The Weekly Brief: Mexico


May 14, 2018 edition—NAFTA’s strains; Round 2.4 signed; and Enel’s capacity.




Last Week in a Minute or Less


Renewables & Electricity. Natural gas combined cycle technology is in demand; Acciona finished the Empalme II plant’s transmission line; and Enel will expand its capacity by 10%.


Natural Gas & Liquid Fuels. New refineries could be a good business; Pemex could start swapping for lighter crude in the second semester; and airlines want to cut costs by freeing the jet fuel market.


Oil & Gas Upstream. Round 2.4 contracts were signed; Pemex drilled only 6 wells out of 128; and Mexico’s oil production dropped again.


Money & Power. NAFTA talks continue with rules of origin as the main debate; low inflation is expected; and Mexico’s presidential candidates have different approaches to the energy sector.


Déjà vu all over again. Last week’s readers were particularly interested in Pemex’s production (Platts – English); AMLO’s respect for the NAFTA deal (WSJ – English); and the attack on Pemex’s employees (El Universal – Spanish).



NAFTA Negotiation


Mexico’s counteroffer for rules of origin: 70%. Mexico presented ideas on auto parts: 70% North American content and a 10-year adjustment period (CTV News – English) (Excelsior – Spanish). A Mexico-US meeting to resolve differences delayed Canada’s Foreign Affairs Minister Chrystia Freeland’s latest encounter with Robert Lighthizer by a day.


Everyone wants a NAFTA deal in May, but it won’t be easy. Negotiators from the three nations met again to attempt to reach a deal. US Trade Representative Robert Lighthizer did not show signs of softening on proposals (Bloomberg – English), while Canada and Mexico have pledged to stand their ground.


Negotiators fear a “zombie” deal. Senior Canadian, US, and Mexican officials will work on rules of origin, a dispute-resolution mechanism, and a sunset clause “as long as necessary.” Guajardo said he wanted “to make the best possible effort to try to land a complete deal” to avoid uncertainty for investors (Reuters – English) with a “zombie NAFTA.”



The Road to Reform


Round 2.4 contracts were signed. The National Hydrocarbons Commission (CNH) and 11 winners signed 19 contracts (El Economista – Spanish) from Round 2.4 to explore and extract hydrocarbons in deep water fields (4-Traders – English). The round could add 74,000 barrels per day by 2033 (Forbes – Spanish), 230,000 jobs, and US$9bn in investments if successful.


Pemex fell behind on exploration…again. The state-owned company has drilled six exploratory wells in 2018, far from the goal to drill 128 wells in the extension offered by the National Hydrocarbons Commission (CNH). Pemex has only requested authorization for 29 wells (El Economista – Spanish) and 27 have been approved by the CNH.


The CRE had to make harsh decisions. The Energy Regulatory Commission (CRE) fined Pemex MXN8m for selling low-quality gasoline (Reforma – Spanish) and okayed the first permit to distribute LP gas with tank trucks (Reforma – Spanish). The continuing debate between CRE and CFE over net billing has slowed growth of rooftop solar panels (El Economista – Spanish).


Pemex almost secures a partner in Tula. The state-owned company said it was close to securing a partner for a coking unit (Mural – Spanish) at the Tula refinery. Pemex said 65 companies were interested and negotiations started with one.


Fuel storage will be increased. Fuel storage that today equates to three days of demand will increase in the next seven years to 13 days (Reforma – Spanish). According to the Hydrocarbons Deputy Minister, that amount would still be low for international levels.



Political Economy


Low inflation is expected. Banamex, Santander, and Banorte forecasted an inflation drop of 0.31%, 0.31%, and 0.30%, respectively, due to the fall in power tariffs (El Economista – Spanish) and the cut in some farm product prices. Annual inflation would drop below 5% for the first time since February 2017, continuing the drop for four months in a row.


Mexico’s presidential candidates have different proposals for the energy sector. UBS said that reviewing the energy contracts, as AMLO suggested, could ensure transparency (El Economista – Spanish) and does not menace the economy. The PRI presidential candidate pledged his goal would be for Pemex to produce 3 million barrels per day again (Reforma – Spanish).


New refineries could be a sweet deal. Specialists recommended that the private sector construct new refineries with capacity for 20,000 to 100,000 daily barrels (El Universal – Spanish) that could be operational in two or three years. The construction would cost between US$600m and US$900m, and hydrocarbon demand would keep increasing until 2030 or 2040.


Pemex could start crude swaps in the second semester. The state-owned company could start swapping heavy crude for light imported oil in the second half of the year (Reuters – English) to increase the quality of the fuel produced (El Economista – Spanish). Pemex plans to access lighter crude for its refineries that today work at 48% capacity.



Market Trends


Mexico’s oil production dropped… again. Pemex produced 1.864 million barrels per day of crude in March, a 7.6% annual decline and 1.6% below February’s levels (El Economista – Spanish). The biggest monthly drop occurred in Cantarell, which used to produce 2 million barrels per day, and where production reached 159,262 barrels per day in March.


Prodemex fixed Fibra E prices. The construction company placed the Fibra E bond in a price range of 18.5 and 21.5 pesos (El Economista – Spanish), which is listed on the Mexican Stock Exchange. The goal was to raise MXN7.4bn by putting 377 million investment certificates in energy and infrastructure up for sale.


Airlines want to free the jet fuel market. The National Chamber of Air Transport is looking to free Mexico’s jet fuel prices. Refilling fuel in the Mexico City airport represents between 20% and 30% of airline costs (El Financiero – Spanish), the highest of their expenses.


Gasoline prices skyrocketed and the government came to the rescue. The price for premium gasoline passed 20 pesos per liter (El Economista – Spanish) in Aguascalientes, Baja California, Baja California Sur Jalisco, Mexico City, Nayarit, and Zacatecas. The Finance Ministry increased the tax stimulus for gasoline to 60% (El Financiero – Spanish).



Strategy & Operations


Acciona connected the Empalme II plant with Sonora. Acciona finished up the construction of the transmission line transporting power from the Empalme II combined-cycle plant to the state of Sonora (El Financiero – Spanish) (Acciona – English). The new infrastructure totals 117 kilometers of transmission lines with 400kV voltage and four substations (El Economista – Spanish).


Enel will grow its capacity. After signing an agreement with CFE, Enel will invest US$97m to expand the capacity of two wind parks and one solar farm (El Economista – Spanish) by 10%. The expansions reinforce the goal to fulfill commitments set in the first two long-term auctions (Notimex – English).


Investment needed in natural gas combined-cycle technology. According to the Mexican Energy Association (AME), natural gas-fired, combined-cycle technology will grow 2% annually (El Economista – Spanish). The association expects investments between US$1bn and US$2bn.


Mexico wants to generate power from trash. Mexican citizens on social media demanded the use of waste to generate power. Mexico City generates 53.1 million tons of waste per year, and every day the government spends MXN3m (El Financiero – Spanish) to move 8,600 tons of waste to landfills.


Siemens plans to close its gas division. Weakness in the power generation market forced Siemens to temporarily close its Power & Gas division worldwide to cut costs (Power Mag – English) (El Economista – Spanish). The German company will develop a package of measures, including reducing “travel costs, sponsoring, and participation in trade fairs and investments.”



Old School Social


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



NAWTEC 2018 will be held May 14-16 in Lancaster, Pennsylvania.


The 3rd Annual Mexico Electric Power Market Conference is scheduled for May 16 at the Presidente InterContinental in Mexico City.


MIREC will be held May 21-24 at the World Trade Center in Mexico City.


The La Joya Energy Conference is scheduled for May 23-24 at the Hilton La Jolla in California.



Lateral Thinking


Thanks to solar energy, Kanchi Gómez won the Adolf Horn Prize. Yusef Julián Kanchi Gómez won the 11th Adolf Horn Prize for the Young Businessmen of the Year thanks to a solar panel distribution project (Reforma – Spanish). The project started six years ago, with three college students who wanted to be leaders in renewable energy distribution.



Quote of the Week


“La dedicación de las ciencias, las letras y las artes, participa de cierta condición de heroísmo y es levadura del saber, la sensibilidad y la conciencia del pueblo.”


“Devotion to sciences, literature, and arts shares some heroic condition and raises knowledge, sensibility, and awareness among people.”


– Agustín Yáñez (1904-1980), Mexican novelist and politician.


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