The Weekly Brief: Mexico


November 19, 2018 edition—Zepeda moves on; the fourth power auction competition; and USMCA’s changes.




Last Week in a Minute or Less


Renewables & Electricity. Six will fight over the fourth power auction; DeAcero and Fisterra Energy will power up Guanajuato; and the CFE expects power costs to drop.


Natural Gas & Liquid Fuels. Mexico imported more crude to help Tula’s refinery; the Sener promises a “serious” bidding for the new refinery; and Koch will import gasoline by May 2019.


Oil & Gas Upstream. The head of the CNH quit; Tonalli drilled in the Tampico-Misantla basin well; and Mexico may become an oil production leader.


Money & Power. Key Democrats will pass the USMCA with changes; inflation is expected to rise; and the IMF lowered Mexico’s GDP outlook for 2019.


Déjà vu all over again. Last week’s readers were particularly interested in CFE’s development plans (DOF – Spanish); Cox Energy’s investment (El Financiero – Spanish); and AMLO’s next power auction (Reforma – Spanish).



NAFTA Negotiation


Key Democrats will pass USMCA only with changes. New Jersey Representative Bill Pascrell said there would have to be “changes in the legislation” and in the enforcement (Bloomberg – English). The Democrats would not require a major rewrite of the deal, but rather stronger “enforcement mechanisms,” especially over environmental and labor rules.


Canada, Mexico, and the US will sign the trade deal by November 30… According to Mexico’s economy minister, cabinet ministers from Canada, Mexico, and the US will sign the new trade agreement on November 30 in Buenos Aires, Argentina (Reuters – English). The signing will be done at the G20 international forum.


…but the aluminum tariffs may not be solved by then. High level negotiations to eliminate the US tariffs on aluminum and steel imports continue, but may not be agreed upon before November 30 (El Economista – Spanish).


Canada is not worried about the US vote. Canada is not concerned over the trade deal after the Democratic victory in the US midterm elections (Reuters – English). Andrew Leslie, parliamentary secretary to Canadian Foreign Minister Chrystia Freeland, expects the trade deal to be ratified in the early spring of 2019.


The US-Mexico Business Council plans to maintain a dialogue. After the US midterms and a month away from President-elect López Obrador taking power, the US-Mexico Business Council met for the second time in 2018, and government representatives and private companies requested to maintain the bilateral relation built even after the political changes in both countries (El Economista – Spanish).



The Road to Reform


The CRE will launch a month-ahead gas index in 2019. The Energy Regulatory Commission (CRE) plans to publish month-ahead natural gas forward prices for Mexico’s domestic market by next year (Platts – English). The CRE expects trade liquidity in 2019 will be sufficient for the publication of both forward and next-day gas price indexes.


Six will fight over the fourth power auction. Six companies will compete for more than 30% of the energy needed by CFE (El Economista – Spanish). The volume of energy required in the fourth auction was reduced by 14%, with a 32% reduction in the maximum price paid for power.


The CFE expects power costs to drop. The general director of CFE Calificados expects power prices to fall by 30% if renewable projects, which could add 15,000MW, start operating (El Financiero – Spanish). The challenge would be to transfer those savings to the final consumers, depending on the tariff design.


The Sener promises a “serious” bidding for the new refinery. The next Energy Minister offered a serious bidding for the construction of a new refinery in Tabasco (El Financiero – Spanish). The companies that could compete would have to prove previous experience in that type of construction and abide by the terms of the bidding.


The CRE set the rules for power gas stations and sales between private users. The Energy Regulatory Commission (CRE) approved the rules for power sales between private users that could boost power gas stations in Mexico (Forbes – Spanish). Renewable energy generators could develop charging stations (El Financiero – Spanish) through the use of natural resources.


The CNH’s head quit, but the CRE’s will stay until 2023. Juan Carlos Zepeda Molina will abandon his position as the head of the National Hydrocarbons Commission (CNH) in December, six months before his expected departure (El Financiero – Spanish) (Platts – English). Guillermo García Alcocer confirmed he will continue leading the Energy Regulatory Commission (CRE) until 2023 (El Economista – Spanish).



Political Economy


AMLO plans a second refinery. President-elect López Obrador does not rule out the construction of a second refinery in Atasta, Ciudad del Carmen, in Campeche (Reforma- Spanish). The International Monetary Fund (IMF) recommended an improvement in Pemex’s financial position before investing in new refineries (Reuters – English).


Pemex may be experiencing a brain drain. Some managers and senior staff members at the state-owned company have already left or are expected to do so in the next weeks, fearing wage cuts and limited access to promotions over outsiders brought in by the new government (Bloomberg – English).


Inflation is expected to rise. Inflation hit the brakes in October, settling at 4.9% (El Economista – Spanish). Analysts expect inflation to increase, getting further away from Banxico’s goal of 3% (El Financiero – Spanish).


AMLO calmed the market over banking laws. President-elect López Obrador will not support a bill proposed to limit bank commissions (Reuters – English). The proposed bill shocked the market, sinking it to its lowest level in more than two years.


The fall in fuel prices may hit the 2019 budget. World oil prices fell by 20% and the lost revenue could reduce the new government’s budget for 2019 (El Financiero – Spanish). The new administration would have to adopt more conservative criteria for oil prices in the 2019 budget.



Market Trends


Banxico finally increased the interest rate. Mexico’s central bank raised the interest rate to 8% due to the cancellation of the airport and the policy uncertainty surrounding the new administration (Bloomberg – English) (El Financiero – Spanish). The increase left the rate close to the historic maximum of 8.25% in 2008.


The IMF lowered Mexico’s GDP outlook for 2019. The International Monetary Fund (IMF) said Mexico’s economy will continue growing (IMF – English) despite the uncertainty brought by the presidential elections and the NAFTA renegotiation. The outlook for 2019 economic growth was cut from 2.5% to 2.3% (El Financiero – Spanish).


Mexico imported more crude to help Tula. Pemex imported light crude to increase the operating levels at the Tula refinery, pushing Pemex’s processing level to 565,000 b/d (Platts – English) (Platts – English). The recovery came ahead of Mexico’s peak driving season in December.


Winter is coming…with higher gas prices. US natural gas prices rose 18% as winter gets closer and concern over storage levels grew (Forbes – English) (Financial Times – English). Mexico’s high dependence on US natural gas brought concern to the Nuevo León energy cluster (El Financiero – Spanish) over a possible increase in power tariffs in the next months.


FDI fell 28% in the quarter after the election. During the third quarter, foreign direct investment fell 28% compared with July-September of 2017 (El Economista – Spanish). Mexico received US$24.1bn in foreign direct investment from January to September 2018, an 11.1% increase compared to the same period in 2017.



Strategy & Operations


Koch will import gasoline by May 2019. Koch will import regular gasoline in May 2019 and premium gasoline in October 2019 (Forbes – Spanish). The goal is to reach a capacity of 500,000 barrels and a daily flow of 30,000 barrels per day by October 2019.


DeAcero and Fisterra Energy will power up Guanajuato. DeAcero signed an agreement with Fisterra Energy to provide 250MW to DeAcero for 20 years (El Financiero – Spanish). The new combined-cycle plant, named Energía de Celaya, will be powered by gas and will have a total capacity of 1,350MW.


Renewables may be the answer for high power tariffs. HR Ratings stated that the slow incorporation of renewables in Mexico doubles its power prices compared to US rates (El Financiero – Spanish). According to Enlight México, the use of solar energy has grown by 60% because of high power tariffs (Reforma – Spanish).


Tonalli drilled the Tampico-Misantla basin well. Tonalli Energia has drilled the first conventional horizontal well on its onshore Tecolutla block (OGJ – English). The well is the first in a plan to develop the northern extension of Tecolutla oil field in Veracruz.


Mexico may become an oil production leader. According to McKinsey, in less than 20 years Mexico could be the leader in production growth in deep waters and shale projects (Pulso Energético – Spanish). Mexico could produce an additional 1.4 million daily barrels of oil by 2035.



Old School Social


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


Cogeneration Day México 2018 is scheduled for November 29 at the Sheraton María Isabel Hotel in Mexico City.


The S&P Global Platts Americas LNG Market Dynamics Webinar will be held December 5.


Energy Mexico 2019 will be held January 29-31 at Centro Cultural Banamex in Mexico City.



Lateral Thinking


A woman archaeologist helped to clean the Aztec image. In 1884, the Mexican-American archaeologist Zelia Nuttall studied terracotta heads found in Teotihuacan that were created by Aztecs around the time of the Spanish Conquest. She determined that they were portraits of individuals representing the dead (Smithsonian – English). Her research won her an honorary special assistant position in Mexican archaeology at Harvard’s Peabody Museum.



Quote of the Week


“La poesía debe asaltar todas las manifestaciones artísticas que pretendan ser memorables.”


“Poetry must strike all the artistic manifestations that pretend to be memorable.”


– Fernando del Paso (1935-2018), Mexican novelist, essayist, and poet.



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