A flurry of tenders for gas-fired projects in Mexico may be good news for construction contractors, but the prevailing state-ownership model means project finance bankers will be left to scrap over "boring" construction loans rather than meaty project finance mandates.
Since President Andrés Manuel López Obrador took office on 1 December (2018), his government has sought to increase state-owned utility CFE's presence in the energy market, which had progressively decreased in the past 15 years.
The two previous administrations, led by Felipe Calderón (2006-12) and Enrique Peña Nieto (2012-18), had reduced the role of CFE by liberalizing the sector through reforms, including the introduction of power auctions to allocate long-term power purchase agreements to projects that would be developed, financed and owned by the private sector.
But the election of López Obrador saw the return of the Obras Públicas Financiadas framework, under which the CFE awards concession contracts to design, build, and finance projects that it will own itself. CFE will pay the developer once the project is ready to start operations.
All CFE bidding processes under López Obrador are following this framework, including the gas-fired project tenders the state utility announced in October (2019).
As a result, construction companies such as Grupo ACS are likely to be the main bidders, say deal watchers. They may need construction loans from banks to fund the work, but not long-term debt.
"It's boring work, but it pays the bills," says one Latin America banker, while another says "it is not project financing as such." There is no need for long-term debt investors like insurance firm Allianz Global Investors to follow the processes.
While project finance bankers in New York are following the bidding processes, some say they are awaiting further clarity on the contract terms. They expect the financing for the projects to consist of three-year construction loans, but pricing is yet to be established.
Developers in Mexico City are also waiting for the CFE to clarify the terms of the tender, but two say their companies will probably not bid. "Our business is in operating the plants, not in building them," explains an official at TC Energy in Mexico.
The gas-fired project up for grabs are:
- an 860MW CCGT in Salamanca, Guanajuato,
- an 804.8MW CCGT in Villa de Reyes, San Luis de Potosí
- a 642MW project in Lerdo, Mexico
- a 500MW project in San Luis Río Colorado, Guanajuato
- a 500MW expansion of the 529MW Mérida IV project in Merida, Yucatan
- a 43MW diesel-fired plant in La Paz, Baja California Sur
Tenders for the Salamanca, San Luis de Potosí, and La Paz projects have already been launched. The remaining three will be announced in the following months. ACS is understood to be bidding for the Salamanca project.
The CFE is also looking for pipelines to supply the plants. The 263km Tuxpan-Tula natural gas pipeline project, a joint venture between TC Energy and IEnova, is being considered to supply some of them, says the TC Energy official.
López Obrador recently announced in a meeting with indigenous communities that the Tuxpan-Tula pipeline's route would be changed so that it does not cross indigenous land. However, the government has not communicated this decision to the sponsors, who remain confused as to how to proceed with construction.
It would not be the first time Lopez Obrador's government changed the terms of a signed contract. Last summer (2019), the CFE renegotiated deals for a series of pipeline projects in Mexico.
Meanwhile, two private companies − Bravos Energía and Vitol − are looking to fill the gap left by the cancellation of CFE's power auction and PPA program with their own. They are currently in the process of accepting bids.
Bankers in New York generally expect a slow year in Mexico but are looking to finance projects that come out of these two private auctions to supplement the construction loans for CFE's CCGTs.
One banker says his firm is also looking at renewable energy projects with non-investment grade corporate offtakers, though the counterparty risk makes this a long shot. "They are too uncertain," he concludes.
(A version of this story first appeared on Power, Finance & Risk)