We’re Off and Running… Sort of

With the inauguration of President López Obrador’s behind us, the first two weeks have not been lacking in energy related headlines. Get the latest right here.

 

Halt on Progress

Before taking office, the new President had said he would have to suspend future oil auctions pending a review of over 100 contracts already awarded, but had not shared what would become of the auctions slated for February 2019.

On Saturday, President Andres Manuel Lopez Obrador’s newly appointed energy secretary, Norma Rocio Nahle, announced that Mexico will cancel the two February bidding rounds for oil and gas blocks. Together, they would have auctioned off 46 oil and gas blocks, including Mexico’s first shale areas to be offered to private and foreign oil companies.

While it is expected that existing investments and contracts will be respected, Nahle has gone as far as to indicate that ALL auctions will be canceled until 2021. This puts enormous responsibility on Pemex to spend money drilling and to be highly effective in finding oil with the “limited” budget that will be allocated. If Mexico is going to go-it-alone, they better get results.

Actions speak louder than words, but true to his campaign promises, AMLO is taking steps in favor of Pemex and deterring the hoards of foreign investors lined up to invest in the energy sector in Mexico.

 

Stop on Pipelines

In more discouraging news, TransCanada has pushed back the targeted completion dates of its under construction—and already delayed—Tuxpan-Tula and Tula-Villa de Reyes natural gas pipeline projects because of a stalemate with local authorities along the prospective routes.

Work has ceased on both pipelines in the State of Hidalgo. Problems have continued with negotiations amongst indigenous peoples along specific areas of the route. Ongoing allegations of extortion and irregular payment demands by Hidalgo officials led to TransCanada ultimately deciding to stop work.

TransCanada said, “Given the circumstances that prevail in the state of Hidalgo, our two projects altogether have exceeded the estimated construction time by over 56 months and the costs associated to these delays. Our work continues in both projects in other regions as we evaluate our options regarding the current route through the state of Hidalgo.”

The delays and cost overruns are clearly a bad signal to potential infrastructure investors. To compound the problem, TransCanada has been receiving fixed capacity payments for both Tuxpan-Tula and Tula-Villa de Reyes since the first quarter of 2018 under a force majeure clause from the pipelines’ anchor customer, the Federal Electric Commission, or CFE. Mexico is cash strapped, and yet they are paying for delivery of volumes that aren’t flowing. Yikes!

The revised completion targets for Villa de Reyes and Tula fall in the second half of 2019 and 2020, respectively. Stay tuned.

 

Full Steam Ahead

At an event in Dos Bocas Port last Sunday, in his home state of Tabasco, AMLO announced plans to start awarding the construction of its seventh refinery as soon as March 2019.

With a lot of federal land covering 566 hectares ready for the new plant, it will have a crude processing capacity of 340,000 barrels a day, making it Mexico’s biggest refinery. The refinery will include 17 processing plants, 93 storage tanks, and will connect to the Dos Bocas maritime terminal. A pipeline will be built joining the refinery to the port.

On top of the (estimated) $8 billion investment in the new processing facility at Dos Bocas, “Lopez Obrador said the government will increase Pemex’s budget by 75 billion pesos (almost $4 billion) for 2019 to proceed with an overhaul of the six existing refineries. AMLO’s objective is to bring gasoline production up to 600,000 barrels a day by mid-2020. In October, Pemex produced 171,700 barrels a day of gasoline,” according to Bloomberg.

This supply-demand inbalance was filled primarily with exports from the United States.

Also in the plan, the Salamanca refinery will undergo work in order to bring capacity to 75 percent by the end of 2019. Pemex will also replace an FCC unit and repair the Mina 1 unit at the Minatitlan refinery to increase capacity by the middle of next year. The Madero plant has gone through extensive maintenance this year and will be operating again in January.

Cadereyta and Salina Cruz will also require extensive maintenance and Salina Cruz will be expected to reach a 70 percent capacity by December 2019. At Tula, where a joint-venture for a coker unit has yet to be finalized, the government will restart the H-Oil unit.

I’ve said it before, but this is an extremely ambitous plan. Under the best of conditions, refinery maintenance and upgrade projects take time—lots of time. They also take pesos. Lots and lots of pesos. Also underappreciated is the tremendous number of skilled labor required to take on all these projects. There are only so many equipment providers and tradesmen capable of delivering the goods.

So I’ll be extremely interested in seeing how AMLO executes this plan.

Inspired to jump into the Mexican market? Click here to contact our international markets team.

Best,

Chad Smith
Senior Vice President of Terminal Services