The Weekly Brief: Mexico

October 9, 2017 edition— DEA and Cheiron won Pemex’s farmouts; Iberdrola plans five renewable energy projects; and the NAFTA renegotiation may run long.





Last Week in a Minute or Less


Renewables & Electricity. Iberdrola will compete in the third electricity auction with wind and solar projects; earthquakes shook US$31m out of wind farms; and Vestas will supply Salitrillos’ turbines.


Natural Gas & Liquid Fuels. Pemex’s refining and production will be up and running in October, and IEPS recovered.


Oil & Gas Upstream. Dea Deutsche Erdoel and Cheiron won Pemex’s farmouts; debates surround CNH and CRE commissioner appointments; and Round 3 will attract US$3.8bn.


Money & Power. NAFTA negotiations may run into 2018; earthquake victims were offered a tax break; and Mexico’s businessmen would rather end NAFTA than get a bad deal.


Déjà vu all over again. Last week’s readers were particularly interested in Iberdrola’s power generation in Mexico (Spanish); the earthquakes impact on power generators (Spanish); and the new special economic zones (Spanish).



NAFTA negotiations


US demands put third round NAFTA talks at risk. US officials pushed proposals on government procurement, textiles, and fresh produce that Canada’s and Mexico’s governments would never accept (English). The trilateral statement after the third round pointed to advances in telecommunications, digital trade, good regulatory practices, and facilitation of trade and customs (English).


NAFTA negotiations may continue in 2018. Considering the complexity of the issues on the table, Mexico suggested that the NAFTA negotiations could run into 2018 (English). The deadline for a deal had been December to avoid complications with Mexico’s presidential election campaign starting in March. The next round is October 11-15.


Mexico’s businessmen would rather leave NAFTA than sign a bad deal… The Business Coordinating Council hinted it could walk out because US demands do not match the Mexican economy of today. The National Farming Board said it would be best to use WTO rules until Trump’s term is out and renegotiate afterwards (Spanish).


…and Wall Street shares that opinion. During the continuing negotiations, investor anxiety in Mexico declined, as measured by the peso’s three-month implied volatility (English). BlackRock said “NAFTA probably won’t be renegotiated after all” and believes that outcome would reduce risks.



The Road to Reform


Dea Deutsche Erdoel and Cheiron won the tender for Pemex’s farmouts. DEA Deutsche Erdoel won the onshore Ogarrio area, with a US$213.8m bonus offer to break a four-way tie (English) (Spanish). Cheiron Holdings won the Cárdenas-Mora onshore field, while no companies bid on the shallow water Ayín-Batsil field.


Round 3 will lure US$3.8bn in investment. The Energy Ministry (Sener) launched Round 3.1 which will include 35 shared production contracts. Sener is expecting the first Round 3 tender to attract at least US$3.8bn over the life of the contracts (Spanish).


Senate is accused of irregularities in making appointments to CNH and CRE. The Senate missed a September 30 deadline to name two commissioners for the Energy Regulatory Commission (CRE) and the National Hydrocarbons Commission (CNH) (Spanish). By law, President Peña Nieto will now name the commissioners from nominees proposed by the lower house.


US offshore oil and gas produces may look south. Mexico’s energy reforms could attract US offshore oil and gas producers if the US does not open its federal offshore areas for exploration and development, according to the National Ocean Industries Association (English). The US producers could seek leasing arrangements.



Political Economy


Mexico’s government tightens its belt… The federal government cut expenses by 28.2% from January through August 2017 compared to the same period in 2016 (Spanish). While the Economy Ministry reduced its spending by 48.7%, the Energy Regulatory Commission (CRE) and the National Hydrocarbons Commission (CNH) splurged, increasing expenses by 30.4% and 21.8%, respectively.


…while tax income got a boost. Tax receipts increased by 8.7% in August, year-on-year, thanks to a rise in value-added tax (VAT) revenues and a pause in the decline of the special tax on fuels (IEPS) (Spanish). The VAT increased by 22.3% annualized and the IEPS fell only by 10.3%.


The Comptroller’s Office unveiled fraud by a former Pemex employee. The Comptroller’s Office sanctioned companies connected to Maclovio Yáñez Mondragón, Pemex’s former deputy director of production in the northern region (Spanish). Using false information, Yáñez promoted four companies to win Pemex contracts.


Tax stimulus is available for earthquake victims. People who lost their housing in the September 19 earthquake could have access to flexible credit for homes and will be exempt from paying certain taxes to reactivate economic activity (Spanish). Victims of the September 7 earthquake in Oaxaca and Chiapas were also offered tax incentives (Spanish).



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Market Trends


Banxico left rates at 7%. Mexico’s central bank governor Agustin Carstens announced the decision to maintain the key rate at 7%, in line with analysts’ forecasts (English). Inflation fell in September, signaling a reversal of the trend of price hikes.


Mexico’s GDP forecast lowered to 2.1%. Analysts lowered to 2.1% the economic growth forecast for 2017 from 2.16%, according to the Banxico survey (Spanish). Analysts increased to 6.3% their forecast for inflation by the end of 2017, higher than the 6.24% previously estimated.


Pemex’s refining and production will be up and running in October. The natural disasters that hit Mexico in September caused damages that affected oil production and Pemex’s refining capacity (English) (Spanish). The company expects full recovery by October and plans to meet its annual production goal of 1.944 billion barrels on average.


The IMF is worried about high household debt. The International Monetary Fund warned that household debt has increased in recent decades and could lead to a new financial crisis and lower growth rates (English). In emerging markets, the median debt level proportional to families’ GDP reached 21% in 2016 (Spanish).



Strategy & Operations


Mexico’s government wants a piece of Talos Energy’s pie. Talos’s discovery of two billion barrels is in a deposit which extends into a Pemex bloc, prompting the government to devise a legal framework for sharing the find (English) (Spanish). Sierra Oil and Premier Oil PLC are holding off on investment pending the final decision.


Iberdrola will compete in the third electricity auction with five projects. The Spanish company is planning five power generation projects valued at US$900m to participate in the CFE’s third electricity auction (Spanish). The four photovoltaic projects plus one wind farm, combined, will generate 750MW.


Earthquakes shook US$31m out of wind farms. Foreign investors have lost US$31m after 24 days of suspended operations at 21 wind parks in the Isthmus of Tehuantepec, Oaxaca (Spanish). The National Center of Energy Control (Cenace) continues evaluating the damages to the generators.


Vestas will supply Salitrillos’ turbines. Vestas received an order to supply and install 27 turbines in the Salitrillos wind farm located in Reynosa, Tamaulipas (Spanish). Turbines will be delivered by the third quarter of 2018 and they will start operating by 2019.



Old School Social


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


The 2o FIEM is November 15-16 at Querétaro Centro de Congresos. The event has achieved ample recognition in the energy sector and has become the opportunity to take advantage of and promote clean energies in the region.



Lateral Thinking


MigrantApp will guide migrants to safety. A smartphone app named “MigrantApp” is being tested in Central America and Mexico to offer information in English, French, and Spanish on safety, health, lodging, and organizations offering assistance (English). The UN Migration Agency emphasized that the app is not a tool for circumventing immigration controls.



Quote of the Week


“Defender a la naturaleza es defender a los hombres.”


“To defend nature is to defend mankind.”


-Octavio Paz (1914-1998), Mexican poet, diplomat, and Nobel laureate for literature.




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