Choice of next Mexico president almost certain; her energy policy, not so much

Considering the polls, it is almost certain that leading candidate Claudia Sheinbaum Pardo will win the Mexican presidential election on June 2. What is not so certain is the election's impact on Mexico's oil, gas and power sectors, which remain largely in the hands of state-owned companies and need funding to meet the country's energy needs.

Sheinbaum, representing a coalition led by the ruling Morena Party, has led in the polls since the beginning of the campaign, largely due to the popularity of President Andres Manuel Lopez Obrador, who has been her mentor. Her main opponent is Xóchitl Gálvez Ruiz, backed by a coalition of parties that have joined to defeat Morena: Institutional Revolutionary Party (PRI), National Action Party (PAN), and Democratic Revolution Party (PRD).

When it comes to energy, Sheinbaum has basically promised to maintain the policies set by Lopez Obrador, which have stalled the liberalization process set forth by his predecessor and put state oil and gas company Pemex and state utility CFE in control of their relevant markets. Gálvez, a self-made entrepreneur, has promised to again liberalize the market by bringing back the power auctions and oil rounds that were organized under the administration of Enrique Pena Nieto. She has promised to downsize Pemex to make it profitable and boost clean energy production to 50% of the county's needs.

Critical point for Pemex

The stakes of the election could not be higher. According to data from the National Hydrocarbons Commission, Pemex' crude production fell below 1.5 million b/d for the first time in over 40 years in May. Lopez Obrador had initially promised to boost Mexico's crude output to 3.5 million b/d even while canceling the upstream auctions set by his predecessor.

Crude production by the private companies that operate in Mexico fell to 85,117 b/d in April, compared with 100,467 b/d in April 2023, CNH data showed.

S&P Global Commodity Insights expects total Mexican output to remain at roughly 1.6 million b/d until 2030, citing a lack of upstream investment.

Likewise, Mexico's natural gas production has fallen to 2.6 Bcf/d in May 2024 from 5.1 Bcf/d in January 2010, causing the country to boost its reliance on imports from the US.

Investing further in Mexico's upstream will require funding, and Pemex debt has ballooned to $100 billion. Pemex maturities for 2024 are at $28 billion.

According to a recent report by independent think tank México Evalúa, in the first quarter of 2024 and for the first time in history Pemex required more money from the government than the money it generated, becoming a financial burden for the country. The next president will have to address this pressing issue.

"Pemex is in the worst crisis in its history," said Rosanety Barrios, special energy advisor to Xóchitl Gálvez in a recent interview on national television.

Pemex problems can only be solved if the company is run by people who really have experience in the industry, she said, in direct reference to Octavio Romero Oropeza, who has been CEO of Pemex during the Lopez Obrador administration.

"The situation of the company has been bad for a long time, but now it is broke, and so it has to be solved at once," she said.

All the big fields in Pemex portfolio are "already exhausted," said Commodity Insights analyst Pedro Martinez during a May 29 webinar. "Very few fields have enough reserves to change the outlook for production," he said.

"The issue with Pemex is that it is reset every six years," said Marco Cota Valdivia, CEO of Talanza Energy Consulting, speaking during the same webinar. "We have been leaving a huge volume of oil beneath the surface."

The only solution is to again invite private companies to invest in exploration and production in the country, but it is unclear what the interest would be considering many have already left as a result of the policy shift during Lopez Obrador's presidency, Martinez said.

"Mexico already missed five years of trying to retain private companies," he said.

Common ground

In refined products, Sheinbaum will likely continue Lopez Obrador's focus on energy independence, which hinges on upgrading Pemex's six existing refineries in Mexico and finishing the new Dos Bocas refinery. Gálvez has floated the idea of shutting down two Pemex refineries to focus on renewables.

Mexico's purchase of the Deer Park, Texas refinery in 2022 brought its total capacity to 1.1 million b/d. Commodity Insights expects that capacity to rise to 1.8 million b/d by 2026 once Dos Bocas is running and other Pemex plants have been upgraded.

However, Commodity Insights expects Mexico will continue to depend on refined products imports in the near future, largely because of its aging refineries.

Both candidates have promised to bring back Mexico's petrochemical industry, which was once a profitable business. And both talk about the need to have Pemex get into the green hydrogen and biofuels business and have vowed to increase the generation of energy using renewable sources.

Focusing on petrochemical products could help Pemex become more profitable, but natural gas output is falling as years of neglect have left the country dependent on imports. And of the 2.6 Bcf/d that is currently produced, Pemex uses 2.1 Bcf/d for its upstream operations, while Mexico's industrial sector requires close to 2 Bcf/d and state utility CFE requires almost 4 Bcf/d to power the country. So it is not clear where exactly Mexico could obtain the gas needed to reactivate its petrochemical industry.

"Mexico's dependency on US natural gas is not only going to continue, but it will also actually increase in the coming years as new natural gas-fired power plants from CFE come online," said David Crisóstomo, Commodity Insights analyst, during the webinar.

Either candidate will likely grow Mexico's power sector to meet demand and open it to private companies, which already control roughly half of Mexico's installed generation capacity.

Mexico experienced blackouts in early May as a result of higher-than-expected temperatures and problems in CFE back-up plants.

Nearshoring incentive

Large amounts of investment are expected in the country from the relocation of production chains closer to the US, a phenomenon called "nearshoring."

"Mexico possesses unique advantages in this context: geographic proximity to the largest economy in the world, ample networks of free trade agreements, and a young and skilled workforce with a high number of people graduating as engineers and technicians every year," UBS analysts said in a report.

Many experts believe this alone will have large implications in terms of power demand and that the next government will have no option but to allow companies to build their own infrastructure.

According to estimates by the solar and wind energy associations, the country needs to install roughly 30 GW of new clean power generation capacity by 2030, which will cost around $30 billion. Industry organizations have pointed out that the country also needs an additional $20 billion investment in transmission infrastructure.

For a podcast discussion of the energy implications of Mexico's election, please go to the Platts Oil Markets podcast .