Mexico Power Report Q2 2014 - New Report Available

From: Fast Market Research, Inc.
Published: Thu Feb 20 2014

While we emphasise that much will depend on secondary legislation, the passage of Mexico's long-awaited Energy Bill could potentially unlock greater private investment in the domestic energy sector and buoy the country's broader economic trajectory. To this end, although reform of the oil and gas sector has dominated the headlines, we are cautiously optimistic that breaking state-owned Comision Federal de Electricidad (CFE)'s quasi-monopolistic position in the power sector - in order to attract greater private investment - could ultimately drive down electricity prices and prevent higher costs from undermining Mexico's attempts to position itself as a global manufacturing hub. While we note that the broader economy performed poorly over 2013, we maintain that macroeconomic and sector-specific fundamentals will converge to drive growth in 2014; not least ambitious plans to install mid-stream infrastructure and rampup gas-fired generation capacity so as to benefit from greater volumes of cheap US gas.

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On December 12 2013, the Mexican Congress pushed through energy reform, with the Chamber of Deputies (the country's lower house) voting to pass the landmark bill just two days after it cleared the Senate. While the implications of reform will be difficult to judge until secondary legislation is enacted in early 2014, BMI's Oil & Gas team believe the bill has the potential to be a game-changer for Mexico's hydrocarbons sector. While we remain cautiously optimistic and believe that opening up the sector will take time, we note that after almost a decade of plunging oil production, the reform could ultimately begin to draw the necessary foreign investment into Mexico and bolster hydrocarbons output - something that could also have huge implications for the broader economy and the power sector.

In this context, we reiterate that Mexico's power sector has long been ripe for overhaul and plans to introduce greater competition into the electricity market are likely to prove less controversial than liberalising the oil and gas sector. With the Energy Bill now having been passed, it appears that some muchneeded reform could be implemented. The rationale behind power sector reform is clear: opening up the sector to private players will help secure investment in much-needed electricity generation capacity; while gradual deregulation will drive down prices and bring both social and economic benefits. Unless this happens, there is a risk that higher electricity prices will trump low labour costs and the geographic advantages that stem from neighbouring the US - Mexico's biggest export market.

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