After a decade of volatile GDP growth and steadily increasing gas and power demand, Mexico has moved to unbundle the monopolies Pemex and CFE once held over its gas and power sectors. These reforms have created the potential for approximately US$415 billion in investment over the next two decades as the country builds pipelines, sets the stage for M&A, and enters the robust renewables market to meet clean energy targets.
As Mexico's power and gas reform continues, questions remain about its long-term success, potential for M&A activity and generation of investment opportunities. 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, timing is of the essence.
If Mexico can integrate across sectors, implementing a deliberate and phased market liberalization, it is more likely to mitigate risk and achieve reform goals.
Renewables: a decarbonised Mexico?
Once the current build-out of midstream and gas-fired power is complete, we expect to see a significant shift toward renewables in Mexico. With power demand growth steady at 2.3% per year and oil prices remaining low, natural gas demand has doubled and renewables have gained market share.
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.
Mexico's first two long-term power auctions have cleared at a 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, we expect to see some swings in time-of-day usage for combined cycle gas turbines, creating a "duck curve" which we see 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 gains as targets increase. By 2035, we expect renewables to displace approximately 2 billion cubic feet per day (bcfd) of gas burn.
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.
However, Texas producers must develop a deep understanding of the Mexican pipeline network, market and pricing to successfully export. 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 in the Permian and Eagle Ford.
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