Mexico’s Energy Dilemma: Between Hydrocarbons and Renewable Resources

The new Federal Government has not given clear signs on whether or not it plans to maintain the Energy Reform enacted six years ago to facilitate the participation of private enterprises in the primary sector. Meanwhile, Pemex is facing serious financial struggles and green resources are gaining momentum and growing acceptance.

Mexico’s energy economy is managed by the State with very limited participation of private investment. Pemex is the country’s state-owned oil company, in charge of crude management, exploration, and sale, which now stands at over $86 billion a year, exceeding the GPD of some countries in the continent, such as Bolivia.

The company produced 1.76 million barrels a day, down by 8% from the same month in 2017, when production stood at 1.73 million a day.

Mexico’s economy is based on the free market with a greater focus on exports. It is the largest economy in Hispanic America, the second in Latin America, and the third in the continent, only behind United States and Brazil.

The paradox of Mexico’s energy reform is that once the market was opened to private initiative all records for fuel and petrochemical imports were shattered.

 

Politics in Mexico’s energy geopolitics

Uncertainty grows in Mexico as acting President Andrés Manuel Lopez Obrador, also known as AMLO, carries on with his intention to remove the Energy Reform enacted in December 2013 at the initiative of former president Enrique Peña Nieto. The Administration has sent confusing signs.

Indeed, a little over a month ago, AMLO offered apologies to those who supported the legal instrument that rules the sector, which is behind the current crisis in Pemex’s oil production. Following this, AMLO publicly announced his commitment to honor the contracts resulting from the oil tenders and stated that there would be no changes to the energy reform for the next three years.

Oil investment declines and imports increase

The Federal Government upholds that, after six years of the reforms that opened the energy market to private investment, all records for fuel and petrochemical imports have been broken.

According to the most recent data revealed by the Federal Superior Auditor, investments, production, and hydrocarbon refining have all declined. For its part, Banco de Mexico (Banxico) stated that these results reach historic figures that significantly affect national finances. The president concluded: “The energy reform has been a complete failure.”

The evidence mainly points to a lack of private investment in the energy sector. In a six-year term, the Peña Nieto government allocated resources for the importation of crude oil and fuels. At the same time, his discourse focused on the need to boost Mexico’s production sector with the help of the Energy Reform.

Pemex: from number three worldwide to number eight

However, it is true, and this has been confirmed by Pemex in its 2017-2021 Business Plan, that the state-owned company, for instance, went from being the world’s third-biggest oil producer to being the eighth in 2015.

Other data from expert sources suggests that just last year Mexico’s gasoline imports hit a new record, reaching 594,800 million barrels per day, up by 60.53% from the 370,500 million barrels per day recorded in 2014, the first year after the legal reform was put into practice.

With regards to the expenses, in 2018 Pemex spent $18.9 billion in gasoline imports, which is an unprecedented record, accounting for more than 90% of its annual budget.

Making a balance in terms of exploration and production, Pemex has set the goal of mitigating the severe production drop in Cantarell, the largest oil field in the country, stabilizing production, and eventually expanding the platform in a profitable, safe, and sustainable manner. By doing so, it also reaffirms the spirit of the Energy Reform, under which production and investment can increase through alliances.

As for refining activities, half of the seven refineries owned by Pemex are operating at 50% of their installed capacity. This has been attributed to the fact that the facilities were built in the 1970s, its refining mechanisms have not been adapted to processing heavy oil, which is mostly what is extracted from the Mexican subsoil.

AMLO advised to not reverse the reforms

Pemex announced it is seizing the historic opportunity presented by the Energy Reform, by being involved in gas production and transportation activities.

In recent events to discuss this matter, the leaders of energy committees, senators and representatives as well as politicians, regulators, entrepreneurs, and experts conclude that the private initiative can contribute to help AMLO achieve his goals through the Energy Reform; especially in specific issues such as increasing crude production and improving Pemex’s finances. Overall, they agree that the reform cannot be pushed back.

Armando Guadiana, Senator of Morena and president of the Senate’s Energy Committee, sustains that participation from both the national and international oil industry will be necessary in order to carry Mexico’s electric industry forward. For his part, Manuel Rodríguez, president of the Chamber of Deputies’ Energy Committee, believes that both Morena and AMLO are willing to listen to the sector’s entrepreneurs and experts and will change their views if necessary.

Likewise, international rating agencies warn that Pemex’s planned investments for this year, estimated at nearly $11 billion, are indispensable but insufficient, as it will not even serve to prevent the sustained production drop.

Alberto de la Fuente, president of the Mexican Association of Hydrocarbon Companies (Amexhi), which comprises the main companies in the sector, and managing director of Shell Mexico, believes that the government must clearly understand the message. De la Fuente assures that private oil companies have taken on the challenge of producing approximately 280,000 barrels per day in six years.

The Administration generating further doubts with thermoelectricity

Although AMLO sustains his administration intends to use renewable energies, he has been criticized for not explaining how to it plans to do so and, on the contrary, prioritizing plans to promote production and dependence on fossil fuels such as coal or gas.

This stems from the announcement of the modernization of 60 thermoelectric facilities in the country and the proposal to build a new thermoelectric plant in Morelos, all while knowing the negative impact that this sort of industrial equipment can have on the atmosphere, given their carbon dioxide and GHG emissions.

Coal promises very little

Despite the fact that Mexico has significant coal reserves, very few have been developed given the great difficulties posed by their exploitation.

The nation’s main coal fields are located in the states of Coahuila, Oaxaca, and Sonora. Neither of them presents good chances of economically exploitable sites.

Renewables Raise Hopes

The New Energy Policy for Mexico’s Welfare was a forum held in Tampico in March with the participation of Governor Francisco García Cabeza and Energy Secretary Rocío Nahle García.

Among other aspects, attendees addressed the Federal Government’s new energy policies. The discussions insisted on the great local capacity to push higher sustained development of the hydrocarbon, electricity, renewable, and technological innovation sectors. They also addressed strategies to improve the energy policy, responsible and efficient use of the resources, economic and social advances, and the reindustrialization of the nation’s energy policy.

Tamaulipas, Campeche, and Tabasco are highly important for Mexico’s energy sector. During their interventions, their representatives stressed the need for collaboration between local and national governments to promote significant energy and, therefore, economic growth with a positive impact on environmental care.

“The consolidation of Tamaulipas as Mexico’s energy state will undoubtedly contribute to the nation’s economic growth,” the governor said.

Great potential in Tamaulipas

Tamaulipas is the first Mexican state to show great potential for energy development due to its volumes non-associated natural gas and electricity production. It has oil and shale gas fields, a petrochemical industry, and the potential for renewable electricity production.

The state also has the support of 27 contracts awarded during the energy tenders organized by the National Hydrocarbons Commission, which will entail an investment of $64 billion in the medium and long term, in addition to the creation of close to 250,000 jobs. Another standout is its gas pipeline system and its proximity to the United States, which facilitates natural gas imports.

Additionally, there are six wind farms in Tamaulipas, with another six under construction. These facilities represent an overall investment of $2.4 billion and are set to generate 3,000 direct and indirect jobs.

More renewable energy on target

Only 20% of the energy generated in this country is renewable and, in light of this reality, a team of scientists discovered five hydrothermal vents with temperatures of up to 200 degrees Celsius, which translates to more than 500 MW of renewable energy that could be exploited in southern Baja California.

Furthermore, Chinese company Ginlong Technologies (Solis), which focuses on PV inverters for the residential and commercial segments, announced it will open offices in Mexico.

Cai Jixiangm, representative of this firm founded in 2005, believes that Mexico offers a great opportunity to invest in renewable power. As for distributed generation for households and businesses, he indicated that Mexico is one of the most attractive markets in the solar sector, with reports that by late 2018 nearly 85,000 solar contracts were signed in the country.

Huge wind farms

Indeed, the nation is seeing the growth of the sector with large solar facilities built under private Power Purchase Agreements (PPA).

“Projects such as the recently completed 405 MW PV plant built by Spanish company Acciona in southern Baja California sell electricity both through tenders and private PPAs,” he added.

Jixiangm also said that Mexican energy authorities hoped to reach an accumulated PV capacity of 5.4 GW by the end of 2019 by means of the three energy tenders held thus far, under which the government has awarded about 4.8 GW of solar power capacity.

Photovoltaic stations turned Mexico into a global leader in the sector after the construction of the second largest solar plant in the American continent in the state of Coahuila. This facility has 2.3 million solar panels installed on a surface covering 2,400 hectares.

In 2017, Mexico broke the record of the world’s cheapest electricity from solar power. It plans that by 2024 35% of the energy generated in the country will come from clean sources.

Nevertheless, in December 2018 the government announced the suspension of energy tenders through some of its international participants. The reasons cited included the emergence of unconscionable contracts signed by previous administrations to benefit private companies.

The nopal, a distinguished promise

Mexico also obtains significant energy yield with the use of nopal, a type of wild plant of the Cactaceae family that is indigenous to the American continent. The Zitácuaro municipality is the home of the Nopalimex plant, the first of its type and built to generate biogas and electric energy by processing this plant, also known as Opuntia.

Just like in China and Chile, this plant is the center of an innovative and ambitious project that encourages participation from producers.

Local authorities are promoting the creation of a large biogas green park that would extend from the Cutzeo Lake to Lázaro Cárdenas, alongside the highway.

Since 2007, Nopalimex has focused on producing nopal that will be converted to biogas for the automotive sector. This fuel will be sold at a cost lower than the current market price and the benefits for the state will include generating 12 million cubic meters of biogas a year, hundreds of jobs, and contributions to environmental care.

For more information, check Energía16

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