Mexico’s AMLO Touts Amended Ethane Contract, New Electricity Law as Sector Unease Mounts

Bizar Male

Mexico’s president and the CEO of its state oil company Petróleos Mexicanos (Pemex) said Wednesday that the terms of an ethane supply contract between Pemex and petrochemicals firm Braskem Idesa (BI) have been amended.

The changes would benefit Pemex, said President Andrés Manuel López Obrador and Pemex CEO Octavio Romero Oropeza, although BI had yet to confirm any final agreements.

BI said Monday that Mexico’s Centro Nacional de Control del Gas Natural (Cenagas), operator of the Sistrangas natural gas pipeline grid, had restored natural gas transport service for BI’s Etileno XXI polyethylene complex in Veracruz state under a 15-year term.

Cenagas had abruptly cut off the service in late 2020, forcing Etileno XXI, the largest petrochemical complex in Latin America, to halt operations.

The cutoff came amid accusations from López Obrador that the terms of an ethane supply contract between Pemex and Etileno XXI were unfair to Pemex.

BI said Monday it had signed a memorandum of understanding (MOU) with Pemex “for the discussion of potential amendments to the ethane supply contract and for the development of an ethane import terminal,” adding that the restored natural gas contract was contingent on renegotiation of the ethane supply contract.

However, it said, “The existing ethane supply contract…has not been modified and remains in full force and effect,” adding, “At this time, BI cannot predict the outcome of such discussions with Pemex, its shareholders, and creditors.” 

This did not stop López Obrador and Romero, though, from unveiling on Wednesday what they said were the agreed-upon new contract terms during the president’s morning press briefing.

Due to its declining production of wet gas in southeastern Mexico, Pemex has struggled to meet its ethane supply commitment to BI under a 20-year, take-or-pay/supply-or-pay contract for 66,000 b/d signed in 2010. 

Under the terms laid out in the new MOU, the contract tenor would be reduced to three years for a volume of 33,000 b/d, Romero said, meaning that Pemex would no longer be obligated to supply ethane to the plant starting from 2024.

Romero said Pemex also has agreed to collaborate with BI in the development of an ethane import terminal that will allow BI “to supply itself” with the essential primary material.

BI has increasingly been importing ethane to Veracruz to make up for the shortfall in supply from Pemex, and has indicated plans to expand its import capacity.

BI is a joint venture between Brazilian petrochemicals firm Braskem S.A. and Mexico’s Grupo Idesa. Etileno XXI’s ethane cracker has the capacity to produce 1.05 million tons/year of high and low-density polyethylene. Ownership stakes in Braskem S.A., meanwhile, are held by Novonor (former Odebrecht S.A.) and Brazilian national oil company Petróleo Brasileiro S.A., aka Petrobras.

Romero also said that while BI previously paid Pemex a discounted rate for ethane, it will now pay “100% of the global benchmark price,” along with 100% of transport costs that were previously borne by Pemex.

Pemex also will no longer be subject to penalties for failing to meet its ethane supply commitments, Romero said.

New Electricity Law

López Obrador on Wednesday also hailed the Mexican Senate’s passage of a controversial new law governing the electric power sector that will give priority in the dispatch order to power generation assets owned by state utility Comisión Federal de Electricidad (CFE).

The law has drawn widespread criticism in Mexico and globally as undermining the country’s constitution, its clean energy transition, and free trade pacts such as the United States-Mexico-Canada Agreement.

The U.S. Chamber of Commerce, the Global Wind Energy Council, the Global Solar Council, and Mexican business chamber Consejo Coordinador Empresarial are among the numerous groups that have denounced the law in recent days.

Undeterred, the president on Wednesday thanked lawmakers for approving the bill, saying, “This will allow us to strengthen [CFE],” and “face difficult moments like what occurred in Texas, which had a repercussion in our country,” a reference to last month’s winter weather event that caused prolonged shortages of natural gas and electricity in the region.

CFE resolved the situation “in five days” by ramping up generation from other sources, López Obrador said. 

The new law has been widely criticized as a means of propping up CFE’s fuel oil-fired thermal plants at the expense of cleaner, cheaper renewable and natural gas-fired plants owned by the private sector.

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