Sheky Espejo, Platts S&P Global

MEXICO CITY
EnergiesNet.com 11 27 2023

Mexico has many challenges in terms of energy, but the main concern for the next government should be to address the financial losses at the state oil and gas company Pemex and its declining production, as they threaten to hurt public finances and the country’s credit rating, according to Rosanety Barrios, the newly appointed energy advisor to Xóchitl Gálvez, the main opposition candidate for the upcoming presidential elections of 2024.

Mexico also needs to join the energy transition and increase the share of renewables in its power matrix if it wants to really take advantage of the wave of investment that nearshoring will bring, Barrios told S&P Global Commodity Insights on Nov. 23.

Barrios was chosen to advise Gálvez, the candidate of Mexico’s opposition coalition Frente Amplio, which is in second place in the opinion polls ahead of the June 2 presidential election. Her position has not been announced publicly. Gálvez, a senator, will face former Mexico City mayor Claudia Sheinbaum, from the ruling Morena party, which leads in preferences.

To increase clean generation and crude production, the next government must utilize the mechanisms enshrined in the constitution like the oil rounds and long-term power auctions, which are still in place despite efforts by the current government to eliminate them, Barrios said. According to official figures, last year 28.7% of the energy produced in the country came from clean sources, such as wind, solar or hydroelectric technologies. A 15-year decline in crude production was contained in 2019 and output stabilized at roughly 1.6 million b/d. It has remained at that level ever since.

During the administration of former President Enrique Peña Nieto, Mexico approved constitutional reforms that liberalized the upstream, gas and power markets. However, in 2018 President Andrés Manuel López Obrador ended efforts organized under the new market rules. Barrios believes the government needs to utilize these tools.

The oil rounds created by the liberalization resulted in over 100 contracts in the hands of around 20 companies, including Pemex, data from the National Hydrocarbons Commission, or CNH show. Over 270,000 b/d of crude are currently produced under these contracts, of which roughly 100,000 b/d are produced by private companies. Also, the power auctions allowed the construction of 7.4 GW of wind and 7 GW of solar installed capacity in the country.

Pemex hurdles

Pemex is probably the hardest challenge of the next administration. It is highly indebted and can barely pay its suppliers, its refining business loses money, and its crude production is falling, but it has been forced to increase operations for political reasons, Barrios noted.

“The first thing to do is stop the bleeding, and Pemex bleeds the most from its refineries,” Barrios said, adding that the company needs to reduce its output to a level where it is profitable.

In upstream, the government needs to realize that resources are limited and that it makes sense to allow private companies to share the risk, she said.

Since 2015, private companies have invested roughly $10 billion in exploration in Mexico, compared with $15.5 billion from Pemex in the same period, CNH data shows. The government has received $8.9 billion in royalties.

Clean energy

According to Barrios, Mexico produces roughly 75% of its electricity using fossil fuels; 60% is gas and the rest is fuel oil and coal. In her opinion, the 60% could continue, as they are supplied by the cheap natural gas that Mexico imports from the US, but in order to reduce emissions the country could eliminate the power plants that use fuel oil and coal.

The gas that Mexico imports can serve the needs of the industry, as it grows with the investments resulting of nearshoring opportunities. But to change its energy matrix, the country should try to cover all additional demand with clean sources, mainly solar energy, Barrios said.

“Mexico is very rich in many resources, but one we have in abundance is sun,” we should make use of it, she added.

Barrios believes that clean energy projects can be sought using the scheme of long-term auctions.

spglobal.com 11 27 2023