A Clearer Insight into Mexico’s ‘Dirty’ Fuel Oil Business
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A Clearer Insight into Mexico’s ‘Dirty’ Fuel Oil Business

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Cas Biekmann By Cas Biekmann | Journalist and Industry Analyst - Mon, 01/03/2022 - 11:15

CFE’s use of fuel oil became a major fault line in the coarsening discussion between public and private corners of Mexico’s energy sector. While it is a cheap and convenient fuel for the company, its use for power production harms the environment. Even so, a closer look at the issue reveals a more complex situation than simply choosing between ‘clean’ and ‘dirty’.

Fuel oil, also known as heavy oil, bunker fuel or combustoleo in Spanish, is a separation obtained when refining crude oil into other products. On its own, the fuel is not particularly valuable, exemplified by its denomination as “bottom of the barrel leftovers” by the International Council on Clean Transportation (ICCT). Fuel oil has adverse effects on the environment and public health: when fuel oil high in sulfur is burned at a power plant without the aid of contaminant-capturing filters, the resulting gases can cause chronic bronchitis and even cancer. In 2020, Reuters acquired internal documents showing that CFE’s Tula power plant burned fuel with too much sulfur in it. Experts warned that the plant likely operated without sufficient filters and one analyst called the plant's emission levels “crazy,” which highlights that these risks are not imaginary in the Mexican context.

Despite its dire reputation, fuel oil does have its place in the historic global energy mix as a serviceable source to fuel ships and thermoelectric power plants. In Mexico, national oil company PEMEX exclusively refines the resource, with state-owned power utility CFE as its main offtaker. The symbiosis between the two state productive companies is an important cornerstone for the López Obrador administration, which seeks to restrict private participation in the market with the objective of bolstering the publicly owned entities. Especially now that the government backs a far-reaching constitutional reform, analysts are keeping a close eye on this relationship.

“Mexico is creating a market to absorb the excess fuel oil from its refineries,” said Ixchel Castro, Analyst, Wood Mackenzie, to Bloomberg News. The government’s seemingly negative stance on renewable energy generation, at least coming from private companies, adds further fuel to the fire. “[CFE Director] Bartlett has said many times that he does not support renewable technology due to the ‘disturbances’ to the national grid. Bartlett and his allies within CFE seem to advocate for coal, fuel oil and natural gas generation, as this avoids the need to take steps to accommodate different renewable technologies that the national grid has the capability to support today,” wrote Sean McCoy, Director, Edison Energy, for MBN.

Government data shows fuel oil is PEMEX’s No. 1 refining product, having refined an average of 245Mb/d throughout the first three quarters of 2021 and 30.56 percent of the country’s average fuel production of 800Mb/d. CFE has been PEMEX’s main client, especially during the natural gas shortage in February. Nevertheless, exporting it to US-based refineries has proven to be profitable for PEMEX, too. Yet, industry experts question the sustainability of Mexico’s fuel oil, both in terms of cost and regarding the environment. Fuel oil exports might be increasing, but overall demand and market value are dropping.

“Fewer countries are buying this commodity, so more energy will be generated from the burning of fuel oil, which is a tremendously polluting activity. This policy is ultimately costing the country quite a great deal. Generating 1MW of wind energy costs US$20. Generating 1MW of solar power costs US$50. Generating 1MW of power through the burning of fuel oil costs around US$100,” outlined Óscar Fernández López, LATAM Director General, Revergy. Other fossil fuels are likewise cheaper: “Natural gas is cheaper compared to fuel oil, but in Mexico it is a political decision more than an economic one,” said Castro.


Conflicting Scenarios for Mexico’s Fuel Oil Use

SENER data on Mexico’s power production shows that fuel oil has lost a lot of ground in recent years, hitting a nadir in 2020. Most fuel oil is burnt by CFE’s aging thermoelectric power plant portfolio. But its dispatch is being rapidly replaced by private renewable energy projects and CFE’s modern, natural gas-fired combined cycle projects. According to data reported to SENER by CENACE in April 2019, energy generated at thermoelectric plants amounted to 3.2 million MW/h. By April 2020, that number reached 1.6 million MW/h, representing a decrease of 51 percent in just one year. In 2021, this figure has mostly stabilized. Notably, CFE’s thermoelectric plants have also largely been adapted to burn lesser-polluting fossil fuels like natural gas.

Regardless, analysts see plenty that feeds their concern. Mexico’s previous administration planned to decommission several thermoelectric power plants but they remain operational under the López Obrador administration. Via a slew of measures, the government has sought to prioritize CFE in the dispatch over cheaper, privately run power plants, which could push older thermoelectric capacity back into relevance. Furthermore, media outlets like BNAmericas have reported on a confidential fuel oil purchase agreement between PEMEX and CFE. In a more overt reference, last year’s PRODESEN aimed to “make the most of fuel oil for electrical generation,” with added steps to lower sulfur levels.

The government, however, contradicts these notions, at least through its rhetoric. “We want to eliminate fuel oil, but you cannot do that from one day to the next,” Bartlett told Reuters in May of this year. President López Obrador has championed CFE’s hydroelectric power plants, which he said can replace coal and fuel oil-based power generation, and aims to upgrade them with a US$1 billion investment. New capacity based on polluting fuels is also out of the question: “We do not have any plans to build plants that produce energy via coal or fuel oil. What is more, we are investing to process fuel oil and convert it into gasoline,” said the president on another occasion. Though much has been said about Tula, there are indications that CFE would rather fuel it with natural gas if it were not for the fact that the pipeline projects supplying the power plant have been stalled since 2015. The government’s actual plans for fuel oil remain unclear. Until uncertainty clears, it pays to keep energy developments under careful observation.

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