The Energy Reform, passed in 2014 under former President Peña Nieto, was wide in scope and encompassed both the refined fuels and electricity industries as part of its mission to attract foreign capital to invest in Mexico’s energy sector. These two markets have considerable differences when you look at the true ability to open doors for competition and attract foreign investment. It’s pretty easy to construct a gas station, buy a bulk parcel of fuels and start selling to the end consumer (some 2,000 non-Pemex branded stations are open today). On the other hand, there is no room for the duplicity of assets and competition in generating, transmitting and distributing electricity. Even in the United States, large markets may have competing marketers but are served by one system of assets while smaller regions have only one choice for an electricity provider. I frequently discuss the dire condition of the tanks, pipes, refineries and more, but the fuels market is not alone. Lack of infrastructure, feedstock and investment is shaking the electricity markets too. The story is similar. Get the latest right here.
Lack of Infrastructure
The Comision Federal de Electricidad (CFE), the Mexican state-owned operator, boasts national coverage near 99% with a majority of the uncovered population residing in communities with less than 2,500 residents. CFE is the predominant power generator and owns the majority of transmission lines and nearly four hundred thousand miles of distribution lines. But much like the refineries, pipelines, storage and distribution assets that Pemex owns on the liquids side, most of these assets are old and have witnessed years of insufficient maintenance and expansion capital.
The situation appears most dire in the Yucatan peninsula which is dependent upon a single connection to generating assets in Chiapas. Reports indicate that this line is in critical shape and any disruption would leave the nearly 75,000 square mile region in the dark. Running out of fuel at the pump for a day or two is a hiccup in the system. Shutting down an entire regions power for days, or possibly weeks, would be an economic nightmare and tragedy on a whole other scale.
Lack of Feedstock
Even if there are no blackouts, brownouts are still a real threat. The largest hydroelectric plant in Mexico is the 2,400-MW Manuel Moreno Torres in Chicoasén, Chiapas, along the Grijalva River. The CRE itself reported there will be less water available for hydroelectric plants in the summer of 2019, citing that there is 14% less liquid in the Chiapas Dams which feed the peninsular region.
Not only in the Yucatan, but across Mexico, a large majority of power generation is thermal, which includes natural gas as a key feedstock. The downward slide in production of natural gas by Pemex E&P is well documented and has created an ever-growing reliance on gas from the United States to fill the increasing void and keep the power plants running. Meanwhile, the United States is in the midst of a production boom stretching across the border from the Permian Basin through the Eagle Ford. With operators chasing crude production, they are faced with an abundance of natural gas as a by-product. Mexico is the ideal destination for these volumes but, again, there is a massive lack of infrastructure south of the border to handle the product and deliver it to the generating plants.
If Mexico cannot resolve its domestic feedstock supply issues and continues to be hindered by the lack of infrastructure available to import feedstocks from international markets, the electricity markets will face a perilous reality for residents and industrial consumers.
Lack of Investment / Available Capital
In connection with the historic lack of maintenance capital, there are reports that the existing budget is deficient by a magnitude of 5x for the distribution lines and 8x for the main transmission lines. This problem is the same as the refining space. Pemex doesn’t have the production of crude and natural gas to generate the cash to support existing drilling operations, future drilling, maintenance capital, expansion of infrastructure and the heavy tax burden it contributes to the national government. There just aren’t enough pesos to go around. Those with the purse strings are faced with tough budgetary choices and a fingers-crossed mentality that nothing terrible happens.
Of course, this is all countered by assurances by senior officials and politicians that there will be no disruptions, that there is sufficient energy for all, and that the system is not in jeopardy. Sounds like a familiar theme: “Nothing to see here. Everything is fine. Proceed as usual.” That may be true… until it isn’t.
Need help getting into the Mexican energy market? Click here to contact our international markets team.
Senior Vice President of Terminal Services