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"Mexico President Changes Energy Environmental & Economic Landscape For The Worst"​

Ron Miller's picture
Principal, Reliant Energy Solutions LLC

Ron Miller is an energy industry expert creating value by analyzing assets, markets, and power usage to identify, monetize, and implement profitable energy and emission reduction projects. He is...

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  • Feb 11, 2022
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The global community is seeing many changes in our energy mix and how we set policy to incent better outcomes for people and the environment. Government can set the tone with legislation to encourage economic and environmental improvement, or do just the opposite. The latter outcome is on full display in Mexico these days with President Andres Manuel Lopez Obrador’s (AMLO) recent constitutional reform to boost state control of the electricity market. 

The Mexico energy dilemma is three-fold: 1) the government does not want competition in the electricity market because state-owned assets that are poorly-run/maintained can't compete on an even playing field, 2) government does not want to encourage solar/wind as it competes with state-run assets to improve emissions, and 3) the CFE/Pemex connection drives actions to market high sulfur fuel oil (HSFO) for electricity generation vs. cleaner-burning natural gas to maintain the revenue base/taxes to government.  

Key discussion points: 

1.    AMLO’s proposed changes to energy market

2.    Trade agreement and rule of law violations

3.    Need for competitive energy market

4.    Environmental damage

5.    What is driving HSFO for power generation?

6.    Impact on energy prices in country

AMLO’s changes: 

The proposed changes are to: 

1.    Eliminate the Comisión Nacional de Hidrocarburos (CNH)

2.    Eliminate the Comisión Reguladora de Energía (Energy Regulatory Commission, or CRE)

3.    Give the Comisión Federal de Electricidad (CFE) 54% of the nation’s power market

4.    Put CFE in charge of setting terms for private generators

Mexico needs a competitive energy market, for electricity, refined products, and natural gas. A state takeover of the entire electricity market and the end of an independent regulator makes no sense in a developing country that needs plentiful and cheap electricity for manufacturing. But AMLO’s new law isn’t about enhancing electric power. It’s about consolidating state power, via its state-owned companies, the CFE and Petróleos Mexicanos (Pemex). 

Quoting AMLO’s statements, "We are trying to compensate for the damage caused by the so-called energy reform," his actions are both anti-competitive but also hurtful to the 129 million Mexican consumers who need reasonably-priced energy, along with following through on environmental agreements. 

“We have to have control of energy prices so that people’s finances aren’t affected and this means strengthening public companies,” AMLO has said. The changes would dial back Mexico’s historic 2013-2014 energy overhaul that opened the market to competition and ended more than 75 years of oil nationalism in the country. Ever since coming to power at the end of 2018, AMLO has promised to kill the energy reform of his predecessor, President Enrique Peña Nieto. 

The president has vowed to undo the reforms of his predecessor and prioritize the country’s embattled state-run companies Pemex and CFE, as the state utility is known. These actions are driven by the inefficiencies of both CFE and Pemex and their inability to compete on a level playing field in the Mexican energy market. 

Trade agreement and rule of law violations: 

The American Petroleum Institute, a top U.S. oil lobby, has already raised concerns about AMLO’s energy policies, arguing they undermined investor confidence and violated Mexico's trade commitments.  

The new Mexican bill violates the U.S.-Mexico-Canada Agreement, formerly NAFTA, as it abrogates contracts, strips investors of value, eliminates market-based competition, discriminates against private capital, cancels access to activities not reserved as exclusive in the agreement, and eliminates independent regulators, including in hydrocarbons.  

As evidence of AMLO’s objectives, under cover of darkness, Mexican National Guard troops sealed the front gates of the Monterra Energy fuel terminal in Tuxpan, Veracruz, in September 2021. The facility was closed by order of Mexico’s energy regulator. 

Monterra Energy is owned by the American global investment firm KKR. Its Tuxpan terminal stores gasoline imported from refineries on the U.S. Gulf Coast. The fuel is destined for service stations in Mexico, which are owned and operated by a variety of companies. 

According to the Mexican newspaper Reforma, the Tuxpan terminal is part of roughly $500 million that companies have invested in gasoline and diesel storage facilities in Mexico. This includes terminals run by IEnova, a subsidiary of San Diego-based Sempra Energy, and Indiana-based Bulkmatic. Reforma reports that both companies have had storage terminals closed recently by Mexican authorities. The arbitrary closing of private gasoline-storage facilities is a fraction of the treaty obligations on trade and investment problem. 

"The imposition of this reform would imply that the most modern, clean and efficient plants of the private sector stop operating, violating the international treaties of which Mexico is part," the Business Coordinating Council said.

Since Mexico opened its energy markets to private investment in 2014, electricity generators selling power into the grid have enjoyed dispatch of supply according to price, with more cost-efficient plants, like those using renewables, natural gas and modern technology, going first.

The bill modifies Articles 25, 27 and 28 of the Mexican Constitution. Article 27 would be amended to establish “that the strategic area of electricity belongs exclusively” to the state and consists “of generating, conducting, transforming, distributing and supplying electrical energy.” 

AMLO’s proposal cancels all power generation permits (including all pending permit requests) and power purchase agreements currently in place, as well as the non-recognition (deemed as illegal) of amended self-supply and independent power producer permits in effect before the 2013 energy reform. The president’s bill eliminates self-supply contracts, among other permits, that allow companies to generate electricity for the grid.  

Need for competitive energy market: 

The government control of Mexico’s energy market will have drastic effects for consumers as arbitrary energy price hikes will become more the norm, while at the same time discouraging foreign investment which Mexico so desperately needs and damaging the environment. 

Gabriela Siller, a Banco Base analyst, said the bill's provision giving CFE the power to cancel contracts with electricity providers could amount to a "self-inflicted wound" as power demand rises in tandem with economic recovery. 

Mexico's main business lobby said approval of the reform would "mark a point of no return," generating irreversible damage to the rule of law, the environment and to the competitiveness of the country. 

Total energy supply (TES) by source, Mexico 1990-2020 in terrajoules shown in Graph 1 has seen many changes with recent reduction in oil-fueled power and more natural gas. With AMLO’s proposed changes, Mexico may see just the opposite with significant impacts on energy costs and environmental damage. 

Graph 1 – Mexico energy supply by source 1990-2020

No alt text provided for this image

Environmental damage: 

One of the new AMLO-sponsored legislative changes is for Pemex to unload HSFO it produces onto the CFE for power generation. This is driven by the tighter sulfur content rules for HSFO, along with a declining market share for HSFO. AMLO’s changes are a financial gift to Pemex to allow it to maximize its profits (and tax revenues paid to the federal government), while greatly increasing emissions. 

HSFO emissions are 40% higher than those from the use of natural gas for electricity generation in the country. 

AMLO’s initiative destroys the wind and solar industry in Mexico which could reduce emissions and assist in complying with Paris Agreement CO2e targets. 

In addition, in 2021, the Secretary of the Environment and Natural Resources had a budget reduction of 28.07% compared to 2018. It seems that Mexico has no interest in meeting the goals of the Paris Agreement. 

AMLO's government has criticized Mexico's former strategy to transition away from more polluting and expensive fuel oil and diesel-powered electricity generation in favor of natural gas and renewable energy, suggesting Mexico should make use of its existing fuel oil plants. 

Mexico's state-owned power company CFE will, despite previous denials, seek to increase fuel-oil fired generation, according to the energy ministry's 2020-2024 development plan. 

What is driving HSFO for power generation?: 

Tighter HSFO specs 

The plan specifically links the strategy to state-owned Pemex which, following International Maritime Organization (IMO) rule changes in January 2021 that ban the use of fuel oil with more than 0.5% sulphur, is looking to offload large amounts of fuel oil in a market with few buyers. 

Pemex is struggling to find outlets for its growing HSFO production, an ill-timed side-effect of its drive to increase refining output given tighter IMO rules and constrained demand from the Covid-19 pandemic. 

Pemex's HSFO production, with 4% sulphur content, reached 201,000 b/d in the week ended 1 May 2021, its highest level since October 2020, according to the data from the Mexican energy ministry (Sener). This is up by 35% from the same week of 2019, and almost flat with the 199,000 b/d produced the prior week. 

Higher HSFO production 

Fuel oil output is booming as Pemex is on a drive to produce more refined products to reduce fuel imports. About 30% of every barrel that Pemex processes becomes fuel oil. Only three of its refineries, the 275,000 barrel per day (b/d) Cadereyta, 285,000 b/d Minatitlan and 190,000 b/d Madero have cokers that can process heavier feedstocks such as fuel oil. Because Pemex is limited in investing capital for coker units to process the HSFO into more profitable products, the excesses will continue in a declining market. 

Pemex exported about 84,000 b/d of HSFO and sold 63,000 b/d domestically in April. For domestic sales, a portion goes to domestic power generation, with fuel oil firing about 3.2% of Mexico's 70 GW of installed capacity, and 37% of capacity with natural gas. Mexico may be using roughly 30,000 b/d of fuel oil for power generation. This leaves approximately 54,000 b/d in need of a destination based on April 2021 export volumes and early May production levels. The government will seek to maximize the use of HSFO and reduce its sulfur content for use in power generation. 

Therefore, Mexico aims to boost HSFO in power generation rather than invest money in cokers or processing of the sulphur. 

Impact on energy prices in country: 

Mexico City consultant and gas expert David Rosales told NGI’s Mexico GPI that in terms of natural gas, the reform would mean “less demand from the electricity sector, fewer projects, and lower growth overall because this would put a brake on Mexico’s competitiveness.” 

The group added, “The approval of this initiative would mark a point of no return, generating irreversible damages for the rule of law, the environment, the public finances, and the competitiveness of the country.” 

The plan also lays out a series of proposals to strengthen CFE and Pemex's positions within their respective markets, despite the 2014 energy reform's premise of free competition. 

Summary: 

1.    An AMLO-led Mexico is seeing a change in direction as to how it views the rule of law in a functioning democracy for both domestic and foreign agreements

2.    Funneling more energy decision making power, without appropriate safeguards, into government agencies is a recipe for a costly, inefficient, and environmentally-damaging energy market

3.    The operational inefficiencies of Pemex and CFE will be on full display if these changes move forward, all at the expense of economic growth, increased emissions, and energy cost hardships for the Mexican public. 

I welcome your comments and questions, and the opportunity to assist you with your energy questions and concerns. You are welcome to review my previous energy articles at my LI profile. I am the principal at Reliant Energy Solutions LLC, a Professional Engineer, Certified Energy Manager, Renewable Energy Professional, and can be reached at ron@reliantenergysolutions.com . My website is: www.reliantenergysolutions.com

Copyright © February 2022 Ronald L. Miller All Rights Reserved

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