Mexico’s state-owned energy companies must shift their limited capital budgets from unprofitable business lines to segments that make money, according to a new diagnostic analysis by local think tank Instituto Mexicano para la Competitividad, aka IMCO.
For national oil company Petróleos Mexicanos, that means re-thinking its strategy to bolster the refining segment and instead investing more in oil and gas exploration and production (E&P), the company’s most profitable activity, researchers said.
For state power company Comisión Federal de Electricidad (CFE), it means pivoting from the loss-making segment of building and operating power plants to the far more lucrative segments of natural gas marketing, and electric power transmission and distribution.
“Pemex loses money in oil refining and CFE in the generation of electricity,” the authors said, adding that investments in loss-making segments by the companies are expected to total about 244.4 billion pesos ($11.2 billion) in 2020, equal to about 5.5% of the federal budget.
They noted that Pemex and CFE have a legal mandate “to generate economic value and profitability for the Mexican state as their owner,” meaning the companies should therefore focus their investments on “more profitable activities and avoid segments that generate losses.”
President Andrés Manuel López Obrador’s government, however, has expressed a different view.
The president has pledged to simultaneously ramp up production of crude oil, natural gas and refined products, while freezing bid rounds and other mechanisms for private sector E&Ps to enter the market.
The rounds, suspended since 2018, have generated some $11 billion of investment, the IMCO team said, citing figures from oil and gas trade association AMEXHI.
The impact of cancelling them should be measured not only by the opportunity cost of not developing the resources, but also by the “negative impact on the investment ecosystem at the country level,” researchers said.
The president’s stated long-term plan of ending oil exports and refining all production domestically, producing 1.8 million b/d of oil in 2020, and reaching 2.2 million b/d by 2024 are “incompatible,” researchers said. They said about 55% of the country’s crude production is heavy oil, which cannot be processed domestically without the reconfiguration of all six existing refineries.
Even if the Dos Bocas refinery under construction in Tabasco state enters operation, “it would not be enough to process this amount of crude.”
Meanwhile, the president’s hand picked director general of CFE, longtime political ally Manuel Bartlett Díaz, has said that CFE must maintain its primacy in the power generation segment no matter the cost. Bartlett opposes the independent power producer (IPP) scheme that has been in place since 1994, allowing private sector generators to build and operate plants with CFE as the offtaker under long-term power purchase agreements.
Plants operated by CFE supplied about 54% of Mexico’s power generation in 2018, versus 30% for IPPs. Bartlett has said CFE must maintain at least a 54% share of the total.
The energy ministry also has attempted, so far unsuccessfully, to push through new power market rules prioritizing CFE-operated plants in the dispatch order, regardless of generating costs.
IMCO researchers highlighted that combined-cycle thermal plants operated by IPPs have a 30% lower average unitary cost, on a per MWh basis, than similar plants operated by CFE.
Combined-cycle plants supply about 51% of Mexico’s power generation, researchers said, with natural gas as the principal fuel.
The authors pointed out that of CFE’s five power generation subsidiaries, only one, CFE Generación V, turned a profit in 2019. This is also the only generation subsidiary that doesn’t operate power plants. Instead it functions as the offtaker for the IPPs.
What’s more, CFE is planning to self-finance the construction of new combined-cycle plants and/or purchase plants operated by IPPs with profits made by its natural gas marketing subsidiary CFEnergía.
This plan, researchers said, will come at the cost of investing in CFE’s profitable transmission, distribution, and natural gas marketing segments.
Since Mexico’s 2013-2014 energy reform, CFEnergía and CFE Internacional have emerged as heavyweights in the Mexican and North American natural gas marketing segments, respectively, researchers said.
For these profits to continue growing, Mexico must take full advantage of its proximity to cheap and abundant gas reserves in the United States, and maximize the value of the growing network of cross-border pipelines, researchers said.
They noted, “the constant supply of natural gas at competitive prices is the indispensable precursor” for CFE’s combined-cycle fleet to operate at their full capacity.
Researchers also stressed the importance of ensuring the independence of federal energy regulators Comisión Nacional de Hidrocarburos (CNH) and Comisión Reguladora de Energía (CRE).
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