Photo credit: Really cool sunset in Mazatlan by Frank Kovalchek
The sun is shining, literally and figuratively, on the energy industry in Mexico as solar energy opportunities are on the rise. While Mexico is all set to allow oil extraction by foreign companies, it is also attracting investors to a much cleaner source of energy – sunshine.
Mexico, which is one of the top ten oil producing countries in the world, is moving towards cleaner energy. The country has plans to generate 35% of its power using clean sources such as solar projects, by 2026. The goal is to reduce emissions and create a diverse energy matrix. External factors, such as the decreasing prices of solar panels, are also helping Mexico achieve this goal. Pricey oil-driven power makes the cheaper solar energy a more viable option, opening a world of solar energy opportunities in the country.
Interest from foreign stakeholders is also spurring on Mexican solar energy projects. As a result, the country’s solar power market is enjoying a transformational phase. Numerous small and medium sized solar power projects have also propped up recently.
First Solar, one of the biggest manufactures of solar panels in the US, recently purchased a project pipeline, marking the company’s entry into Mexico’s utility-scale solar market. As a company of First Solar’s stature lays the groundwork for solar business expansion in Mexico, it becomes clear that the Mexican solar market is primed for sustainable growth.
Another investor, the local energy company Gauss Energia recently launched a photovoltaic plant in Mexico, the biggest one in Latin America. Gauss Energia is also contemplating a different model for funding new projects. The model, known as self-supply, is already being used for funding Mexican wind farms. Energy developers will benefit from long-term power purchase agreements with non-state enterprises that will purchase electricity at fixed rates.
With such initiatives arising from the private sector, the government is also developing encouraging programs such as the Small Electricity Producers’ Program. Under this program, the state utility Comisión Federal de Electricidad (CFE) purchases up to 30 megawatts of power from solar projects. CFE offers 20-year agreements that are pegged at 98% of the area’s average cost of power generation in the preceding year.
In addition to its environmental benefits, solar power generation also makes economic sense. The 4 million energy users, 3.5 million of which are commercial users, will certainly benefit from the cheaper solar energy. A net metering system will also benefit installations under 500KW by crediting generations for unused power.
Mexico has no shortage of solar resources. Approximately 70% of the country receives incoming solar radiation, or insolation, that is higher than 4.5 kilowatt hours per square meter on a daily basis. These are remarkable numbers. Mexico’s average insolation is nearly 60% higher than that in Germany, a country that has the largest market for solar products in the world.
The solar power market is already fairly competitive in Mexico’s northern areas, which enjoy higher-than-national average solar resources. Mexico’s solar sector is without a doubt attracting numerous interested parties, locally and from beyond borders.
Mexican Senate has just approved the liberalisation of the energy market in Mexico. Even though the Reform focuses more on oil than electricity, it seems that such market will provide opportunities for solar generators to grow in Mexico. During first quarter of 2014, the Government will publish the Renewable Energy Strategy that will uncover specific goals and projects in that area.
Photo credit: Max Phillips (Jeremy Buckingham MLC) Photo: Shale gas pipes, Pennsylvania USA by Beyond Coal and Gas
Despite starting to explore the area in 2010-2011, Petróleos Mexicanos (Pemex) will not be able to tap into the Mexican Eagle Ford Shale for decades. In addition to focusing on less risky shallow-water project, Pemex cannot afford the higher costs associated with more wells, labor and skilled training.
Mexico is the sixth largest potential natural gas supplier. However, it has been catering to local demand by importing liquefied natural gas (LNG) from the Middle East and Africa for four times the rate set in North America. Considering the fact that the Eagle Ford shale in Mexico contains 343 trillion cubic feet of shale gas and the country overall has 680 trillion cubic feet, the situation has been deemed “frustrating”.
Without lower-priced domestic natural gas, electricity prices have gone higher. This in turn has affected the country’s manufacturing sector, which was expected to thrive due to the cheaper labor and lower export prices. Low fuel prices in the US set a hard competition for manufacturing facilities in Mexico. However, the potential of renewable sources in Mexico could balance a little bit the situation.
If Mexico agrees to fully open up to foreign expertise, it may discover unconventional drilling techniques like hydraulic fracturing. Also known as “fracking”, this technique has helped the US achieve a shale gas boom and reduced its natural gas imports. However, Mexico isn’t offering any incentives to private or foreign companies. Currently, private companies can be involved in Mexico’s energy sector via services contracts. Through these contracts, they will get paid for the services they render, but will not own any reserves. Such clauses aren’t tempting enough to influence investment in shale resources, which are currently dominated by smaller companies.
Pemex has only awarded three of six blocks in the July 2013 auction, disappointing many investors. However, failure to award three blocks wasn’t as peculiar as the way other firms won theirs. The Humapa block was awarded to Halliburton for $0.01 billion despite Pemex setting a maximum price of $6.50 billion. Similarly, Weatherford and Petrolite were awarded the Miquetla and Soledad for $0.98 billion and $0.49 billion respectively. Pemex had set the maximum price of Miquetla at $6.5 billion while Soledad’s was $6 billion. Experts predict that Pemex has taken this step to protect its interest as the contracts aren’t going to see their 30-year life when energy regulations change.
President Enrique Peña Nieto currently has the votes he needs to open up the energy sector after 75 years. Voting will be held before December 15 while a secondary legislation will pass by February 2014. However, according to Ariel Ramos, a partner with Haynes and Boone, US companies will be at a position to provide the needed expertise when Mexico’s shale gas plays are ready and developed.
If Mexico developed 2,500 wells annually, it will become self-sufficient by 2020. On the other hand, at 5,000 wells per year, its gas production would increase and Mexico may become a key exporter in North America and Central America. Mexico will release, by end of year, its Energy Plan, and by Q114, its Renewable Energy Plan. Will this change strategy on natural gas?
Photo credit: Global Santa Fe Rig 140 by ST33VO
Despite the Deepwater Horizon oil spill and natural gas fracking boom three years ago, experts expect offshore oil drilling in the Gulf of Mexico to produce huge amounts of oil. Big finds, which are known as “elephant fields” by engineers, have the power to produce for at least 50 billion barrels over the next 20 years.
For Mexico, this is a pleasant surprise as its oil production had started decreasing since 2004. With the aging of oil fields and lower returns from the largest field Cantarell, the US Energy Information Administration (EIA) believed that Mexican oil production would continue declining. However, with the introduction of the August 2013 energy reform proposal, President Enrique Peña Nieto has focused on attracting foreign investors to boost oil production and build Mexico’s economy.
As the US is Mexico’s largest trading partner, the economic growth of the latter is deemed of great importance. This is why a number of US oil companies have signed a Memorandum of Understanding (MOU) with Mexico’s national oil company Petróleos Mexicanos (PEMEX). One of the latest to jointly develop, own and operate a facility in Mexico is Keppel Offshore and Marine.
Keppel has signed up with PEMEX’s subsidiaries PEMEX Exploración y Producción and P.M.I. Norteamerica S.A. de C.V. In his congratulatory message, CEO of PEMEX Emilio Lozoya said, “This MOU highlights PEMEX’s commitment to increase oil and gas production in the long term by developing a sustainable offshore and marine industry in Mexico that can readily meet our needs. By partnering with the world’s leading rig builder Keppel, we are confident that the shipyard will be a success and help to provide a wide array of solutions for the production of oil and gas. Mexico’s proven reserves of oil and gas at the start of 2013 is almost 14 billion barrels of crude-oil equivalent and we believe that a significant number of shallow water and deep-water drilling rigs as well as FPSOs and FLNGs will be required to maximize production in the years to come.”
The US Senate has passed legislation in October to enact an international treaty to govern oil drilling in the Gulf of Mexico. Through it, a framework for oil and gas development across both countries’ maritime boundary would be implemented. Alaska Senator Lisa Murkowski explained, “In addition to opening up nearly 1.5 million acres of the outer continental shelf, it also ensures that any exploration along our maritime border adheres to the highest degree of safety and environmental standards.”
The House and Senate are yet to decide whether or not to exempt publicly traded companies from disclosing what they pay other countries for drilling and collecting oil and natural gas. However, once the treaty goes through, the Bureau of Ocean Energy Management believes that both countries will have access to 172 million barrels of oil and 304 billion cubic feet of natural gas.
Aside from benefiting the US and ensuring its place as the top oil and gas producer in the world, offshore drilling in the Gulf of Mexico will boost Mexico’s economic development. With more jobs and an added competitiveness in the international market, the growth in oil production will increase the 3% economic growth by 1-2% this year.
Photo credit: Black Rock Solar photovoltaic array at Food Bank of Northern Nevada by BlackRockSolar
Mexico’s geographic location and solar resources have made it one of the top candidates for solar energy development. However, till 2012, the number of investors in this industry and government support was limited. Now, despite its thriving oil industry and an upcoming offshore drilling treaty with the US, Mexico’s solar energy is growing steadily and strongly.
Up till recently, most of Mexico’s clean energy was produced by hydroelectric stations while wind and solar energy combined produced less than 1.5% of the power. With local and foreign companies receiving permits for 215 megawatts of solar plans, over 40,000 homes in the country’s sunnier northern regions will receive ample power and Mexico’s solar capacity will increase by fivefold.
By opening its energy sector to foreign investors after 75 years, Mexico has lured in more than American oil companies. US-based First Solar Inc. along with German Saferay GmbH and Spanish Grupotec Tecnologia Solar SL have bought projects in Mexico. As for local efforts, local investor Gauss Energia has opened a photovoltaic plant in September, which is the largest in Latin America. Through it, Gauss Energia plans to “open the way for the development of the photovoltaic sector”.
Gauss Energia’s plans appear to be successful as Mexican states Coahuila and Oaxaca have started pushing solar PV projects of their own by the end of October. The state legislature of Coahuila passed a resolution to sign a 15-year power purchase agreement with Parque Solar Coahuila to create a solar park that will cover the energy needs of the state government and Torreon and Matamoros’ municipal governments. Private and local firms will fund the entire project.
As for Oaxaca, Chinese company Hareon Solar plans to invest $250 million in a solar park and solar panel factory. “The production of solar panels would be done in the Tehuantepec Isthmus,” said Oaxaca’s Minister of Tourism and Economic Development Jose Zorrilla de San Martin Diego. “From there they would take the product to other countries and power generation would happen in Costa Chica.” The project is currently waiting for approval from the Comision Federal de Electricidad. Once initiated, it will generate 1,000 jobs in the Tehuantepec Isthmus, which is where a majority of Mexico’s wind power is generated.
Experts believe that more funding and power purchase deals are required for the market to take off. With deals in hand, price points will be established and investors will be given the confidence required for the market to boom. However, local Gauss Energia has introduced an alternative funding model called self-supply. Through it, developers can sign long-term power purchase contracts with non-state companies to buy electricity at a fixed price. This model has already attracted a few parties, including Ford Motor Co., which in June signed up to purchase 3 megawatts from a future 20 megawatt solar plant in Sonora.
Mexico is expected to generate 35% of its energy from clean resources come 2026. The Energy Minister predicts the production of 2,170 megawatts by 2020.
Photo credit: Oil drilling rig arriving at New Plymouth, Taranaki, New Zealand, 10 August 2008 by Phillip Capper
There are impending plans to potentially overhaul the Mexico’s oil industry. The government has unveiled a controversial bill, which seeks to make changes to the Constitution to allow the partnership of private companies and Pemex to exploit the large reserves of oil and shale gas.
The State run oil company Pemex has had a monopoly for seventy five years and is the sole producer for gas and oil in Mexico. Their operation has suffered numerous managerial and resource issues, so they now outsource many operations including exploration and drilling to service companies. However, this business model is largely unattractive to major oil companies and as a consequence oil production in Mexico has been steadily declining.
Major oil producers which are struggling to discover new large reserves and fields are far more likely to be attracted to the operating conditions and familiar geology of Mexico. Since the alternatives are likely to involve the unforgiving Artic conditions or unstable political regions in other areas of the world.
The new bill, which looks set to gain congressional approval, is politically risky and could cause discord among the public and nationalistic politicians. The bill would break the tradition which was established in 1938, when Mexico became the first large oil producer to nationalize their oil industry. This set the trend for a number of other developing nations to follow Mexico’s example. Mexico has some of the most restrictive laws on energy in the world. Many experts compare the rigidity of the rules to Kuwait’s and cite that even Cuba is more liberal in this regard.
Many Mexican officials are hopeful that this new initiative will promote massive economic growth and attract billions in investment dollars, improve efficiency and competitiveness and showcase Mexico. The bill has fallen short of many oil companies hopes as it will not allow private companies to gain outright ownership of an oil field. Pena Nieto has confirmed that the government will provide a cash equivalent rather than relinquish a share of the oil found and produced. This profit sharing initiative is similar to arrangements that are offered in Iran, Ecuador, Malaysia and Iraq.
The opinion of many experts is that the interest developed among the major oil companies may well depend on the clarification and crucial detailing that will be confirmed in secondary laws. These should cover issues such as how much tax and fees will private firms be charged by the Mexican government. Mexico will need to offer incentives and attractive contract deals to secure investment and encourage commitment of capital. It is likely that Mexico will limit the number of companies permitted to explore her territory. They will likely target partnerships will major companies who have the technological equipment and expertise for shale and deep water drilling.
On the other hand, the Reform could force the U.S. Senate ratify the Transboundary Hydrocarbon Agreement, setting the rules for dividing potential oil reserves in the Gulf of Mexico. Mexican Senate already approved this Agreement. The Reform could be the first step for an integration of a cross-border energy infrastructure.
The bill represents high stakes for Mexico as oil production under Pemex has dropped by a quarter in the last ten years. This is primarily as a result of lack of technology and expertise that are expensive and create difficulty in development. This decline is present even with annual investment from Pemex has increased fivefold in the last ten years.
Assuming the bill is passed, the hard work of clarifying the detailing for Mexico’s potential offshore oil boom will need to begin.