No less than seven companies succeeded in winning long term electricity contracts in the past few weeks. These successful auctions followed several others from Mexico’s Pemex and other truly lucrative state and state-affiliated concerns. Those include major petroleum rights for known oil-fields in the Gulf of Mexico as well as lot of similar contracts for Pemex support and infrastructure over the last eight to nine months.
All of these contracts come in the wake of sweeping and sometimes controversial energy sector reforms. They were hailed as the signature political achievement in the early years of the current administration under President Enrique Peña Nieto.
But for companies new to the Mexican energy sector, prospects for bidding – and winning – an energy sector contract can seem daunting. The energy sector in Mexico was largely closed to outside bidders and even to non-government companies. That situation made much of the sector more or less decrepit for the better part of seventy years. That means just about kind of energy sector reform ought to sound like real opportunity.
But the auctions being offered by both Pemex and the Comision Federal de Electricidad (CFE) have been met with mixed enthusiasm. That’s in part because many simply don’t know many of the details of the auction contracts and bidding processes. The legal reforms themselves leave lots of unanswered questions and seeming gray areas. That can make bidding with 100% confidence next to impossible.
But let’s look at the auction and the energy landscape into which the winning bidders are moving.
Among the three biggest contract winners were Sunpower from the US, Alten Renewable Energy from Spain and Italy’s Enel. These long term energy contracts were intended to finance projects in clean and renewable energy. They were all for 15 years of energy generation, with 20 year contracts for the CEL Tradeable Renewable Energy Certificates. All of these contracts together were awarded for the rights to generate some 1,720 MW of electricity. The CFE intends to provide for some 5% of electricity demand from the CELs by 2018. The investment is expected to top US$2.1 billion by 2018 when most of the contracts begin.
The average prices from the entire auction came to about $41.80 per megawatt-hour. These seven auctions awarded contracts for 1,100 megawatts of solar generating capacity and another 620 megawatts for wind farm projects. The CFE will conduct another auction this month for the remaining demand.
The CFE was thus able to sell some 5 million clean-energy certificates with 20 year limits. Larger mostly industrial consumers can buy the certificates in order to comply with the 5% requirement.
But importantly, all of these companies successfully bidding for the contracts need to be familiar with the bidding process, the business culture and the technical standards for the Mexican market. In most cases, they need to be relatively big firms to be able to move with any certainty into such a landscape. Of course, there are international and regulatory agencies all over the place. But with the right technical, legal and engineering teams in place, it’s certainly something that they can do.
Many of the most recent Pemex contracts have been license contracts, as opposed to earlier offered production sharing contract models. The license contracts include a standard royalty plus a further royalty based on gross revenue.
Pemex petroleum contracts have largely gone to Mexican companies, but they are seeing increasing competition as international players learn the ropes and move quickly into the market. December onshore contracts, attracted 40 bidders. 26 were individual companies and another 14 were joint ventures. International bidders included Renaissance Oil Corp from Canada, several bidders for the United States and Armour Energy, GDF Suez E&P and Pacific Rubiales. The total investment from those auctions alone is expected to amount to some US$1.1 billion.
Although the consortia are able to specialize in their building of teams, the private companies who keep operations under one roof continue to predominate. Never-the-less, the number of successfully bidding Mexican established firms, and start-ups, is worth keeping an eye for future joint operations. The home-based expertise in Mexico’s regulatory market cannot be underestimated.
Although Mexican technical standards generally match up with other similar countries and markets, it’s often to any firm’s advantage to partner with someone from the home market. Many of the technical norms and the Pemex Normas de referencia will throw outside engineering firms for a loop – or into a scramble for translation. Most of these documents, including the Caname Normas oficiales, the Pemex Gas y Petroquímica Básica and the Official Mexican Standards are available in English translation already. These can be downloaded and shared with subcontractors or investors or similar parties as part of a standard package. That allows many of the most competitive firms to avoid the extensive trouble of translating and modifying documents or measurements, across borders.