Mexico Energy Reform: Opportunities
and Challenges
Miranda Ferrell Wainberg, Senior Advisor
Mexico’s Transformative Energy Reform 2013-2014
•
•
•
•
•
Three articles (25, 27 and 28) of the Mexican Constitution were amended
16 new laws created
12 existing laws modified
8 enabling laws published
Guidelines, procedures and standards are being prepared
• Private investment allowed in oil and gas exploration and
production for the first time in 75 years
• Gas imports by pipeline from US accelerated
• Pemex to transfer gas pipeline assets to system operator
CENAGAS
• Generators can sell into wholesale power market and/or
directly to customers
• T & D system to be operated by ISO CENACE
• 35% of power generation from clean sources by 2024
• Clean Energy Certificates to ensure investment beginning
2018
Energy Sector Framework
Source: Analitica Energetica S.C. December 2014
Upstream Sector
(Oil and Gas Exploration and Production)
Private Investment Allowed in the Upstream Sector
WHY?
3P & Prospective Reserves (Billion BOE)
Substantial Resource
Potential
Sources: JP Morgan 2/9/15; U.S. EIA
Falling Oil and Gas
Production
Private Investment Allowed in the Upstream Sector
WHY?
Pemex Duty and Taxes
Pemex Net Income
Underinvestment by Pemex due to high fiscal burden – 53% of
total revenue in 2013
Source: JP Morgan 2/9/15
Private Investment Allowed in the Upstream Sector
WHY?
Pemex Proved Reserves Replacement Rate
Pemex inability to replace production
Source: JP Morgan 2/9/15
Private Investment Allowed in the Upstream Sector
HOW?
Round Zero – August 2013
• CNH granted Pemex 83% of Mexico’s proved
& probable reserves and 21% of prospective
resources
• Majority of the resources are in
southeastern shallow waters
• 42% of deep water prospective resources
were granted to Pemex
• The CNH will conduct bidding rounds for
investments in the remaining 17% of 2P
resources and 79% of prospective resources
Round Zero balances the resources Pemex will operate and those resources which
the State will manage and grant by subsequent bidding rounds.
Source: CNH
Private Investment Allowed in the Upstream Sector
HOW?
• 109 fields or 14.6 billion BOE in prospective
resources including 22% in deep water; 61% in
Chicontepec; 5% in onshore, shallow water,
and heavy oil fields; 1% in unconventional gas
• 60 fields or 3.8 billion BOE in 2P reserves
including 71% in Chicontepec and other
nearby unconventional fields
• Bids open to Pemex as well as domestic and
foreign private companies and other NOCs
• SENER expects Round 1 to attract $50.5 billion
in investment by 2018 or about $12.6 billion
per year
Source: CNH
Private Investment Allowed in the Upstream Sector
Round 1 Bidding Processes
Source: CNH
Private Investment Allowed in the Upstream Sector
HOW?
Initial Tender: 23 fields (19 contracts) of 169 Round 1 fields
• 14 shallow water exploration
contracts (PSCs) with prospective
resources of about 11 billion BOE
• Province accounts for 80% of Mexico
cumulative production
• Bids due and winners announced
July 15, 2013
• 5 shallow water development
contracts (PSCs)
• Low production costs
• Bids due and winners
announced September 30,
2015
Source: CNH
Private Investment Allowed in the Upstream Sector
HOW?
In addition to Round 1, Pemex initially plans to farm out six shallow water fields with
estimated potential of 1,097 million boe and requires $12.5 billion of investment.
Additional farm outs are expected in 2015.
Source: CNH
Potential Investment Capital from Private Investors
Private investment in the upstream sector from
2015 to 2020 could be $56 billion or 45% of total oil
and gas sector private investment
Source: Marcos y Associados 2/15
Mexican Upstream
Sector Reform
Opportunities
•
•
•
•
Substantial investment opportunities for
companies in all phases of hydrocarbon
exploration and production
Tax revenues from non-Pemex investors
should reduce the Pemex fiscal burden
while contributing to a public budget that
relies on oil and gas production for 33% of
its revenues
Increased production from Mexico will
enhance North American oil and gas
security
Post-reform Mexico’s GDP expected to
grow at 3.7-3.9% annually compared to
3.3% pre-reform
Challenges
•
•
•
•
•
•
•
Low oil prices
Very aggressive timing
Security
The fledgling CNH has new and expanded
responsibilities with tight deadlines – is it
up to the task?
Safety and environmental regulation and
enforcement is the responsibility of a
brand new and inexperienced agency
Industry has many concerns about the
PSCs in Tender 1
Minimum national content of 25%
required in 2015 increasing to 35% by
2025 in a country without a developed oil
services industry
Natural Gas Midstream Sector
(Pipelines, Processing & Storage)
Gas Imports By Pipeline From US Accelerated
WHY?
Gas Production Vs. Gas Consumption
Source: BCG 4/2014
Impact of Gas Shortages on Quarterly GDP
Source: JP Morgan 2/9/15
• Natural gas consumption, especially in the power sector,
continues to grow while production declines
• Shortfalls have been met by gas pipeline imports from the US and
LNG
Gas Imports By Pipeline From US Accelerated
WHY?
Natural Gas Share in Electric Generation
Electric Generation by Fuel, 2027
• Natural gas demand from electric generators will continue to grow as more
expensive fuel oil is displaced
• Initial domestic production focus post-reform is oil and US natural gas is currently
abundant and inexpensive
• Natural gas is considered a “clean fuel” by Mexico and is important in meeting the
country’s emissions targets
Source: JP Morgan 2/9/15
Gas Imports By Pipeline From US Accelerated
HOW?
Total gas midstream investment for cross-border and domestic infrastructure could
reach $34 billion by 2020
Source: RBN Energy
Gas Imports By Pipeline From US Accelerated
(Import Now, Domestic Production Later)
• Agua Dulce-Frontera and Los Ramones Phase 1
began operation in Dec. 2014 with 2.3 Bcf/d
capacity expandable to 3 Bcf/d
• A $935 million contract was awarded by Pemex
to Brazil’s Odebrecht and others for construction
of Los Ramones Phase 2 to be complete in 2Q
2016 with capacity of 1.4 Bcf/d
• Construction contracts for three connecting
pipeline projects moving up to 1.4 Bcf/d of
Permian Basin gas from West Texas to CFE power
plants were awarded in early 2015
• The Sonora Pipeline which will carry 510-700
MMcf/d to several CFE power plants is under
development by Ienova (Sempra)
Source: RBN Energy
• These projects alone will add 3.9 Bcf/d of gas
export capacity (gas exports in 2013 were 1.8
Bcf/d)
Domestic Natural Gas Infrastructure Requires
Expansion
Natural Gas Infrastructure 2013
Natural Gas Infrastructure 2028
•
•
•
•
•
Current domestic infrastructure has limited capacity and coverage. The center, west and Baja
California lack capacity. Much capacity is old – 20 years plus – many bottlenecks.
From 1995-2013 natural gas demand more than doubled but the gas pipeline system grew by only
19%.
Since Nov. 2012 Pemex has issued 35 critical alerts which pause imports and limit national gas
supply.
Estimated losses due to pipeline limitations were $1.4 billion in 2012.
Substantial investment in domestic gas infrastructure is required.
Expansion of Domestic Gas
System
• The gas midstream sector has been open to private investment since 1995
• Significant new non-Pemex open-access transportation has not been significant due to
Pemex domination of the gas pipeline system and its limited capacity
• Under the reform Pemex and CFE must transfer their gas pipeline assets to a new
independent regulator, CENAGAS. CRE ordered the Pemex asset transfer in February
2015.
• CENAGAS will operate the existing gas pipeline system and will ensure safety and
equal access for transportation as well as permit new infrastructure and establish
transport rates. New projects will be tendered through open seasons.
• These measures should help stimulate new private investment approaching $21 billion
in natural gas infrastructure
Natural Gas Midstream Sector
Opportunities
•
•
•
Substantial investment
opportunities for private
companies in cross-border and
within Mexico midstream
infrastructure
The removal of Pemex from the gas
transmission and distribution will
allow new marketing companies to
emerge bundling pipeline capacity
and the gas commodity
CENAGAS to ensure open access to
pipelines creating a more level
playing field for investors
Challenges
• Pemex initial capacity reservation
contracts could result in
continued Pemex dominance of
the mid-stream, at least in the
short term
• CENAGAS is a new and
inexperienced regulator
• Uncertain timing of the build out
of the domestic Mexican
infrastructure which is critical for
a robust market
Electric Power Sector
Why Reform the Electric Sector?
Electric Rates Mexico vs. US
(cents per Kwh)
CFE Historical Net Income (pesos billion)
Sources: SENER, JP Morgan 2/9/15
• Electric rates are high and uncompetitive, especially for industrial customers
• Negative impact on Mexican manufacturing sector and country GDP
• Underinvestment by CFE due to budgetary constraints and the company’s financial
losses. Heavy subsidies for residential and agricultural customers and huge distribution
losses (20.8% - almost triple the OECD average) contribute to the losses.
• Capacity growth has significantly lagged demand growth. Transmission and distribution
networks are old (30% are past their useful life spans) and inefficient creating major
bottlenecks in the system.
The Post-Reform Mexican Electric Sector
• CFE has two years to separate its generation
function from its transmission and distribution
function
• Generation is open to private investors who
can sell to a new wholesale power market or
directly to qualified end users whose
consumption is greater than 3MW*
• CFE T & D grid will be operated by CENACE, a
new ISO, which will dispatch generation based
on lowest cost, guarantee open access to the
T & D grid and run the wholesale market
• Private investors will be able to contract with
CFE to build, finance and operate T & D
networks
• Should stimulate significant private
investment in both generation and
transmission and distribution
• With the participation of more efficient
private investors electricity rates should fall
*Since 1992 private participation has been allowed but all surplus
power had to be sold to CFE, limiting the attractiveness of the IPP model.
Mexican Electric Power
Sector
Opportunities
Challenges
•
•
•
•
•
Substantial investment opportunities
for private companies: $50 billion
from 2016-2020 per SENER
Growth of the wholesale electricity
market should generate
opportunities for marketing and
trading firms
Competition in all sectors of the
power value chain should lead to
lower electric rates
Mexico will become more attractive
to industries with adequate
electricity supply and lower rates
•
•
•
•
•
CENACE is a new, inexperienced
agency
Initial CFE capacity reservations could
dominate T & D system
SENER must craft a “never done
before in Mexico” legal regime which
will ensure open access to the T & D
networks
Residential and agricultural subsidies
– do they continue?
Timing of electricity rate reductionsinfrastructure construction is multiyear
Security/theft
Renewable Energy Sector
Pre-Reform Renewables Sector
• Robust legal framework in place to promote renewables: 2008 Law for the
Application of Renewable Energy and Financing the Energy Transition; 2012
General Climate Change Law and 2013 National Climate Change Strategy
• In 2013 renewables accounted for 24% of installed generation capacity and 14% of
gross generation
• Mexico has aggressive targets in terms of reducing power generation from fossil
fuels and lowering greenhouse gas emissions:
• In 2013 fossil fuels accounted for 82% of gross generation. The target is 65%
by 2024 with 35% of generation coming from “clean sources.”
• Emissions reductions targets: 30% by 2020 and 50% by 2050
Post-Reform Renewables Sector
The “Clean Energy” vs. Renewables Controversy
•
Reform Objective: Promote the use and development of “clean energy”
•
Under the 2014 Law of the Electricity Industry “clean energy” includes renewables
(hydroelectric, wind, solar, geothermal, biomass) as well as efficient cogeneration,
nuclear power and other low carbon emission technologies which could include
highly efficient fossil fuel-based generation
•
The renewables industry is concerned that renewables will not be able to compete
with less expensive natural gas, especially current “cheap gas” from the US
•
Others argue that natural gas is complementary to wind and solar by providing a
back-up to these intermittent resources
H2 2014 Costs for Mexico Selected Technologies Unsubsidized ($/MWH)
Source: Bloomberg New Energy Finance 2/2015
Post-Reform Renewables Sector
Clean Energy Certificates (CECs)
• The objective of the CEC program is to incentivize the private sector to invest in clean
energy by providing an additional revenue stream for investors, thereby improving the
investment’s attractiveness and competitiveness
• Beginning in 2018, Clean Generators will receive CECs for each MWH generated without
fossil fuels; when fossil fuels are used, the CEC is multiplied by the non-fossil generation
percentage of the facility’s total generation
• The following entities will be required to purchase CECs: suppliers and distributors that
sell electricity to end users; qualified users that consume at least 3 MW in year one of
the program, 2 MW in year two and 1 MW in year one and end users who generate or
import electricity for their own use without using the national T & D grid
• The initial requirement for power users to purchase CECs is 5% of electricity consumed
which corresponds to Mexico’s target for clean generation by 2018. The requirement will
be reset annually by SENER based on its estimates of the costs of achieving Mexico’s
policy objectives regarding clean energy
• SENER’s estimating procedures put a priority on low costs over low emissions given the
goal of reducing electricity prices
Forecast Growth of the Renewables Sector
• SENER forecasted that about $41
billion of investment in renewable
generation is required between 2013
and 2027
• This investment results in renewables
(hydroelectric, geothermal, wind, solar
and unidentified new clean
technologies) accounting for about
30% of installed capacity and 20% of
gross generation in 2027
• Wind and hydroelectric power
represent 79% of the renewables
installed capacity
Source: SENER
• For Mexico to meet its 2024 goal of
35% of generation from clean sources,
additional investment in renewables is
required and/or nuclear and gas-fired
generation will make up the difference
Renewable Energy
Sector
Opportunities
Challenges
• Mexico’s emissions reduction
targets and clean energy
generation targets create a
significant space for renewable
energy investments
• Mexico’s geothermal potential is
large (2310 GWe) and CFE has not
had the capital to develop. Sector
could grow by 40% by 2020.
• CECs will enhance the economic
attractiveness of renewables
investments
• Inexpensive natural gas imports
from the U.S. could be a serious
competitor for renewables, at
least initially
• CECs do not come into effect until
2018
• The preference for low costs over
low emissions could hurt
renewables in the short term
Mexico Energy Reform
• Bold and Transformative
Vision of the Mexican Energy
Sector
• The Execution Risks Should
Not Be Underestimated
• Multi-year Process to
Achieve Reform ObjectivesManage Expectations