The Weekly Brief: Mexico


May 20, 2019 edition—Chevron’s exploration; Pemex’s financial boost; and CFE’s projects in the Bajío.




Last Week in a Minute or Less


Renewables & Electricity. CFE to invest in the Bajío; Tabasco will owe CFE no more; and uncertainty surrounds the Mexican power market.


Natural Gas & Liquid Fuels. Moody’s expects refinery construction cost overruns; and gasoline imports dropped.


Oil & Gas Upstream. Chevron gains exploration approval; the Baker Institute says Mexico’s shale is a no-go; and Pemex is looking for a deepwater fresh start.


Money & Power. S&P does not care about Pemex’s financial package; FocusEconomics kept Mexico’s GDP outlook; and the USMCA ratification gets closer.


Déjà vu all over again. Last week’s readers were particularly interested in AMLO’s clean energies goal (El Economista – Spanish); the self-sufficient energy strategy (El Financiero – Spanish); and the Golfo 1 wind park (El Financiero – Spanish).



NAFTA Negotiation


Trump finally lifted the aluminum and steel tariffs. President Trump announced the removal of the steel and aluminum tariffs imposed on Canada and Mexico a year ago (CNN – English). The goal is to boost the new NAFTA ratification in Congress (Bloomberg – English) and ease trade tensions.


Trump backers seek support for USMCA. A nonprofit group supporting President Trump’s re-election bid is organizing a tour in key battleground states to garner public approval for Trump’s NAFTA rewrite (Bloomberg – English).


Business groups are encouraging Democrats to pass the USMCA. Automakers, oil drillers, and retailers are investing in a lobbying blitz to salvage the new NAFTA (Bloomberg – English). The business groups are even using former Democrat lawmakers to push for the ratification.


Democrats may be up for ratification after all. Nancy Pelosi met US Trade Representative Robert Lighthizer to discuss the updates to NAFTA and the trade war with China (CNBC – English). After the meeting, the House Speaker and Democratic leaders were optimistic they will ratify the new NAFTA as Lighthizer is making an effort to address their concerns (Politico – English).


Joe Biden may be in an uncomfortable position regarding NAFTA. Joe Biden is considered the Democratic front-runner in the Upper Midwest due to his good relations with labor leaders. However, his support of NAFTA and the TPP could impact his chances due to the effect of trade deals on job losses (Bloomberg- English).



The Road to Reform


Mexico’s Energy Secretary appealed to rating agencies after Dos Bocas… Rocio Nahle called for “fairness and responsible evaluations” (Reforma – Spanish) for Pemex amid widespread skepticism as the Mexican government decided to go ahead with the Dos Bocas refinery (Reuters – English; El Financiero – Spanish).


…and Moody’s expects the refinery to be over budget. The credit rating agency estimates the Dos Bocas refinery will cost between US$2bn and US$4bn more than government estimates (Reuters – English) (El Financiero – Spanish). The reason is the government’s and Pemex’s lack of experience in building refineries.


The Baker Institute says Mexico’s shale is a no-go. Despite President López Obrador’s campaign promise to ban shale gas development, Baker Institute researchers found that limited water access and a lack of infrastructure could stall hydraulic fracturing in Mexico anyway (OGJ – English).


Pemex is carrying the upstream burden on its shoulders. With the cancellation of rounds for three years and of farmouts, the state-owned company has to increase production without joint venture capital or private participation. Analysts estimate Pemex requires an investment of US$8bn to stabilize production (Petroleum Economist – English).



Political Economy


The Mexican government cut Pemex some (financial) slack… Measures included the announcement of two extended credit lines for up to US$5.5 billion with the Mexican government acting as guarantor, US$2.5 billion in debt refinancing, and a gradual tax bill reduction (Reuters – English). AMLO aims to reduce market fears amid uncertainty over the Dos Bocas project.


…and AMLO considers it a peace offering to rating agencies. President López Obrador expects rating agencies to take into account the plan to refinance Pemex (El Financiero – Spanish). AMLO signed the deal with HSBC, J.P. Morgan, and Mizuho Securities.


Tabasco will owe CFE no more. Tabasco reached an agreement with the state-owned company to end its historic debt of MXN11bn (El Financiero – Spanish). The state will have the IF tariff, the lowest in Mexico, after proving that temperatures remain above 33 Celsius all year long.


Moody’s is concerned with Mexico’s public finances. Moody’s pointed to the mixed messages sent by President López Obrador and members of the administration; the constant changes and disagreements do not correspond to the clarity and reliability of countries with an A3 rating (El Economista – Spanish).


FocusEconomics maintained Mexico’s GDP outlook. Among the 42 consulting companies and banks consulted by FocusEconomics, Mexico’s GDP growth was maintained at 1.7% for 2019 and 1.9% for 2020 (El Economista – Spanish). The stability is explained by the expectation of a quick USMCA ratification.



Market Trends


The Dos Bocas project garners fresh doubts. The CCE president called for a cost-benefit analysis (El Financiero – Spanish) while Eurasia Group believes there is a high chance that the project will never be completed (El Financiero – Spanish). Some analysts and investors questioned the effect on Mexico’s sovereign debt (El Financiero – Spanish).


S&P does not care about Pemex’s financial package. A sector specialist at Standard & Poor’s said both President López Obrador’s announcement of measures to help Pemex’s debt and credit lines and the government’s decision on the Dos Bocas’ refinery are neutral to Mexico’s sovereign rating and to Pemex’s (Reuters – English) (El Financiero – Spanish).


Gasoline imports dropped, a first in two years. The volume of gasoline imports fell 16% thanks to a 7.9% drop in demand and a 17% cut in import prices in the first quarter of 2019 (El Economista – Spanish). The value of imports surpassed fuel exports, with a deficit of US$4.8bn.


With the new fiscal plan, Pemex could increase production. The Finance Ministry said the additional fiscal relief granted to Pemex to increase production in mature oil fields could add up to an additional 400,000 barrels per day from these areas (Platts – English).



Strategy & Operations


Chevron gains exploration approval. The National Hydrocarbons Commission (CNH) granted Chevron permission to go ahead with its exploration plans as it aims for its first deepwater well in Mexico by 2021 (Platts – English). Part of a block awarded in Round 2.4, the exploration targets are located in ultradeep waters in the Salinas Basin.


Pemex is looking for a deepwater fresh start. The Mexican state oil company is evaluating a potential return to deepwater, a senior executive revealed at the Offshore Technology Conference in Houston. It was also revealed that Pemex might ask the Mexican government for direct assignation of the promising Pit-Kiyab shallow water oil fields (Platts – English).


Uncertainty surrounds the Mexican power market. Private companies are considering the changes brought by the new administration into the power market and weighing the risks of investing in Mexico (RTO Insider – English). The companies mentioned the canceled power auctions and the reconstitution of the state-run electric business as some of the changes.


CFE to invest in the Bajío. The electrical company is committing to MXN$600 million in improvements for 2019 in order to satisfy growing industrial demand in Querétaro (El Financiero – Spanish). The heavily industrialized Bajío state is increasing its electrical energy consumption by 6% per year, and new power stations are needed to cope (El Economista – Spanish).



Old School Social


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



MIREC Week is scheduled for May 20-22 at the World Trade Center in Mexico City.


P&E Day 2019 will be held May 22 at Expo Santa Fé in Mexico City.


XXVIII La Jolla Energy Conference will be held May 22-23 in La Jolla, California.


The 5th Mexico Gas Summit is scheduled for May 29-30 at the Marriott Riverwalk in San Antonio, Texas.



Lateral Thinking


Scientists discourage octopus farming. Scientists are concerned with octopus farming due to the nitrogen and phosphorus pollution and the high demands of the octopus’ diet on wild fish (Science Alert – English). Mexico and Japan have developed programs for octopus farms that researchers hope will be stopped by these results.



Quote of the Week


“Sólo merece llamarse hombre el que sabe y puede y quiere ayudar al hombre.”


“The only man who deserves the name is the one who knows, can, and wants to help men.”



– Jaime Torres Bodet (1902-1974), Mexican politician and writer.



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