Concerns mount about pandemic's impact on Mexico energy projects

Mexico’s oil and electric power sectors are feeling the effects of the COVID-19 pandemic, raising questions about the fate of energy projects. 

“Projects under construction may face increased completion risk due to supply chain constraints, if manufacturers of key equipment (e.g. photovoltaic panels) are unable to meet expected delivery schedules,” Fitch Ratings warned in a research note. 

Even though the government has been slow to impose restrictions, businesses and the energy sector are feeling the pain.  

Since March 19, a spate of wind turbine and components factories in Spain and the UK have been shuttered as part of lockdowns to counter the spread of the virus, representing supply chain challenges for wind and solar projects in Mexico. 

Fitch outlined a scenario whereby downgrades of energy firms could result in lack of access to financing, an inability to find contractors to replace those that decide to pull out, and restrictions on labor mobility that could mean a lack of manpower. 

As yet, there are no reports that companies in Mexico have declared force majeure or similar clauses in project contracts. 

“COVID can be rapidly introduced in a force majeure discussion, while oil and gas prices are a bit different for force majeure discussion,” José Zapata, a partner at law firm Holland & Knight, said in a recent webinar hosted by the Inter-American Dialogue. 

Meanwhile, private sector oil E&P firms cannot officially abandon well drilling or other exploration work because hydrocarbons regulator CNH, which would need to formally approval plan modifications, is in recess until at least April 19.  

Even so, there is a growing sense that firms are scaling back. 

And Fitch is warning that operational risks could mount, due to the absence of “adequate contingency plans.”

REGULATORY INSTABILITY

Despite short-term uncertainty that could hamper finances and project completion, the rating agency said it did not “generally expect” such strains to “translate into negative rating actions unless worse performance put a material strain on the project’s ability to pay near-term debt service (considered unlikely given the presence of debt service reserve funds) or was expected to permanently reduce future project cash flow.”

But the wider context of the energy market does not inspire investor confidence. “Constant changes to the sector’s operating rules create uncertainty regarding future adjustments that may jeopardize the financial health of private projects,” said Fitch, which last June downgraded Mexico’s national oil company Pemex to junk.  

The energy ministry’s decision to cancel a fourth electricity auction a year ago, as well as more recent moves to change the rules for eligibility for Clean Energy Licenses, have sewn these suspicions.

Fitch also said the appointment of allies of President Andrés Manuel López Obrador to posts at the country’s principal energy regulator CRE was a bad sign, “putting in question regulator independence.”

AMLO in late 2019 also won senate backing to name his preferred candidate, Rogelio Hernández, as head of CNH. 

More controversially, last November AMLO put a former staffer with no previous environmental experience, Ángel Carrizales, in charge of the nation’s recently created environmental agency ASEA, where he is expected to approve construction of the Dos Bocas oil refinery.   

Fitch cautioned that the simmering doubts about regulatory stability could now lead to declining private investment in the energy sector.