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July 16, 2018 edition—125 hydro projects; AMLO’s refineries; and NAFTA’s auto sector.
Last Week in a Minute or Less
Renewables & Electricity. The new administration plans 125 hydropower projects; Los Cabos will consider geothermal power; and the CFE will finally encourage solar roofs.
Natural Gas & Liquid Fuels. IEnova won a Mexican marine terminal; AMLO plans to boost refining by watching India; and everyone debates IEPS.
Oil & Gas Upstream. Fuel rounds can help refining tenders; S&P expects Mexico’s oil production to remain low; and AMLO will respect oil contracts if they are corruption-free.
Money & Power. Auto associations want attention to return to NAFTA; AMLO met US officials; and energy propelled inflation.
Déjà vu all over again. Last week’s readers were particularly interested in Pemex and Sener’s technicians (El Financiero – Spanish); Thermion’s long-term investments (El Economista – Spanish); and Puebla’s natural gas plants (El Economista – Spanish).
NAFTA Negotiation
S&P is worried NAFTA uncertainty will damage Mexico’s rating. S&P warned that Mexico could be downgraded to a BBB+ if the NAFTA renegotiation ends (Reuters – English). A NAFTA retreat could bring changes to the deal that would reduce benefits for Mexico.
Auto associations want to focus on NAFTA… The North American auto associations urged renewed focus on the NAFTA talks, encouraging all parties to return to the negotiation (Reuters – English). The associations said it is best for all the countries to return to establishing a new NAFTA agreement.
…and Mexico’s auto exports are up. Excluding Nissan, Mexico’s auto exports increased by 8.1% in June compared with the same month in 2017 (Reuters – English). Mexico’s auto sector has been threatened by the uncertainty surrounding the NAFTA negotiation.
Trump’s trade war may leave energy in peace. According to Husky Energy, the energy sector seems to be safe from the effects of US President Donald Trump’s trade war (Bloomberg – English). This company has a production center in Canadian oil sands, refineries in the US, and gas fields in China.
The Road to Reform
AMLO plans to boost refining India-style. Mexico’s President-elect López Obrador plans to build two refineries under an open tender scheme to avoid fuel imports (Milenio – Spanish), following the example of India (Platts – English). The proposed Energy Minister will visit the Jamnagar refinery (Pulso Energético – Spanish).
A strong Pemex will be AMLO’s priority. Fluvio Ruiz Alarcón, a collaborator in AMLO’s energy strategy and Pemex’s former independent advisor, said the goal will be to transform Pemex into an independent national oil company with budgetary independence such as in Norway and Brazil (Platts – English).
AMLO will respect oil contracts if they are free of corruption… The future Finance Minister pledged the oil and gas contracts awarded during the previous administration will be respected if no problems arise reviewing the tender process (Reuters – English). The AMLO team does not expect the contract reviews will find acts of corruption.
…and fuel rounds can help refining tenders. After four years of auctions, the upstream sector could help the downstream sector in their future tenders with four lessons learned: transparency and publicity for the bidding process, an open and competitive process, shared risk, and long-term stability (Pulso Energético – Spanish).
Political Economy
How much does IEPS cost? The Finance Ministry expects to spend MXN107.8bn in the special tax on gasoline (Excelsior – Spanish) to help soften the rapid increase in gasoline and diesel prices. Gas station businessmen asked AMLO to restructure the special tax on gasoline (El Financiero – Spanish) and to strengthen the fight against fuel robbery.
Pemex sold its PMV share to Mexichem. The state-owned company sold Mexichem its 44.09% share in Petroquímica Mexicana de Vinilo (PMV), for MXN3.4bn (Milenio – Spanish). In September 2013, Pemex and Mexichem partnered up through the PMV company.
AMLO met the in-laws (and other US officials). President-elect López Obrador met with Jared Kushner, President Trump’s son-in-law, and US Treasury Secretary Steven Mnuchin (Reuters – English). AMLO sent President Trump a proposal for the bilateral relation including trade, development, migration, and security (El Financiero – Spanish).
AMLO promised 4% economic growth. President-elect López Obrador pledged Mexico’s Industry Chambers that the Mexican economy will grow at an average rate of 4% annually (El Economista – Spanish) (Mexico News Daily – English). In the last 35 years, Mexico has grown at an average rate of 2%, affecting job creation.
Market Trends
S&P expects Mexico’s oil production to remain low. The international rating agency forecasts low oil production in Mexico until 2025 (El Financiero – Spanish). Based on a projection going out to 2040, oil production would increase in 2027, reaching 2 million barrels per day by 2035.
The Cepal studied Latin America’s FDI in 2017. The Cepal found that in Latin America and the Caribbean, foreign direct investment was reduced for a fourth year in 2017, reaching US$161.6bn, 3.6% less than the previous year (Cepal – Spanish). Besides the reduction, the auto industry in Mexico reached historical levels of production and FDI, despite the NAFTA uncertainty.
Energy propelled inflation. Inflation in June reached 4.65%, pressured by energy price increases with a 5.9% rise in LP gas, 1.5% in gasoline, and 1.5% in power (Excelsior – Spanish). AMLO pledged a reduction in gasoline prices and no further increases in gas and power (Animal Político – Spanish).
Moody’s warned the states over IEPS. The international rating agency said the tax stimulus to the special tax on gasoline will increase 48% in 2018 and will limit the growth in federal transfers (Milenio – Spanish). During the first five months of 2018, the special tax income obtained by the states was reduced by 8%.
The IIF is concerned about Mexico-US relations and NAFTA. The Institute of International Finance warned that the NAFTA renegotiation and US relations with Mexico are more worrisome elements than the victory of a leftish government (El Economista – Spanish). The Institute estimates Mexico’s debt at 35.4% of GDP.
Strategy & Operations
The CFE will finally encourage solar roofs. The state-owned company abandoned the writ of amparo against the Energy Regulatory Commission’s dispositions to encourage solar roof generation, returning to homeowners what they generate with panels or in cash (El Economista – Spanish). Users can implement three schemes: net metering, net billing, and the total sale of power.
IEnova won a Mexican marine terminal. The Sempra subsidiary won the contract to build a US$150m marine fuels terminal in Topolobampo (Platts – English) (Forbes – Spanish). The 20-year contract will be to build, design, and operate the terminal that will ease access to international fuel supplies.
The new administration plans 125 hydropower projects. The new administration plans the installation of 125 plants, and 112 of them will be private (El Economista – Spanish). The estimated investment for the projects is US$737m by 2024 in management plans and repowering 63 current plants.
Los Cabos will dig deep for power. Baja California Sur has an important geothermal potential greater than 500MW and different locations that can be explored (El Financiero – Spanish) (Mexico News Daily – English). According to the Energy Regulatory Commission, Baja California Sur could produce 40% of its energy from renewable resources, not considering geothermal (El Economista – Spanish).
Old School Social
Events in the world beyond your screen—go see and be seen!
The Mexico Oil & Gas Summit will be held July 18-19 at the Sheraton María Isabel in Mexico City.
The Energy Congress ANIQ 2018 is scheduled for July 19 at the Club de Industriales in Mexico City.
Expo Energía is scheduled for August 14-16 in Puebla, Mexico.
Lateral Thinking
Mexico made history with CBD as a supplement. After legalizing medicinal marijuana with less than 1% tetrahydrocannabinol, Mexican producers could start putting cannabidiol (CBD) in everyday health products (Forbes – English). CBD has non-intoxicating and astounding applications for preventing and treating health conditions.
Quote of the Week
“Más vale morir con honra que deshonrado vivir.”
“It is better to die with honor than to live in disgrace.”
-Hernán Cortés (1485-1547), Spanish conqueror leading the expedition of conquest in Mexico.
We hope you have a productive week. Please send any news, comments, or CBD benefits to MexicoWeekly@energynarrative.com.
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