Mexico’s state power utility Comisión Federal de Electricidad (CFE) on Monday affirmed its stance that renegotiating five natural gas pipeline contracts would result in significant long-term savings for the firm.
Spokesman Luis Bravo Navarro issued a statement responding to a widely publicized report by congressional auditor Auditoría Superior de la Federación (ASF).
The ASF report breaks down the forecasted financial impact of the amended contracts on a net present value (NPV) basis.
The ASF findings confirmed that extending the contracts from 25 years to 35 years, along with freezing and levelizing the rates paid by CFE to the pipeline owners, would result in significant savings for CFE, Bravo said.
The report found that the renegotiation would result in savings of $4.3 billion in nominal terms and $442 million in real terms for CFE over the first 25 years.
For the subsequent 10 years, the renegotiation would save CFE more than $2 billion in nominal terms and $100 million in real terms, Bravo said.
By renegotiating the contracts, CFE eliminated the financial risk of higher debt and the budgetary risk of greater government subsidies that otherwise could have resulted from rising rates over the lifespan of the contracts, Bravo said.
“The leveling and freezing of rates for 25 years, and for a subsequent 10 years, brings stability to the natural gas price, contributes to fulfilling the mandate of the president to not increase electricity rates, and benefits [CFE’s] power stations and the national industry for 35 years,” he added.
In other words, the ASF report “does not ‘disprove,’ but rather confirms the savings obtained by CFE through renegotiating the contracts, and informs about the additional cost that obviously comes with the extension of the contracts,” Bravo said.
According to the ASF, the cost to CFE for the 10 additional years in NPV terms would be an estimated $583 million, equal to 10.9% of the renegotiated cost for the first 25 years.
In other words, “You contracted 40% more service and it only cost you 10% of the first [25 years] of service,” a lawyer involved in the negotiations told NGI’s Mexico GPI. “It didn’t cost CFE 40% more in terms of net present value.”
The 10-year extension also shields CFE from exposure that it otherwise would have faced at the end of the first 25 years, said the lawyer, who asked not to be identified.
The lawyer explained that the original contracts did not include an extension option at the end of the term, meaning that CFE would have needed to negotiate a new contract starting from year 26.
All five of the pipelines in question, including another two for which renegotiation is still ongoing, were commissioned by CFE to import gas from the United States in light of falling domestic gas production by state oil company Petróleos Mexicanos (Pemex).
Security vs. Sovereignty
The scrutiny around the contracts underscores the vital importance of U.S. gas imports to Mexico’s energy security.
President Andrés Manuel López Obrador’s government, however, has a stated mandate of “energy sovereignty” based around strengthening CFE and Pemex. This objective could end up jeopardizing Mexico’s energy security, said Talanza Energy Consulting analysts Marco Cota, María Serna and Daniela Flores in the firm’s latest monthly research note.
“Without more domestic natural gas production, a dominant CFE may actually be putting our energy security and (unwantedly) sovereignty at risk,” the analysts said.
“Additionally, to strengthen Pemex, the government has decided to stop bidding rounds for private participation, thus reducing our country’s restitution reserves and weakening our energy security.”
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November 05, 2020 at 04:50AM
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Mexico's CFE Defends Natural Gas Pipeline Renegotiations - Natural Gas Intelligence
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