The Weekly Brief: Mexico

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May 9, 2016 edition— Round 1.5 was postponed; four banks back the KKR fund; and IEnova finally catches a break.





Blind Spots


The CFE suffered a MXN20.2bn blow. In the first quarter, the state-owned company announced MXN20.2bn in losses, 24% more than in the same period last year. According to the CFE, the difference is explained by lower tariffs and weaker sales which were MXN2.2bn less than in 2015 (Spanish).


The lack of maintenance in Pemex’s pipelines endangers Tabasco’s population. The state-owned company has failed to give corrective and preventive maintenance to almost 2,000 km of pipelines in the state averaging 29 years of age (Spanish). According to a local congressman, that explains the frequent accidents causing human casualties and environmental degradation.


Scarce resources translate into reduced infrastructure maintenance. Pemex Exploration and Production (PEP) has suffered a 69.5% cut in the budget for maintaining production infrastructure between 2012 and 2016 (Spanish). The company is working to conclude a study to identify and evaluate risk factors for workers in six refineries.


The families of the Pemex Tower victims were compensated. Three years after the accident, the three Copicosa contract workers were granted treatment equal to that of Pemex employees who also died in the explosion. The Federal Court ruled that Pemex must offer a public apology and compensate each family with MXN10m (Spanish).


Déjà vu all over again. Last week’s readers were particularly interested in the nine projects offered by the CFE  worth eight billion dollars (Spanish), the withdrawal of the investment for the Juchitán wind project (Spanish), and the lower expected prices for electricity packets in the next auction (Spanish).




The Road to Reform


Round 1.5 has been postponed. According to the Sener, the round dedicated to unconventional resources will be postponed due to low oil prices and the lack of regulation regarding  techniques such as fracking (Spanish). Round 2 will be announced between June and July of this year.


Cenace offers a new prize: another electricity auction. Cenace launched a second reverse auction directed to renewable energy generators. The tender specs will be published on May 13. Although the information is public, the potential bidders will have to buy it to participate, at approximately 31,000 pesos (Spanish).


Gasoline import certificates may ruin the party. All the fuel to be imported will have to pass a complex process of certification in labs previously registered with the Finance Ministry. There are no labs that meet the Ministry’s requirements  in the US (Spanish).


New leaders of the energy reform were chosen. The Senate ratified eight government  appointments in energy sector agencies (Spanish). The new president of the Energy Regulatory Commission (CRE) is Guillermo Ignacio García Alcocer, and Jordi Herrera Flores is a new independent member of the Technical Committee of the Mexican Oil Stabilization Fund.



Shameless Commerce Interlude


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Political Economy


Pemex is allowed to pay debts in dollars. Through international factoring, the state-owned company will start paying companies it owes more than US$5m with contracts signed in dollars for 2015 and 2016 (Spanish). Cemex will receive part of the delayed payment on US$26.2m and ICA Fluor part of the US$25.6m it is owed (Spanish).


…and Pemex expects to receive savings due to a new pensions plan. The state-owned company estimates that it will receive MXN186bn, minus MXN50bn that were advanced in December (Spanish) (English). The government agreed to cover part of Pemex’s labor liabilities if the company modified the pension system with the union.


Four banks back the KKR fund. According to the IFR, Credit Agricole, KDB, Mizuho, and SMBC will finance the KKR fund to acquire Pemex assets that may then be leased to Pemex (Spanish). The agreement includes Pemex pipelines, platforms, plants in refineries, and a compression station (Spanish).


The Mexican Oil Fund hangs by a thread. The Mexican Oil Fund for Stabilization and Development (FMP) will receive less income than 4.7% of GDP, the threshold for generating savings, according to the executive coordinator. This is due to the structural changes observed in the international oil markets (Spanish).



Market Trends


The IMF says Mexico is moving slowly but…surely? Alejandro Werner, IMF’s director of its Western Hemisphere Department, said the positive effect of the energy reform will come more slowly than expected due to low oil prices (Spanish). His recommendation is to reduce the deficit using central bank transfers (English).


Moody’s suggested that Mexico’s rating could drop again. The rating agency warned that Mexico’s A3 qualification can be downgraded. Stagnation in fiscal consolidation and a potential increase in Pemex’s contingent liabilities can pressure for a negative rating action (Spanish). Moody’s forecasts moderate growth of 2.5% for the Mexican economy in 2016 and 2017.


BBVA Bancomer trusts Pemex and its credits… After announcing the best quarter of its history, the managing director of the Mexican BBVA subsidiary said that the bank’s close relationship with Pemex is based on trust: the company will pay its loans. Pemex has direct credits with Bancomer for 4.7% of the bank’s total credit portfolio (Spanish).


…but AT Kearney doubts Mexico’s growth. Mexico is no longer among the top ten countries the consulting firm considers inspire greatest confidence for direct foreign investment, falling from a ranking of 9 in 2015 to 18 in 2016 (Spanish). Due to the global economy, the structural reforms did not produce the expected growth.



Strategy & Operations


CFE launches a shining plan. Through CFE Solar, the state-owned company will sell and install solar panels for commercial and domestic customers (Spanish). Many companies are applying for interconnection contracts for this equipment, and the goal to derive 30% of electricity from renewable energy sources in 2021 may be raised (Spanish).


Pemex’s refineries get tidied up for sale. The state-owned company accelerated repairs of plants to increase fuel production, following last year’s fall of production to 1.07 million barrels per day. Pemex plans to close 142 units for maintenance this year (Spanish). The refineries are running annual losses of MXN100bn.


The Los Ramones Phase II may be up and running this month. Pemex, First Reserve Corp., and BlackRock are developing a pipeline which would boost natural gas deliveries from the US to Mexico by 17% to 22%  (English). The Mexican company announced that the system “may begin service” in May.


Ienova finally catches a break. After three rejected bids, the company won the tender to build the Ramal Empalme pipeline in Sonora with an offer of US$10.8m (Spanish). The CFE awarded IEnova a 25-year contract for a 20-km, 20-inch diameter, 226 MMcfd pipeline.



Lateral Thinking


Mexican students designed a Martian robot. The UNAM Space team created a robot made of aluminum and designed to explore, collect, and separate samples on Mars (English).

The students entered their invention in the Sample Return Robot Challenge, a competition hosted by the Worcester Polytechnic Institute (WPI) and the NASA.


Quote of the Week


“En circunstancias especiales, el hecho debe ser más rápido que el pensamiento.”


“In special circumstances, the act must be faster than the thought.”


  • Hernán Cortés (1485-1547), Spanish Conquistador who led the expedition that conquered the Aztecs


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