Publish in Perspectives - Wednesday, February 20, 2019
Pemex will be allocated $24.5 billion of the country’s 2019 federal budget, a 14.1 percent increase. Here Pemex headquarters in Mexico City. (Photo: Mexican Government)
Mayer Brown partners Ariel Ramos (Mexico City) and Francisco Méndez. (Houston).
Energy regulatory bodies CRE and CNH lose more than 30 percent of their resources.
BY ARIEL RAMOS AND
The federal revenue budget estimated for 2019 is US$307.3 billion, which represents 21 percent of Mexico’s GDP. The main source of income continues to be tax revenues (62.3 percent of total public revenue), whose collection represents 13 percent of the GDP. The oil revenues of 2019 will represent 19.8 percent of the total budgetary revenues in the country. The energy sector as a whole is expected to contribute 27.7 percent of the total federal revenue, with resources equivalent to US$77 billion. Pemex revenues are estimated to be 10.4 percent higher in real terms by the end of 2019.
The public expenditure proposed for 2019 is also US$307.3 billion (6.0 percent higher in real terms than 2018). Government says that it designed the public spending plan around austerity and savings policies to channel more public resources to social needs and infrastructure spending. In order to finance priority projects—namely the "Mayan Train", the Transisthmian Corridor, rural roads, the modernization and rehabilitation of airport infrastructure, Internet for All, marginal neighborhoods and the reconstruction plan —sectors such as environment, agriculture, personal services and operating expenses reflect relevant cuts, and the discretional allocation of resources to the states (Ramo 23) and certain autonomous institutions such as the Energy Regulation Commission (Comisión Reguladora de Energía) and the Hydrocarbon National Commission (Comisión Nacional de Hidrocarburos) face significant reductions.
Public expenditure in the energy sector includes six departments and entities: (1) Pemex, (2) the Federal Electricity Commission (CFE), (3) the Ministry of Energy (SENER), (4) the Regulatory Energy Commission (CRE) and (5) the National Hydrocarbons Commission (CNH). However, Pemex and CFE will spend the largest share of the federal budget allocated to the energy sector.
Public spending on energy matters in 2019 will prioritize the hydrocarbon sector, specifically exploration and refining. The electric sector, despite receiving more resources through CFE, will be allocated less capital for generation through clean energies (including nuclear and hydroelectric) and transmission and distribution. In line with this, SENER will prioritize hydrocarbon policy over others.
Also in line with this, on January 25, 2019, CFE cancelled the Ixtepec-Yautepec Transmission Line tender (a high voltage DC transmission designed to have the capacity to transport up to 3,000 MW over 500 kV), stating that the project was not a priority for the current administration.
Pemex, Mexico’s state-owned oil and gas company, will be allocated US$24.5 billion of the country’s 2019 federal budget, a 14.1 percent increase with respect to the amount approved in the 2018 budget. This allocation is considered necessary to meet the demand for petroleum and petrochemical products; to drill for and complete new wells and repair existing ones; and to provide hydrocarbon, petroleum and petrochemical logistics services in a sustainable manner.
The government has three priorities for its 2019 investment in Pemex:
1. Stabilize the production of crude oil, reversing the downward trend in the short term and increasing production in the future;
2. Rehabilitate the six refineries that make up the company's National Refining System (Sistema Nacional de Refinación), assuring the reliability of the crude process, which will allow increased production of refined products, especially gasoline and diesel, and thereby reduce Mexico’s dependence on imported gasoline and diesel; and
3. Start construction of a new refinery (the seventh in the country) in Dos Bocas, Tabasco.
The government also will direct resources toward the maintenance of gas processing plants, ducts and ethylene and fertilizer facilities.
The recently announced National Refining Plan (Plan Nacional de Refinación) and the National Plan for the Production of Hydrocarbons (Plan Nacional para la Producción de Hidrocarburos) aim to increase the production of (1) petroleum to 1.86 million barrels per day (mbd) by 2022 and (2) oil to 2.2 mbd by 2022.
CFE, Mexico´s state-owned power and energy company, will be allocated US$3.2 billion of the 2019 federal budget, a 36 percent increase with respect to the amount approved in the 2018 budget. Through the 2019 program to maintain, rehabilitate and modernize the power generation infrastructure, resources will be used to ensure the availability and reliability of the power generation equipment, which will make approximately 5 percent more energy available to the market and increase thermal efficiency by 1.08 percent.
The government has four priorities for its 2019 investment in CFE:
1. Consolidate its new operating model and develop a productive business culture with effective talent management;
2. Accomplish the objectives of productivity and cost control, achieving a higher level of performance and becoming more cost-competitive;
3. Continue to evolve the business portfolio toward greater profitability and financial strength; and
4. Start the commercialization and transportation of gas to maximize the value of the pipeline network. (Renegotiation of gas supply agreements is expected to occur during 2019.)
SENER is one of the departments with the highest budget growth, increasing its resources by 961.2 percent (in total, US$1.4 billion).
Energy regulatory bodies such as the Energy Regulatory Commission (Comisión Reguladora de Energía) and the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos) lost 31.1 percent and 30.3 percent of their resources, respectively. The programs most affected are Hydrocarbon Regulation and Permits (Regulación y Permisos de Hidrocarburos), Electricity Regulation and Permits (Regulación y Permisos Eléctricos) and the Hydrocarbons Promotion and Regulation Program (Programa de Promoción y Regulación de Hidrocarburos). In line with this reduction, oil tenders and long-term clean electric auctions recently have been suspended.
The amount budgeted for infrastructure amounts to US$37.4 billion, which is 6.3 percent higher in real terms than 2018, representing 12.2 percent of the total federal budget and 2.8 percent of the GDP.
Although this year the budget was increased with respect to the previous one by 17.4 percent, the increase is lower than that budgeted for each of the years 2014, 2015 and 2016. That is to say, since 2014, the trend overall has been downward, decreasing as a percentage of GDP by 1.3 percentage points in five years.
Ariel Ramos is a Mayer Brown partner in the Oil & Gas and Infrastructure Investment groups and Banking & Finance practice and is based in the firm's Mexico City office. Francisco Mendez is a Houston-based partner in Mayer Brown’s Oil & Gas and Infrastructure Investment groups.
Mayer Brown Counsels Jan R. Boker and Lilia Alonzo and associates Aldo A. Jáuregui and Julio M. Martínez Rivas also contributed to the report.
This article is based on a Legal Update from Mayer Brown. Republished with permission. To download the complete report, please use this link.