices for the entire country does not imply that fuel prices will increase (Spanish). The Finance Ministry will maintain the tax stimulus on fuels in 2017 and 2018 (Spanish).


Acciona wants the government to safeguard CFE’s auctions. Acciona demanded government oversight of the financial capacity of the companies building wind and solar plants to confirm they will sell energy to CFE (Spanish). The goal is not to celebrate investment announcements, but to ensure the projects get built.


Pemex plans 40 farmouts. Pemex is preparing 40 farmouts that will be grouped in seven clusters because they are mostly small onshore fields (Spanish). The state-owned company is working with the Finance Ministry on a new fiscal framework for these partnerships (English).



Political Economy


Mexico tightened its belt. From January to October, net public sector spending totaled MXN4bn, a reduction of 6.3% compared to the same period in 2016 (Spanish). The Finance Ministry cut capital spending by 34.1% and programmable expenditures by 10.6%.


IEPS revenue fell by 28.4%. From January to October, revenue from the special tax on gasoline (IEPS) was reduced by 28.4% compared to the same period in 2016 (Spanish). In total, MXN182bn were collected compared to the MXN240bn obtained in the first ten months of 2016.


AMLO proposed amnesty for drug lords and all hell broke loose. Andrés Manuel López Obrador, the presidential candidate, said that if he wins the 2018 presidential election, he could consider offering amnesty to drug traffickers (Spanish). Aspiring candidates from opposing parties considered the proposal a “crazy” and “ignorant” idea (Spanish) (Spanish) (English).


Mexico’s refineries worked at half speed last fall. In October, Pemex’s six refineries operated at less than 33.68% of capacity, processing 544,000 barrels of crude per day, the lowest volume of output ever (Spanish). Pemex pointed to earthquakes and hurricanes as the reason for the low production.



Market Trends


Mexico broke the ceiling on US sales. From January to October, sales of goods and services from Mexico to the US reached US$261.3bn, a record high for a similar period (Spanish). Economic growth in the US and a weak peso fueled the increase in sales.


Oil prices fell as OPEC is expected to extend production cuts. Oil suffered the greatest price drop in more than two weeks due to worries that an extension of OPEC’s deal could send US shale activity to a new level (English). North American exploration firms may boost spending by 20% in 2018.


The IMF pointed to the main challenges for Mexico’s next president. The International Monetary Fund (IMF) said Mexico’s main problem is low economic growth and the next president should work to strengthen the fight against corruption and insecurity (Spanish). A focus on education and improving infrastructure could also increase success stories in the country.



Strategy & Operations


Gas station owners go for their own storage terminals… The Energy Ministry announced that US$2bn is being invested to develop 40 private gasoline storage terminals, expanding current capacity by 122% (Spanish). Chevron asked Pemex to open its infrastructure and the Energy Regulatory Commission (CRE) is considering alternatives to the open seasons (Spanish).


…and Koch and Kinder Morgan prepared. Koch Supply & Trading Mexico (KMEX) contracted an 85,000-barrel diesel fuel cargo to be supplied in early December (English). Kinder Moran added two Mexico gasoline grades, anticipating demand for California-produced gasoline (English).


Cemex and Progreso will be powered by solar. Cemex will develop the Cemex Huichapan solar farm, located in Hidalgo, investing US$20.7m according to the Environment and Natural Resources Ministry (Spanish). The San Ignacio Solar Farm will be built in the municipality of Progreso with an investment of US$34.2m (Spanish).


Exxon was the first to import gasoline into Mexico. The US oil giant imported two cargoes of 120,000 barrels of gasoline to sell to the Grupo Orsan gasoline consortium (English) (Spanish). ExxonMobil will open 50 gas stations in Mexico (Spanish).



Old School Social


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


A panel discussion on the Trump Administration, Latin America & Energy: Mexico, Natural Gas & LNG Exports is December 15 at the National Press Club in Washington DC.


The 3rd Mexico Infrastructure Projects Forum is January 17-18 at Hotel Camino Real, in Monterrey.


Energy Mexico 2018 is January 30-February 1 at Centro Citibanamex, in Mexico City. For the third consecutive year, ENERGY MEXICO OIL GAS POWER EXPO & CONGRESS will be the main energy event in Mexico, where all the sectors of the industry will come together: oil, gas, power and renewables.


Mexico WindPower is February 28-March 1 at Centro Citibanamex, in Mexico City. In its seventh edition, Mexico WindPower 2018 consolidates its position as Mexico’s most important Congress and Exhibition event in the wind power sector. In addition, you can network with key personalities of the industry and meet real buyers face-to-face.



Lateral Thinking


Mexico’s logging affects Monarch butterflies. Bans on logging were lifted from April to December 2016 and extended in 2017, both outside and inside the Monarch Butterfly Biosphere Reserve, to remove windblown trees, reducing fuel accumulation (English). The removal of damaged trees could accelerate the decline of monarch butterfly populations.



Quote of the Week


“La materia, inmortal como la gloria cambia de formas, pero nunca muere.”


“Matter, immortal as is glory, changes shapes, but never dies.”


-Manuel Acuña (1849-1873), a Mexican writer.



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