Listen: Mexico’s energy future hinges on election outcome

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Jeff Mower:
Hello and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights, where we will be discussing Mexico's upcoming presidential election and what that means for the country's energy sector.
I'm Jeff Mower, director of America's Oil News and with me is Sheky Espejo who covers all things Mexico energy from Mexico City. Mexico's presidential candidates have finished their campaigns ahead of the June 2nd vote. The election comes at a time of falling crude production. When the current president Lopez Obrador came into office, his plan was to boost crude output to 3 million barrels a day while limiting private sector activity of Mexico's upstream.
Now crude output has since fallen to 1.5 million barrels a day in April. That's the lowest level in 40 years. Claudia Sheinbaum, who is running on Lopez Obrador's Morena party is currently leading in the polls ahead of her opponent, Xochitl Galvez. Does that mean if Sheinbaum wins we will see a continuation of Lopez Obrador's policy? What do you think Sheky? I mean we're hearing it, as far as what you've been hearing so far, it looks like it will be a continuation, although some doubts are being thrown on those expectations.

Sheky Espejo:
Yeah, I think there have been a lot of expectations that Claudia Sheinbaum could make a different change in the policy. She has been under his wing for a long time. He's been her mentor, you would say. She grew up under his figure and he got her to become mayor of Mexico City, which was her previous position. So it is hard to see how she could make a radical change from him. She has promised the continuity and because of some basic fundamental reasons of his policy, which are bringing wealth and prosperity to everyone and not just the few, not just the rich. So under that premise, I think it has been hard for her to distance herself from him. But there are people, as you say, who are hopeful that reality could make her change. But production has fallen below 1.5 million barrels a day in April the lowest since before 1980. So that in itself could be a reason for her to make a policy change. At least that's what people hope.

Jeff Mower:
So the producers hope it, right? I mean when it comes to something like Mexican crude production, to be fair to Lopez Obrador, at first, he promised the 3 million barrels a day and then he that to something like two and a half or 2 million barrels a day. I guess what I'm curious about is how important is it for the Morena party to grow production or do they simply have other priorities? Do they want to transition to cleaner fuels? Is that a more important priority to them?

Sheky Espejo:
That's funny. Both candidates have promised transition and they have both promised to make investments in clean technologies. Obviously, Xochitl Galvez has been more upfront and more blunt about those promises. She's promised to have 50% of the country's generation from clean sources by 2030. It's a very bold goal. Sheinbaum has been a little bit more conservative in her strategy. That she will continue to focus on Pemex and strengthen the state utility companies. And she said that the way she could help Pemex transition into the new centric would be to help it enter into clean fuels like biodiesel and also get into modern fuels like green hydrogen. It's not clear how she would do that, but that's what she's promised.
You have to also consider that the focus in this administration has been to be independent in fuels. So becoming independent in fuels, at least in this administration, has meant to keep up production of at least 1.8 million barrels of liquids including condensates to feed the refineries. As long as that continues to be the need and the use in Mexico, it's not clear how you could do without that production.

Jeff Mower:
Are they maintaining that level with condensate? So we talk about 1.5 million barrels a day.

Sheky Espejo:
Close to that. They're at 1.7 including condensates. So that's 1.5 million barrels of crude and around 200,000 barrels of condensate, it's two point, 150,000 barrels of condensates.

Jeff Mower:
And maybe a bit of background. I know a while ago where we were talking about the auctions that were initially supposed to have been held. The industry was being liberalized when Lopez Obrador came into office. And there were what, four auctions that were supposed to be held, but they were canceled once he came into office. I think the original idea was just to reevaluate them. So the thinking is, "Well, if Sheinbaum gets in, is she really going to get these auctions going again?"
I spoke to the vice president of Harbour Energy, which is active in Mexico, a person named Gustavo Baquero at the CERA conference recently in March. And he was optimistic, which I thought was really interesting. He said that every country has a different risk. He said, quote-unquote, "I think pragmatism will prevail in Mexico." Just thinking of the lower production. And also, he was sort of looking at Mexico as Brazil was say 10 years ago or looking at Pemex.
Pemex is in a similar financial situation that Petrobras was 10 years ago. That's what he said. And Brazil subsequently opened its oil and gas industry. And it does make me think about that. Just thinking about how much other countries in the area and other companies have opened up or increasing output. If we assume that we're going to need oil for a while, that the need for oil production will remain, this energy transition keeps getting kicked down the road it seems. Then these countries like Guyana, Brazil, Argentina, are going to make out. That may put some pressure on Mexico.

Sheky Espejo:
Mexico has around 100 billion barrels of oil equivalent. And most of it it's in unconventional deposits and something around 70 or plus percent of that is not assigned either to Pemex or anybody for different reasons. If Sheinbaum didn't do that and didn't open up the sector again and just kept what Pemex has and what private companies have and worked on it, I think that would be a shame. I don't think a country could afford to do that if it were dependent on oil resources only. Mexico is not. So it can afford to, let's say, not pay too much attention to it, but it can definitely not overlook those resources completely. I think the hope for many people is that at some point people are going to realize that you're not going to be able to exploit all those resources forever. The window of opportunity for those resources to be developed is closing. And that's the question, right?

Jeff Mower:
But where are we seeing production declining? I mean there is some private production going on. I mean there were some companies that were able to get into Mexico in the upstream. But the private production is only adding up to what, 85,000 barrels a day right now?

Sheky Espejo:
It came up to 100,000 at some point. That has been hard to maintain. The expectation was that at some point private companies would be able to produce around 500,000 barrels. That includes big projects like Trion or Zama that have yet to reach maturity. There are people who are more skeptical about that promise. It could be as little as 300,000 at some point. And that's what most forecasts including S&P Global's are counting on for the Mexican production to keep some level of stability.

Jeff Mower:
You mean field tech Zama. But I mean Zama's interesting because Pemex is delaying investment in Zama. Is that correct?

Sheky Espejo:
That's right. So if Talos energy had-

Jeff Mower:
Well, let's back up. Talos is a partner in the Zama field, right? The Zama find?

Sheky Espejo:
Talos was the operator. It's still a partner. It has now reduced its exposure to the project because of the decision of the Mexican government to name Pemex the operator. Then it has sold 50% of it above a project to a Mexican firm controlled by the Mexican billionaire Carlos Slim reducing its risk. And Pemex as now the operator has delayed the investments into 2025. Let's just say that if Talos had continued to be the operator according to its plans, it would've started production, not investments, production in 2024. So that just tells you how frustrating it could be for some companies to deal with the Mexican government and Mexico conditions.

Jeff Mower:
So with the drop in oil production, we're also seeing not much gas production, not much gas output. I know Mexico's importing gas from the US. But that's also left Mexico in a bit of a bind on the power side. Is that correct? You had some blackouts there recently. And was that due to, not really necessarily due to a lack of gas, although I guess you could argue that, but really a lack of reliable capacity elsewhere. What caused those blackouts?

Sheky Espejo:
According to a recent set of panels and interviews we've had with members of the industry, it was a combination of factors, but the main factor of them being a lack of investment in infrastructure, this is transmission infrastructure. What we've seen is that demand has continued to grow, but generation capacity has not. And this is because the government has made efforts to strengthen the role of the state utility by minimizing the participation of private producers. So since demand has continued to grow and CFE has monopolized the business using its own plants at all times to be dispatched, we saw a peak in demand in May that was not expected in the country until June. That coincided with some maintenance works in certain backup plants from CFE, and that together with the lack of investment in transmission caused CFE to declare alerts in three days in early May and after the programed blackouts in some moments of the night.

Jeff Mower:
I mean that's not enough. We see blackouts occasionally in the US and elsewhere. You don't think that was enough to really obviously swing the election. We all know who's won yet, if the polls are correct. AMLO's social programs have just been very effective as far as social spending goes, an increase in benefits the voters that care, right?

Sheky Espejo:
That's right. Unfortunately, for industrial users or other people who want change in the energy policy, his social programs have been highly effective and things like blackouts in some areas of the country do not matter that much to make a difference. Although they do matter for people who are considering investments. And so at some point, people are also confident that the Sheinbaum or the Xochitl Galvez or either one could take actions and that's one thing they agree on. The power sector is an area in which both candidates agree there needs to be more focused because everybody knows Mexico is attracting more investments from companies who are trying to relocate to be close to the United States' market, and that requires huge quantities of power.
Mexico needs around, let's say, roughly 27 gigawatts of clean energy by 2030 to meet its own international commitments in terms of energy transition. That's not by any means considering the potential growth in demand that nearshoring will bring. So that just gives you a rough amount of the needs. People normally talk about one gigawatt in Mexico of capacity equaling $1 billion in investments. So that's give or take the comparison that people have made in terms of renewable energy. So this solar wind.

Jeff Mower:
How far along are they on that 20 gigawatt goal?

Sheky Espejo:
Nothing. We have not built anything. So we in the transition or in the, let's say, liberalization process that happened between 2015 and 2018, that's included long-term auctions of energy in which CFE, the state of utility was the anchor investor, Mexico got to build around seven gigawatts of solar and approximately the same amount of wind capacity in the country. So it's like 14, 15 gigawatts.

Jeff Mower:
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One more thing I want to talk about refining. I know we touched on it a bit, but if you could call this... One goal that, as you mentioned earlier in our talk, that AMLO really chased after was refined products independence. And he seems to have made some progress there. Pemex bought into your park refinery in Texas, so it's technically a Pemex Mexican refinery. And Pemex is building this new Dos Bocas plant. What is the latest on Dos Bocas as far as the... When are we expecting that plant, that refinery to come online?

Sheky Espejo:
This is a great topic, which I think we could divide into two areas. One of them is the functionality, operability of the project, and another one is the financial side of it. Because it could be true that the government is making strides or huge efforts to increase its production of fuels. One could argue what is the cost of that? At what cost is Pemex carrying out that strategy? Because all critics argue that Pemex loses money in its refining business and the more it refines, the more it loses.
So that's true. We are producing more fuels if you consider the amount of fuels we were producing when Lopez Obrador entered his administration. It's almost around twice the amount. But we are also producing twice the amount of fuel oil, which is under current market conditions less valuable than the raw material it comes from. And that fuel oil is distorting the power market because it's being fed to power plants that were meant to be using natural gas by now. And it's also distorting the export market because it is being mixed by Pemex with condensate to be able to be exported and that's affecting the revenues of export products.
So yes, we are producing a little bit more fuels than we were, but the costs are amazing. And when is Dos Bocas going to be operating? Well, that depends on who you ask. If you ask the president, it is already working 100%. We know that there have been some shipments from Altamira from another refinery owned by the government to Dos Bocas. And there is the speculation that the government is planning to just feed it to Dos Bocas and eliminate the sulfur in it and then be able to say that Dos Bocas is already refining. This is something that has been reported in Mexican media. The fact that they are trying to pretend Dos Bocas is already refining diesel. Although we know that that diesel is coming from another refinery and it was just sent to Dos Bocas for its final transformation.

Jeff Mower:
All right.

Sheky Espejo:
I have to say that Dos Bocas, the maneuver that they're trying to implement in Dos Bocas is not the only thing that this administration is trying to do to compensate for the fact that the project is not completed. We know because of filing from a US-based company that a power plant that is planned to be inaugurated in September located in Mexicali in Baja California does not have access to gas yet, although it is a natural gas fired power plant. So the government knows this and apparently it's going to try to solve this by sourcing liquified natural gas from a vendor in the US who's going to ship it through truck across the border just to be able to inaugurate it and for the president to take the picture.

Jeff Mower:
No, I get what you mean. It's something we always have to be skeptical about when covering the oil industry.

Sheky Espejo:
It would be very surprising if the result of the election were dramatically different from what the polls suggests. So right now, Claudia Sheinbaum is 20 points ahead. Something very, very unexpected and radical will have to change for Xochitl Galvez to win. I'm just saying it because it's not the first time it happened, but it will be really, really surprising.

Jeff Mower:
Plenty to cover here and plenty more we could talk about I'm sure. And we will find out what happens after June 2nd. Well, thanks Sheky for joining me and thanks again to our listeners for tuning to this episode of the Platts Oil Markets Podcast. This oil markets episode was produced by Mighty Perez in Mexico.