After a decade of volatile GDP growth and steadily increasing gas and power demand, Mexico continues to progress toward an unbundling of the monopolies Pemex and CFE once held over its gas and power sectors. According to a recent study by Wood Mackenzie, these reforms have created the potential for approximately US$415 billion in investment over the next two decades as the country builds pipelines, develops a renewables market to meet clean energy targets, and sets the stage for M&A.
Eric Eyberg, Director of Latin America Gas and Power Consulting for Wood Mackenzie, explains: "Mexico's energy reform is heating up investment activity across all sectors —not just upstream. An expected US$15 billion in new gas pipeline construction, coupled with Pemex's exit from the midstream should provide continued infrastructure opportunities in the gas sector, similar to the construction of new gas-fired and renewable generation in the wake of CFE unbundling."
As Mexico's power and gas reform continues, questions remain about its long-term success, potential for M&A activity and the risks associated with new investment opportunities. Eyberg elaborates: "Although power reform has been swift, the unbundling of CFE is still in its infancy and the Mexican government's gas reform plan is taking an aggressive approach to make up for lost time. While successful reform doesn't require 'Goldilocks' levels of perfection as every reform process requires adjustments, timing is of the essence."
Wood Mackenzie's study underscores that if Mexico can coordinate across sectors, implementing a deliberate and phased market liberalization, it is more likely to mitigate risk and achieve reform goals.
Renewables: a decarbonised Mexico?
Over the past 10 years in Mexico, power demand growth steady at 2.2% per year, natural gas demand for power has doubled and renewables have begun to gain market share. Once the current build-out of midstream and gas-fired power is complete, Wood Mackenzie expects to see a significant shift toward renewables.
Achieving Mexico's 2035 clean energy targets would require approximately 68 GW of renewables from a base of 20 GW today, but the resource-strong country may well rise to the challenge. "Although gas will continue to play a key role, with overall energy prices following its lead, new solar and wind capacity could require as much as US$60 billion in investment over the next two decades," says Eyberg.
Mexico's first two long-term power auctions have cleared at staggeringly low prices of US$47/MWh and US$33/MWh, respectively with a mix of wind and solar joining what appears to be a global trend in falling prices. As solar power penetrates the market, Wood Mackenzie expects to see some swings in time-of-day usage for combined cycle gas turbines, creating a "duck curve" which is seen in California today resulting in midday price suppression as zero-cost power generation floods the market.
"Because clean energy goals require a percentage of power generation from clean sources, they will partially offset recent market share gains in gas-fired generation as targets increase. By 2035, we expect renewables to displace approximately 2 billion cubic feet per day (bcfd) of gas burn with significant impacts on the gas industry." says Eyberg.
Cross-border capacity: a growing gas market in the US Lower 48
Mexico's proximity to the United States will also create new opportunities for gas exports from the US Lower 48. "With the ongoing US$15 billion pipeline build in Mexico to 2020, which includes a doubling of US/Mexico cross-border capacity to 14 bcfd, producers in the Permian Basin and Eagle Ford will enjoy another growing market for their gas." notes Eyberg.
However, Texas producers must develop a deep understanding of the Mexican pipeline network, market and pricing to successfully export. In conclusion, Eyberg explains that the need for US gas will also hinge on Mexico's renewables development as it vies for market share with fossil generation in the power sector. "Timing will be strategically significant for producers to secure market access, which will not be available to all producers, as we expect to see marked production growth across both the Permian Basin and Eagle Ford."