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Mexico's Energy Transformation Takes Hold

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Empowering Public Private Collaboration in Infrastructure


Mexico's Energy Transformation Takes Hold

Mexico is in the process of liberalizing its energy industry, which is key to the country’s long-term economic growth. Production and investment declines over the last several years have had a major impact on GDP and government revenues. Just ve years ago, oil-related scal revenue through transfers from PEMEX accounted for about 40% of total government revenue. Today it accounts for just over 15%.

Mexico’s oil and gas production remains down about 40% from peak levels, and the country’s effort to stop declines and return to growth has not yet had an impact. Crude oil production at 2.0 million b/d in June was far below a peak of 3.4 million b/d in 2004. Mexico’s dry natural gas production peaked in 2010 at 5.1 Bcf/d, but is down to only 3.2 Bcf/d this year, forcing the country to rely heavily on US pipeline gas and LNG imports.

Through a series of upstream oil and gas auctions, Mexico has awarded dozens of E&P contracts to a number of companies and consortia, which has already led to some signi cant nds by US independent Talos Energy and Italy’s Eni.

Unable to meet growing demand with local production, Mexico is opening its re ned products markets to competition. Imports of US petroleum products over the rst four months of 2017 were up over 125% year-on-year. Mexico is in the process of expanding its re ned products pipelines and terminals, and allowing outside access to existing assets.

Pipeline imports of US natural gas make up nearly 60% of total Mexican natural gas supply, compared to just 22% in 2010. Platts Analytics expects that US natural gas imports will rise to nearly 70% of total supply by 2022.

Chart+-+Mexico%27s+Oil+and+Gas+Sector+Direct+Contribution+to+Mexico+Real+GDP+Growth

Natural gas pipeline import capacity has grown 145% since 2010 to 10.8 Bcf/d. By 2022, import capacity is expected to reach 14.2 Bcf/d. Mexico’s natural gas market is in a massive state of ux. Gas trading is still in a nascent stage of development after getting off the ground in July. Gas buyers are hesitant to leave Pemex. Current supply/demand conditions suggest that areas of supply shortage and/or transportation constraints could experience premium prices. Industrial customers have expressed concern about the recent lifting natural gas price caps on rst-hand sales and the possibility of price spikes in some regions. Prices in constrained areas theoretically could increase a level near fuel oil at roughly $9/ MMBtu.

Breaking the Mexican gas market up into 10 Cell RegionsTM, Platts Analytics expects that the strongest natural gas price premiums will form in the Peninsula, Western, and Central gas regions, with large differentials expected between Baja California and Baja California Sur.

Mexico’s wholesale power prices sustained healthy margins over US power prices in 2016, but prices have climbed even higher in 2017 as the natural gas market has tightened pushing more expensive fuels into the power generation supply stack to meet growing demand. Mainland Mexico prices jumped $24.48/MWh, or 56%, on average across all control regions to average $67.62/MWh during the rst half of 2017.

Table: Revenues Expected from Mexico's Energy Reform to Date ($ million)


Upstream
Round One
First 2,700
Second 3,100
Third 1,100
Fourth 34,400
Trion 11,000
Round Two
First 8,200
Second 1,100
Third 1,000
Seismic 2,500
Natural gas & petroleum
Gas pipelines 12,000
Petroleum products - transport, storage 4,000
Distribution and sale of petroleum products 12,000
Electricity
First auction 2,600
Second auction 4,000
Generation 97,000
Transmission 12,800
Distribution 9,600

Source: CRE



COP24 Special Edition Shining A Light On Climate Finance

Highlights

− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report
Download


Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

Read the Full Report
Download


Plugging the Climate Adaptation Gap with High Resilience Benefit Investments

Highlights

- Adaptation financing needs to substantially increase to address the higher impact of extreme weather to society due to climate change.

- Adaptation projects are typically cost effective and bring wide range of resilience benefits.

- To demonstrate the value of resilience benefits to various stakeholders we consider that it is important to quantify those benefits based on a robust modeling framework.

- We expect that due to the large size of the adaptation gap and constrained public finances,private investment would need to make a considerable contribution to adaptation financing.

Dec. 07 2018 — We believe the recent surge in economic damage from extreme climatic events may focus the attention of public authorities about the need for adaptation investments and accelerate investment in this area.The United Nations Environment Program (UNEP) forecasts adaptation costs in developing countries at between $140 billion and $300 billion by 2030, and $280 billion and $500 billion by 2050. That is approximately 6x-13x above the amount of international public-sector finance available today--just to meet 2030 costs.

Over the last two years,the world has seen a flurry of extreme weather, which has exposed the vulnerability of many countries to these events. Climate change may make matters worse, irrespective of whether we manage to keep global warming to 2 degrees Celsius or not. Attention to climate change adaptation is therefore increasing, especially about how to finance it, given the need to raise enough public and private investment to fortify exposed countries and communities against the potentially devastating effects of physical climate risk.

Read the Full Report
Download

Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.