Energy sector Nordic Investment in Mexico Energy

Energy
Nordic Investment
in Mexico
Energy sector
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Oil & gas sector
Overview
Mexico is a country of great natural resources and oil is one of them. Until now certain activities have
been exclusively carried out by the government, but now the energy reform is changing the rules of
the game.
On December 12, 2013, the Mexican Congress approved energy reform, with the Chamber of Deputies
(lower house) voting to pass the landmark bill just two days after it cleared the Senate. Secondary
Laws that define the operational side of the reform were published in August 2014. These reforms are
expected to have a significant impact on Mexican hydrocarbon sector. The reform could finally begin
to attract the necessary foreign investment to bolster output after a decade of plunging oil production.
The recently passed energy reform goes a significant way toward addressing weaknesses in Mexico’s
oil and gas sector. The bill does not dispute the dominant national narrative that hydrocarbons belong
to the State. But the reform takes major steps to not only permit, but to actively attract foreign
investment.
President Enrique Peña Nieto signed the Secondary Laws in August 2014 and announced a series
of actions for speeding up the implementation of the reform, including:
•Initiation of Round One.
•Creation of decrees of the National Centre for Energy Control (Cenace) and the National Centre
for Gas Control (Cenagas).
•Submission of candidates for the Energy Regulatory Commission (CRE) and the National Centre
for Hydrocarbon Control (CNH) and independent members of Pemex and the CFE, as well as
independent members of the Technical Committee of the Mexican Oil Fund.
•Creation of public fund of domestic contractors and suppliers and creation of Mexican Oil Fund.
•Issuance of the decree creating the National Agency of Industrial Security and Environmental
Protection of the Hydrocarbons Sector.
Source: PwC Mexico, Sener, BMI Oil& Gas report 2014
PwC Mexico
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Energy Reform:
publication of secondary laws
Constitutional amendments and additions on energy were published in the Federal Official Gazette
on December 20, 2013.
On April 30, 2014, the President sent Congress a package of bills for a decree issuing, amending,
supplementing and/or repealing certain provisions of secondary legislations that were debated
and approved during an extraordinary period of sessions held in July and August 2014.
The main objectives of the reform are:
1.Ensuring energy security of the country by opening the energy sector to national and international
private investment.
2.Strengthening Productive State Enterprises (EPE for its initials in Spanish), Petróleos Mexicanos
(Pemex) and the Comisión Federal de Electricidad (CFE, for its initials in Spanish), by means of a
new regime that promotes their efficiency, transparency and accountability, as well as their
managerial and financial autonomy.
3.Establishing clear rules to encourage accountability in order to prevent corruption and to generate
fair and competitive conditions resulting in a decrease in the price of energy.
4.Strengthening the National Hydrocarbon Commission (CNH for its acronym in Spanish) and the
Energy Regulatory Commission (CRE for its acronym in Spanish) as regulators. The National
Agency for Industrial Security and Environmental Protection of the hydrocarbon sector (ANSIP
for its acronym in Spanish) is established.
5.Creating the Mexican Petroleum Fund putting it under the administration of the Central Bank
in order to manage resources from oil exploitation.
6.Creating the Mexican Petroleum Fund under the administration of the Central Bank in order
to manage resources from oil exploitation.
Once the legislative process was concluded, the drafts were passed into law by the President
in August 11, 2014 Official Gazette.
The ordinary legislative process dealt with 21 laws grouped into nine bills 9 of which were enacted
and 12 amended, namely:
New laws:
1.Hydrocarbons’ Law
2.Electric Industry Law
3.Coordinated Regulatory Agencies Organic Law
4.Petróleos Mexicanos Law
5.Federal Electricity Commission Law
6.The National Agency of Industrial Security and Environmental Protection
of the Hydrocarbons Sector Law
7.Geothermal Energy Law
8.Hydrocarbons’ Income Law
9. Mexican Oil Fund for Stabilization and Development Law
Amended laws:
1. Foreign Investment Law
2. Mining Law
3. Public-Private Associations Law
4. Federal Public Administration Organic Law
5. Federal Public Entities Law
6. Public Sector Acquisitions, Leases and Services Law
7. Related Public Works and Services Law
8. National Waters Law
9. Federal Budget and Fiscal Accountability Law
10.Public Debt General Law
11.Federal Duties Law
12.Fiscal Coordination Law
Source: PwC Mexico report: http://www.pwc.com/es_MX/mx/industrias/archivo/2014-08-pwc-sector-energia1-en.pdf
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Following are the principal amendments and additions:
Article 25:
The Federal Government will continue to own and control State organisms and the State Production
Entities. The planning and control of the National Electric System, the public transmission and
distribution of electricity and the exploration and extraction of oil and other hydrocarbons will
remain in the hands of the State in the terms of article 27 of the Constitution. Social and private sector
companies will be supported by social equity, productivity and sustainability criteria.
Article 27:
No concessions will be granted for radioactive minerals, oil or solid, liquid or gas hydrocarbons.
According to the regulations, the State will conduct all exploration and extraction of hydrocarbons by
means of assignments to State entities or contracts with private parties. The planning and control of
the national electric system and the public transmission and distribution system will be in the hands
of the State. No concessions will be issued for the abovementioned activities. Private parties may take
part in all other operations via contracts. State Production Entities may enter into contracts with
private parties.
Article 28:
The planning and control of the national electric system, the public electricity transmission and
distribution service and the exploration and extraction of oil and hydrocarbons have been identified
as strategic areas. The petrochemical industry is no longer considered a strategic area. The Mexican
Oil Fund, a public trust, has been created in order to receive, manage and distribute income arising
from assignments and contracts.
Transitory provisions
The bases to be considered in secondary legislation are established in 21 articles. The important
points are:
The creation and regulation of State Productive Enterprises - Pemex and the CFE will become State
Production Entities within a period of two years. During that period, Pemex may receive assignments
and sign contracts. Regulation of those entities will be drawn up in 120 days, including a special
regime for contracting, acquisitions, leases, services, public works, public debt and other factors
required to make them competitive.
Types of contract and the respective payments
During that same period, Congress will make the changes to the legal framework necessary
to regulate the following models of contract and types of compensation (among others):
Round zero: Preferential bidding processes
With the assistance of the CNH, the SENER will conduct preferential reviews of Pemex requests for
exploration areas and production fields. Assignments will specify service area, depth and the term
of each.
Transparency and external audits
Within a term of 120 days, the bases and rules for the procedures will be established for State
contracts with State Production Entities or with private parties, which must be made known
and made available to the public for consultation. Likewise, contracts will be required to contain
clauses pertaining to transparency, external auditing systems and the disclosure of prices, taxes
and payments.
Migration of Pemex assignments
Pemex may reclassify assignments as contracts with the approval of the SENER and the assistance
of the NHC. If Pemex decides to contract a private party, the CHN will conduct the bidding process.
No assignments may be transferred without SENER approval.
National content
The participation of domestic and local production chains will be encouraged; the minimum
percentages of national content will be established in the law, and domestic industry will be promoted
in those areas.
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Preference for the use of surface area or the subsoil
Hydrocarbon exploration and extraction and the public electric energy transmission and distribution
system will have a preference over any other system involving the use of the soil or the subsoil.
Mining concessions
Mining concessions will not include the right to oil and hydrocarbon exploration and extraction.
Whenever technically feasible, the law will provide mechanisms to facilitate the coexistence of these
activities (mining and the activities associated with hydrocarbons).
New order of competencies
In a period of 120 days, the laws will grant competencies to:
•SENER to design contracts and the technical guidelines for bidding processes.
•The NHC to authorise surface reconnaissance and exploration services, issue invitations to bid,
award and sign exploration and extraction contracts and supervise extraction plans.
•The ERC to regulate and issue permits for the storage, pipeline transportation and distribution of oil
and gas, among others and for it to regulate third-party access to pipelines and storage areas,
regulate and issue permits for electricity generation and authorise rates for the transmission and
distribution of electricity.
•The Ministry of Finance to establish financial and tax conditions for all contracts.
Mexican Oil Fund for Stabilisation and Development
The Mexican Oil Fund, with the Central Bank acting as a trustee, will become a public trust in 2014
and begin operating in 2015. The fund will receive all State revenues arising from assignments and
contracts, with the exception of taxes, and will make all payments and transfers contemplated in
the law.
The National Centre for Natural Gas Control
Once the Law Regulating Article 27 of the Mexican Constitution in Matters Pertaining to Oil has gone
into effect, the National Centre for the Control of Natural Gas will be created in a period of 12 months
to operate the national pipeline transportation and storage system.
The National Industrial Security and Environmental Protection Agency
This agency will regulate and supervise the facilities and operations of the hydrocarbons sector, the
dismantling and abandonment of facilities and comprehensive control of residues.
Sanctions
The laws must warn, identify and severely punish all signatories, contractors, permit holders, civil
servants and other public and private individuals and entities, whether Mexican or foreign, engaging
in acts or omissions for the purpose of influencing decision-makers at the State Production Entities
with a view to securing a specific economic benefit.
Besides from opening the upstream sector, the bill also involves some other steps. These include:
opening the midstream and downstream sectors to larger investment; the creation of a sovereign
wealth fund overseen by the Central Bank to help create distance between the Mexican government’s
fiscal position and Petróleos Mexicanos (Pemex); and the granting of greater responsibilities (and
powers) to various energy regulators. This is a significant and big step, which will probably attract
considerable investments and transform the sector significantly over the long term, bolstering its
competitiveness compared to regional and global peers1.
In November 2014 the corresponding regulations for the Secondary Laws will be issued.
A deeper analysis of the secondary laws can be found from:
http://www.pwc.com/es_MX/mx/industrias/archivo/2014-08-pwc-sector-energia1-en.pdf
http://www.pwc.com/es_MX/mx/industrias/archivo/2014-08-pwc-sector-energia2-en.pdf
http://www.pwc.com/es_MX/mx/industrias/archivo/2014-08-pwc-sector-energia3-en.pdf
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1
Source: BMI Q1 2014 Special report implications of Mexico’s energy reform.
Round zero
On August 13, 2014, Sener announced the results of round zero, the stage in which work zones for
Pemex are assigned first, before being offered to private companies. Thus Petróleos Mexicanos obtains
83% of the proven and probable reserves requested on March 31st. Pedro Joaquín Coldwell, Minister
of Energy, announced that as a result Pemex will be able to exploit 1.6 billion barrels of oil per year,
which will ensure its development and enable it to maintain a production level of 2.5 million barrels
of oil per year for 20 years. Between 2015 and 2018 the oil company is expected to channel
investments amounting to around 50 billion dollars. Juan Carlos Zepeda, president of the National
Hydrocarbons Commission (CNH), announced that round one will begin immediately by approaching
oil industry companies and in the third week of November 2014 tender areas and pre-bases, including
business and tax terms for each of the blocks, will be determined.
Sener said that 156 blocks will be offered in round one, 96 of which correspond to exploration projects
and 60 to drilling plans. The blocks cover an area of 28,500 kilometres 91% of which consists of
exploration areas and the other 9% to drilling fields.
Source: Sener.
Round One
The National Commission for Hydrocarbons (CNH) said that of the 169 oil blocks up for tender in
Round One some may be standardised for their operation. During the Summit Mexico Upstream:
Contracts & Deepwater in October 2014, the CNH Commissioner, Édgar Rangel, said Round One
contemplates 169 units, 109 of which are exploration and 60 development fields. He said that Sener
has already initiated consultations with companies to tender the blocks and the best contractual
model for them is still being analysed. Rangel said there are companies for every kind of opportunity.
There are those specialising in deep sea or shallow waters or in zones like Chipontec.
Likewise, he said that with the 2P and prospective reserves granted to Pemex, the company can
register a replenishment rate of 100%. However, he said that it is not just about reserves; other
influencing factors include production, reclassification, revisions and inclusions stemming from
discoveries.
Source: El Universal.
Investment Opportunities
According to Banorte-Ixe research, the approval of the secondary energy laws package could add
between 3 and 5 % increase in GDP between 2016 and 2020. The ongoing effects of amendments to
the energy laws will be around 1% of potential GDP in the long term. The response from the foreign
exchange market is positive, and Standard and Poor’s and Fitch Ratings could raise their credit
Outlook for Mexico to positive, or even from BBB+ to A.
According to the President of the Energy Regulation Commission (CRE), Francisco Salazar Díez
Sollano, there are investment opportunities in liquid storage infrastructure, in particular the storage
of hydrocarbons. “According to Pemex Refining data, the storage capacity of Magna gasoline is
equivalent to three days while in the case of Premium and diesel it is seven. This means that in the
event of a contingency requiring such reserves to be drawn on, gasoline would only be available for
that number of days”, the President of CRE told the daily Milenio. This also applies to natural gas
according to the Energy Ministry (Sener)’s 2013-2026 strategy.
Source: Banorte-Ixe, Pemex Refining, Milenio.
PwC Mexico
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Bigger energy budget
In 2015 the National Hydrocarbons Commission (CNH)’s Budget will be 4.6 times higher than 2014’s,
reaching 350 million pesos according to the Ministry of Finance and Public Credit (SHCP)’s published
budget.
CRE will be responsible for granting electricity generation and sale permits and all midstream
hydrocarbon activities; it will receive 400 million pesos or almost double its 2014 budget.
Sener has requested an 18% increase in next year’s budget, as Mexico will implement standards for a
new energy sector. The 2014 Energy Decree confers 3.896 billion pesos that Congress must approve in
December 2014.
The budget for Petróleos Mexicanos (Pemex) will amount to 540.580 billion pesos, 3.6% more than
this year’s.
The Federal Electricity Commission (CFE) has a 2015 budget amounting to 314.456 billion pesos.
Source: El Financiero.
Nuevo León: Mexico’s power hub
According to Leonardo Beltrán Rodríguez, Undersecretary of Planning and Energy Transition at the
Ministry of Energy, Nuevo León is working to become one of Mexico’s main energy centres in the area
of hydrocarbon and alternative energy exploration.
Beltrán Rodríguez said the state has enormous potential in sectors such as wind energy and is already
working on wind energy generation projects. He also announced the creation of a programme to
support training for energy sector professionals in Nuevo León.
Source: Mexican Business Web
Tamaulipas has 63% of Pemex’s conventional prospective reserves
Of the 52.6 billion barrels of crude oil equivalent estimated by Pemex as conventional prospective
reserves, 63.3% are in oil provinces related to Tamaulipas: Burgos, Tampico-Misantla, and deep-sea
Gulf of Mexico.
According to the focus of the Energy Agenda of Tamaulipas presented to Tampico businessmen,
Tamaulipas has two assets for hydrocarbon exploration and exploitation: the Burgos Integral Asset,
located in Northeast Mexico, which covers most of the northern area of Tamaulipas as well as Nuevo
León and Coahuila, and the Production Asset Poza Rica-Altamira, in the province of TampicoMisantla, which covers the southern part of Tamaulipas and part of Veracruz.
Of the four oil provinces where nonconventional prospective reserves amounting to 60.2 billion
barrels of crude equivalent are estimated, three extend through Tamaulipas: Burgos and TampicoMisantla to a great extent, and Sabinas-Burro Picachos to a lesser extent. In 2013, crude oil production
in Tamaulipas contributed 19.18 thousand barrels daily. The trend is positive with an average annual
growth rate of 1.59%. In 2013, natural gas production in Tamaulipas amounted to 825.32 million
cubic feet daily for an average annual growth rate of 7.22%.
Source: Mexican Business Web
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PwC Mexico
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Key players and entities
Oil
Government entities
Main government entities in the energy industry are;
Secretaría de Energía (SENER) – Ministry of Energy, government body responsible for the energy
policy and planning of the energy industry in Mexico.
Comisión Reguladora de Energía (CRE) – government entity responsible for regulating the power
and natural gas sector
Comisión Nacional de Hidrocarburos (CNH) – government entity responsible for overall
exploration and production activities in regulation, providing technical advise to SENER, conducting
tender and contract supervision and evaluating exploration and development plans.
Upstream
State productive enterprises
Pemex
The main state productive enterprise is Pemex, which accounts for all oil and gas production, as well
as the entire Mexican refining sector. Pemex is the largest company in Mexico and among the 10
biggest companies in the world in terms of revenue. The enterprise was founded on July 20, 1938 by a
parliamentary decree, after the nationalisation of foreign-owned oil companies operating in Mexico.
Since then, Pemex has held a monopoly over the exploration, production, refining and marketing of
oil and gas and their related products. Gas distribution was opened up to foreign companies in 1995,
but Pemex has sole production rights.
The Pemex refining division operates six refineries with a total installed capacity of 1.54mn barrels
per day (b/d). Even though it has the fourth largest proven crude oil reserves in the Western
hemisphere, Mexico imports over a 25% of its oil products. Pemex has stated that it needs to spend at
least US$19bn over the next 10 years in order to make up for domestic shortfalls in gasoline
production. Pemex is committed to a major schedule of refinery upgrades in order to meet expected
growth in demand. According to the government´s projections, Mexico will need to build a new
refinery every three to four years over the next 20 years to meet the growing domestic demand for oil
products. Mexican pipeline imports of natural gas are now almost the same as the US natural gas
production. Because of imported gas being priced at the US Henry Hub benchmark, imports remain
cheap despite surging growth in demand. These price dynamics have a reinforcing effect, and will
therefore support a future growth in demand. That means that this trend is expected to remain in
place for the near future, with the associated negative implications for Mexican domestic natural gas
production, which shrank 7% from 2006 to 2012. Business Monitor International predicts that
Mexican gas production will grow at a modest 1% annually for the foreseeable future.
International oil companies (IOC)
International oil company (IOC) upstream involvement is minimal and is confined to oil field
servicing, engineering contracts, gas distribution and liquefied natural gas (LNG) investment. The
previous government pushed for further liberalisation but struggled in the face of an oppositioncontrolled parliament.
National and international services companies
Based on the previous industry model in place, all companies have been contracting with Pemex
under services agreements, and this has provided a large space for service companies to continuously
seek and bid for opportunities to partner with Pemex. Most of the multinational service companies
have a presence and do businesses with Pemex and there is also a growing amount of local companies
developing state of the art services and products to fulfill Pemex’s needs. There are national content
requirements in place that until the moment of the reform have been a task for Pemex to grow and
promote as its mandate to create value for the Nation, though these requirements are not too high in
comparison to countries like Brazil, and these national content policies will now be a full
responsibility of SENER.
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Nordic investment in Mexico
Examples of international cooperation
China
In April 2013, Pemex and Sinopec signed a long-term oil supply agreement on the sidelines of the Boao
Forum in China. The deal will allow for a minimum of 30,000 barrels of oil per day (b/d) of Mexican
crude to be sent to China for at least two years. While this is a relatively small agreement, it is the first
contract of its kind between Pemex and Chinese companies.
On August 5, 2014, an agreement was reached to create reciprocal opportunities in energy sectors
under these bilateral mechanisms during a meeting between Minister of Energy Pedro Joaquín
Coldwell and the President of the National Commission for Development and Reform of the People’s
Republic of China (CNDR), Xu Shaoshi. Activities include the creation of a 3 and 3.5 billion dollar
fund for channelling energy, infrastructure and other areas of opportunity. According to Sergio Ley
López, former Mexican Ambassador to China, the country is interested in the energy sector due to its
energy shortfall.
Importantly, this deal also symbolises the way in which Mexico is seeking to find additional export
markets for its crude oil. This is particularly true at a time when domestic production in the US has
continued to surge, leading to a precipitous drop in imports - including imports from Mexico, the
USA’s second largest source of crude.
Source: Mexican Business Web
Japan
According to the Nikkei news agency, in March 2010, the Japan Bank for International Cooperation
(JBIC) agreed to lend the Mexican government US$600mn to develop the Chicontepec Basin. The
loan is one of the largest ever received by Pemex for a single project and demonstrates Tokyo’s
reassessment of its historical neglect of Latin American oil producers. Japan is heavily reliant on
Middle Eastern supplies for its oil requirements, a regional dependence it has been looking to reduce
in recent years. Given the previously closed nature of the Mexican oil industry and poor returns from
Chicontepec, the loan appeared to be largely a goodwill gesture aimed at nurturing relations with the
Mexican government.
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Mid/Downstream
The transportation, storage, and distribution network is arguably the part of the Mexican oil and gas industry that receives less attention
and investment than it deserves. The use of advanced technologies to map and monitor Mexico’s oil pipeline network, and the shift from
corrective to preventative maintenance of existing oil transportation infrastructure, are steps in the right direction to improve midstream
performance. On the other hand, natural gas transportation has been open to private investment for almost two decades but new
infrastructure development has only recently started to see a significant boost, driven by the energy needs of a growing Mexican
economy. There are ambitions to improve hydrocarbon transportation through the introduction of new monitoring and maintenance
technologies, and the respective roles of the public and private sector in the expansion of Mexico’s hydrocarbon transportation network.
Mexico’s National Refinery System consists of six operating refineries in the country, which are undergoing a revamping process to
increase the refining capacity within the national territory and match processing capabilities with the increasingly heavy crude Mexico is
producing. Despite the increase in capacity from 1.54 million b/d to 1.69 million b/d, throughput levels have actually declined in the past
years – from the 2009 peak at 1.295 million b/d refined in Mexico to 1.199 million b/d in 2012.
Industry forecast by Business Monitor International
Pemex exploration & production
Production of crude oil
(thousands of barrels per day)
2007
2008
2009
2010
2011
2012
2013
Jan 2014
1-23 feb
2014
3,076
2,792
2,601
2,577
2,553
2,548
2,522
2,506
2,503
Project
Ku-Maloob-Zaap
527
706
808
839
842
855
864
865
864
1,464
1,009
646
501
449
404
380
354
356
Crudo Ligero Marino2
187
186
194
199
199
193
159
146
143
Antonio J. Bermúdez
130
110
96
77
68
64
67
74
76
69
97
122
125
111
93
73
66
65
243
211
183
171
165
174
221
236
237
Cantarell
Ixtal-Manik
Chuc3
Delta del Grijalva
57
75
104
141
155
141
105
96
96
Aceite Terciario del Golfo
23
29
30
41
53
69
66
56
54
376
369
419
483
511
555
587
613
614
6,058
6,919
7,031
7,020
6,594
6,385
6,370
6,460
6,544
5,915
6,289
6,534
6,337
5,913
5,676
5,678
5,830
5,900
143
629
496
683
681
708
691
630
644
3,058
2,754
2,594
2,549
2,515
2,479
2,420
2,401
2,388
1,356
1,347
1,362
1,191
1,172
1,211
1,229
1,208
1,120
5,622
5,640
5,786
5,796
5,583
5,335
5,192
5,106
5,154
Plants
4,289
4,257
4,460
4,483
4,536
4,423
4,452
4,427
4,466
Direct products
1,334
1,382
1,326
1,312
1,047
912
741
679
688
Gas usage (in %)
92.3
87.7
90.1
94
96.2
97.9
97.9
97.2
96.7
Otros proyectos
Gas production
(million cubic feet per day)
Hydrocarbon
Nitrogen
Crude distribution
(thousands of barrels per day)
National system of refinery
Gas distribution
(millions of cubic feet per day)
Source: PEMEX http://www.pep.pemex.com/25.2.2014
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Gas
Mexico’s natural gas consumption has experienced strong growth, fuelled by cheap natural gas in the
US. This is resulting in two trends: firstly there is no interest to invest in Mexico’s vast non-associated
gas shale, causing domestic production to decline, and secondly, cheap supply is boosting imports of
natural gas from the US. Increased investment is needed for pipelines connecting Mexico and the US
and transporting the gas throughout Mexico.
Pemex is authorised to sell natural gas
A plenary session of the Energy Regulatory Commission (CRE) has approved an agreement to change
the purchase-sale contract and general conditions pertaining to the sale of natural gas by Pemex Gas y
Petroquímica Básica.
During the CFE’s session in October 2014, Francisco Barnés, commissioner, said that under this new
framework contract model, the now State Production Company must end first-hand hydrocarbon sale
contracts and adhere instead to the new regime proposed by energy reform. “The implementation of a
framework contract and its general conditions for the sale of natural gas along with its annexes
requires a transition from the current transitory regime to a permanent regime consisting of new base
agreements and controls between PGPB and buyers. PGPB must terminate agreements entered into
with buyers and adhere to what the commission indicates”, he added.
Source: Reforma, Oil & Gas Magazine.
Monthly increases in LP gas end in 2015
The energy reform establishes no more monthly hikes in the price of LP gas in 2015 and a cap on its
sale price, according to Minister of Energy, Pedro Joaquín Coldwell. In his opening message to the
GLP Forum México in the beginning of October 2014, he said the price cap will enable users to choose
the company that best suits their interests.
“As of 2017 the price of LP will be free and depend on supply and demand”, he said. Furthermore, one
of the benefits of energy reform consists of Mexicans being able to use fuel at competitive prices and
preserve the environment. “Another of the benefits of the reform is that as of 2016, LP gas imports can
be made by any person or company that is compliant with the requirements established by the rules”,
he added.
The current demand for LP gas in Mexico amounts to 238,000 barrels a day, and calculated that over
the rest of the 6 year term 500,000 jobs will be created as a result of the energy reform: 135,000 direct
jobs and 365,000 indirect jobs.
Source: Oil & Gas Magazine
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Conclusion
There are still a number of questions unanswered, with the announcement of regulations for
secondary legislation and the results of round one.
After a steady decline in crude, natural gas liquids (NGL) and other liquids production, from 3.79mn
barrels per day (b/d) in 2003 to an estimated 2.87mn b/d in 2013, according to BMI output will begin
to stabilise over the coming years, hitting a low of 2.84mn b/d in 2016 before bouncing to 3.17mn b/d
in 2022.
One of the main new drivers of reserve and production gains will likely be increased exploration in
deepwater and ultra deepwater. After many years of failed efforts, recently Mexico has had a number
of successful hits in the Gulf of Mexico’s Perdido Fold Belt. Combined with the recently passed
US-Mexico Transboundary Hydrocarbon Agreement and a number of recent finds on the US side of
the Gulf, helping to further derisk investment in the area, this suggests scope for significant investor
interest in Mexico’s deepwater acreage, maintaining long-term production potential2.
Indeed, The Ministry of Finance and Public Credit (SHCP) expects that in 2015 investment will grow
4% year-on-year in real terms compared to projected real growth of 1.4% this year.
According to SHCP, this growth should come from structural reforms and sound management of
public finances. The Ministry also expects investment to contribute 22% to total economic growth by
2015, which is projected at 3.7%, or a contribution of 0.8 pp.
12
Nordic investment in Mexico
Source: BMI Oil & gas report 2013, PwC Mexico.
2
PwC Mexico
13
Electricity sector
Overview
In the case of electricity, in spite of the fact that Mexico has succeeded in generating electricity for
more than 95% of the population, generation cost is too high compared to other countries (for
medium and high voltage it can be more than 50% than what a company pays in the USA).
The recent reforms have a positive impact on the general workings of the national electrical system,
offering new opportunities for investors and consumers and transforming the The Federal Electricity
Commission (CFE) into a state-owned productive enterprise.
The amendments to articles 25, 27, and 28 of the Mexican Constitution and the transitory articles
recently approved by the Mexican Congress have a significant impact on the National Electricity
System (SEN) as a whole (hereafter the Reform).
The Reform will strengthen competitiveness in the generation of power, accelerate the expansion of
transmission networks, improve distribution supply quality, and offer end consumers a wider range of
opportunities to meet their consumption needs at more competitive prices. Likewise, the Reform will
drive the leverage of natural gas in the generation of electric power through the expansion and
reinforcement of the gas pipeline network. Additionally, it will contribute to attaining the objectives
of non-fossil fuel participation in the energy matrix.
This new paradigm offers the private sector the opportunity to participate in the electricity sector
more actively, from investments in generation, transmission and distribution activities to leveraging
the opportunities that a more competitive approach will offer to electric power users.
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Nordic investment in Mexico
Electric sector regulations
1917
The Mexican Constitution (last amendment 2013)
Electric power generation is excluded from the public utility concept (Art 27, amended in 2013). In addition, the Energy
Regulatory Commission will be responsible for regulating and granting generation permits, as well as establishing
transmission and distribution fees (T-10º).
Article 27 establishes that all activities conducted by the power generating industry for public service is exclusively
reserved for the State.
Article 27 establishes that any activity of the electric industry intended for public service is reserved for the State.
1958
Article 27 of the Constitution with respect to Petroleum (amended in 2008) establishes that electric power can be
cogenerated by PEMEX, subsidiary organisations and their companies, so their surplus can be sold to the Federal
Electricity Commission under agreements entered into by those entities.
1975
The Public Electricity Service Law (LSPEE- amended in 1992) considers self-supply, cogeneration, small-scale producers,
energy independent producers or energy importation for own use as regimes where private companies can invests,
however this will also be revised given the Energy Reform, in order to expand the schemes through which the private
sector can invest.
2008
The Law for the Use of Renewable Energy and for the Financing of Energy Transition and the Regulations thereto
(amended in 2012) are intended to regulate utilisation of renewable energy sources and clean technologies. Article 20
establishes that the same advantages of renewable energies will apply to cogeneration. The Law sets the objective to
generate no more than 65% of electricity through fossil fuels in 2024
2012
The General Law on Climate Change is intended to guarantee the right to a healthy environment and to establish
uniformity in drawing up and implementing public policies for adapting to climate change and mitigating gas and GHGs
compounds, among others. The Law sets the objective to generate 35% of electricity through clean energies by 2024
PwC Mexico
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The 2014 Energy Reform
What are the implications of the reform for electricity sector?
Following is a brief description of the key elements of the current context of every activity of the
electricity sector, what the Reform sets out for this sector and its possible implications.
It is important to emphasise that, as the Reform states, in the following months, the secondary laws of
the electricity sector will be determined in order to begin the implementation of the Reform, which
will include execution of the transformation measures for the key bodies of the sector.
Planning
Context
The current Electric Power Public Utility Law and its regulations state that the Ministry of Energy
(SENER) is in charge of planning the Electricity Sector. Therefore, the CFE elaborates a proposal that
must be approved by this ministry.
When the construction of new generation facilities is required, the CFE notifies the SENER of the
characteristics of the projects, based on costs and the comparable environmental, technological and
reliability criteria. Then, the ministry determines if the CFE undertakes the corresponding actions or
if it hires a private vendor. Furthermore, the control and distribution of power corresponds to the CFE,
through the National Centre of Energy Control (CENACE), a departmental division of the Operations
Division.
The Reform states that…
The Nation is responsible for planning and controlling the SEN (Art 25, 27, and 28). The CENACE will
be a decentralised public body in charge of: The operative control of the SEN; operating the wholesale
electricity market; managing the open/non-discriminatory access to the national transmission
network and the general distribution networks, as well as other functions that will be defined
(Transitory 16º). The CFE will transfer the resources required by the CENACE in order to fulfil its
capabilities. Once the CENACE is created, as a decentralised public utility, it will support the CFE for a
maximum of 12 months to continue operating its networks effectively. (T-16º)
Generation
Context
•By the end of 2012, the SEN has approximately 61,000 MW in operation, approximately 53,000
(86%) of which corresponds to public utility and independent producers. The remaining 8,000 MW
belongs to the self-supply and cogeneration modalities.
•In February 2014, the main existing generation modalities are: CFE’s own plants, independent and
small producers that deliver their power to the CFE, and self-supply, cogeneration and exportation.
•A new capacity of 55,000 MW is expected to be needed over the next 15 years (including 11,800 MW
of withdrawals), which is likely to represent more than 65% of the total installed capacity to date.
•Combined cycles would be the largest installed technologies (>28,000 MW), followed by
hydroelectric plants (>2,700 MW), and the development of a certain renewable capacity, especially
wind power (>2,700 MW), in public utilities.
•The current regulatory framework establishes the objective of reaching 35% of electric power
generation through non-fossil sources for 2024; the current percentage is approximately 20%, thus
an installation of between 10,000 – 20,000 of non-fossil MW will be necessary by then, above the
currently planned figures, in order to reach the desired goal.
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Nordic investment in Mexico
The Reform states that..
Electric power generation is excluded from the public utility concept (Art 27). In addition, the Energy
Regulatory Commission will be responsible for regulating and granting generation permits, as well as
establishing transmission and distribution fees (T-10º).
The law will assign clean energy and pollutant-emission reduction obligations to the industry (T-17º).
It also states the Executive will implement a transition strategy to promote the use of cleaner
technologies and fuels (T-18º).
A specific law for geothermal energy will be issued to regulate the proper leverage of this resource to
generate electric power (T-18º).
The Mexican Oil Fund for Stabilisation and Development, which will govern the receipt of all Mexican
State revenues, except taxes, derived from contracts for hydrocarbon exploration and extraction
activities, will be authorised to invest in renewable energies, among others (T-14º).
Potential implications include a) a larger share of private investment in electric power generation,
through the potential opening of the market and/or through bilateral contracts with consumers; b) a
greater flexibility in bilateral energy trading contracts, with the current barriers of the self-supply
model, especially in the addition or replacement of new consumer partners in operation projects and
continuous development of clean energies via minimum fees or green certificates to generating
companies, which would contribute to reaching the goal of generating 35% of electric power via
non-fossil sources. It would specifically imply a boost to geothermal energy, providing legal assurance
to investment in the exploration and usage of that resource.
Transmission & Distribution
Context
•Mexico has an interconnected transmission system throughout the country, except for the isolated
systems of Baja California and Baja California Sur. It has a core network (400kV - 230 kV), subtransmission (161kV - 69kV) and distribution networks of medium (60kV - 2.4 kV) and low tension
(from 240V to 220V).
•Given the geographic features and the location of the generation plants, the country presents a
transmission-line density of 730 km/TWh, almost four times larger than the US, which implies
higher costs in the expansion of the system.
•To date there are competitive renewable resources, which have not been connected or developed
due to the lack of transmission networks. Therefore, some are being developed in several states in
order to connect more than 5,000 MW, mostly from wind power.
•Regarding public utilities, a transmission network expansion of some 17,000 km is expected (an
approximate 17% increase over the current length), a figure that should be higher given connectivity
needs and the electricity demand for future years. As for distribution, the network suffers losses of
more than 18%, twice the measure of the OECD (7%), due to technical and non-technical losses.
The Reform states that..
•The electric power transmission and distribution public utility belongs to the State and no
concessions will be issued in that area (Art 25, 27 and 28).
•Private citizens will be able to finance, install, maintain, manage, operate, and extend, on behalf of
the State, the necessary infrastructure to provide transmission and distribution services (T-11º).
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17
Potential implications include…
a) Given the great need for new transmission lines, the CFE could implement different types
of PPP projects to develop new lines.
b)This could drive the expansion of the system, as in the case
of the roads and highways sector, through the Service Rendering Projects modality, among others,
which allowed the increase and modernisation of the Mexican roads and highway network, offering
the best service to users.
It would especially simplify the interconnection of renewable energy projects through the
development of the networks by a third party whose compensation is linked to the energy
transmitted, improving projects’ competitiveness by not having to consider them as an initial
investment for this kind of infrastructure.
As for distribution operations, PPP or similar schemes will be allowed for the expansion of the
distribution networks to new urban and industrial centres, as well as investment in new technologies
to reduce network losses.
Commercialisation
Context
•The electric power public service has more than 40 different fees for consumers, based on their type
and geographical location, which are updated as per automatic adjustment factors determined
mainly by the Treasury and the opinion and input of SENER and the CFE.
•The tariffs associated with the industry and services present average values above those of other
countries in the region, and are almost twice the average of those in the US, causing a significant
impact on the competitiveness of the Mexican productive sector.
•Residential tariffs, except those for the High Consumption Residential tariffs (c.2% of total
residential users), are subsidised. This subsidy is applied by kWh consumed, generating fluctuations
in its application: 10% of the higher income population (who usually consume more energy) receive
more than double the subsidy, per capita, than the 10% on a lower income.
•A consumer can choose self-supply when seeking more competitive electricity prices. To do so, he/
she can decide to become a consumer partner in a remote self-supply project, or buy equipment (e.g.
photovoltaic cells) for local self-supply. Both cases have attractive incentives for renewable energies
and efficient cogeneration.
The Reform states that…
•As mentioned, electric power generation is excluded from the public utility concept (Art 27). The
Energy Regulatory Commission will regulate and grant generation permits, as well as transmission
and distribution supply fees (10º) for the sale of the energy generated.
Potential implications…
The CFE will no longer be the only electric power marketing company, which will motivate the
competition to become involved in the area. A consumer who looks to meet consumption needs will be
able to compare the tariffs offered by the CFE and other private generators.
Currently, the process for including a consumer partner in a self-supply project when the generation
permit has already been granted may take a long time, making it less attractive to both parties and
increasing the financial risks of the project. The provisions of the Reform could imply a flexible
adjustment for the inclusion of a consumer in a generation project, generating a more dynamic market.
A review of the tariff policy could imply an analysis strategy and the distribution of subsidies under a
scheme that differs from the current one, for example, orienting efforts towards specific groups
(retirees, unemployed, etc.) or urban centres with per capita incomes below defined limits, as
implemented in other countries of the region. This, in turn, would reduce part of the economic burden
of the CFE, leveraging these resources more effectively.
It would be advisable to analyse the optimum legal structure of the companies considering
participation in this sector, as well as the tax effect and the respective optimisation areas4.
18
Nordic investment in Mexico
Source: PwC Mexico 2014 “Mexican energy reform 2014”.
4
Renewable energy sector
Overview
The government’s 2013-2017 National Energy Strategy addresses the issue of electricity tariffs. The
objective is to make them cheaper for clients as a means of boosting investment and raising
productivity. Local governments have also asked to become eligible for these lower tariffs, the details
of which have yet to be published.
The National Energy Council of Mexico has submitted its National Energy Strategy for 2013-2027. The
Renewable Energy Law sets the goal of generating 35% of electricity based on clean technologies by
2024. Mexico’s renewable energy market is being driven both by government objectives and by market
competitiveness.High electricity prices and federal clean energy goals are boosting the use of the most
cost competitive resources. As expected, the government is keen to diversify the electricity generation
mix raising the contribution of renewable sources of energy to the grid. In November 2008, the
Mexican Congress passed a Law on the Use of Renewable Energies and Financing of Energy Transition
(LAERFTE), which provided for the creation and implementation of a Special Programme on
Renewable Energy (Special Programme), which was announced by the federal government in August
2009 and assumed the establishment of a National Strategy for Energy Transition and Sustainable
Energy Use (Strategy), which was issued by the SENER (Secretaría de Energía) in January 2011.
Mexico is making a considerable progress with its renewables expansion with high-profile
international companies channelling investment into the sector, including General Electric, Vestas
and EDF5.
Share of renewable energy in the generation of electricity for selected economies, 2011
World
Total OECD
Brazil
Canada
Chile
Spain
Germany
China
Mexico
Japan
USA
Korea
0%
Source: SENER
20%
40%
Renewable
Source: ProMexico, Secretaría de Energía “Energías renovables 2013”,
http://www.evwind.com/2011/03/02/las-energias-renovables-en-mexico/ 19.2.2014
5
60%
80%
100%
Non-renewable
PwC Mexico
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Foreign Direct Investment
Mexico has an excellent geographic location and extensive renewable resource potential, which
makes it attractive to foreign investment. In the case of wind and geothermal energy, only 3.2% and
2.1% of the country’s potential is in use, respectively, which means that there are ample investment
opportunities for making better use of renewable resources. In the 2003-2012 period, Mexico received
approximately 7,343 million dollars of FDI for the RE industry, which is concentrated in the states of
Oaxaca and Baja California. The main investor countries are Spain, the US, Denmark, and France6.
Incentives
The government provides tax incentives in the renewable sector; companies may depreciate 100% of
machinery and equipment for generation from renewable energy sources. Companies importing or
exporting machinery, equipment, instruments, materials for research or development of renewable
energies are exempt from customs duties.
Interconnection agreements
Interconnection agreements allow independent producers and small producers to sell their electricity
to the CFE via a contract between the generator and the licensee.
Cogeneration Energy
Cogeneration (CHP(1)) technology enhances rural and industrial development; however, further
administrative and regulatory action is required. Cogeneration systems are fairly sound, evidencing
high technology maturity. Cogeneration systems save energy because they are more efficient in taking
advantage of residual heat, experiencing lower power losses and are more efficient in fuel utilisation.
The power plant is designed to meet thermal demands and a continuous power surplus is generated
during periods of lower power demand.
Potential
•Increases competitiveness in the domestic industry and is close to consumption points
•Great potential for the development of cogeneration within the industry with high thermal
requirements:
1.PEMEX
2.The sugar industry
3.The cardboard, food, paper industries and others
•The installation of CHP power facilities requires no subsidy programmes; power and economic
efficiency will justify its penetration in the market
Barriers
•Regulatory: Uncertainty regarding the purchase value of production surplus
•Financial: Firms’ credit rating hamper access to financing
•Lack of knowledge: Underestimation of benefits associated with CHP (financing sources and
potential power generators)
Actions
Modify the arrangement for the sale of surplus electricity to the CFE
•By providing long-term information on purchase prices
•By establishing agreements between PEMEX and the CFE that guarantee power sales
•By setting technical interconnection standards and requirements that fit the technical features of
the project
•By emphasising the information and awareness programmes provided by the different stakeholders
regarding the advantages of cogeneration
•By developing a gas distribution network that will supply the small and medium-sized industry7
20
Nordic investment in Mexico
Source: Tecnológico de Monterrey “Sector Energético”, Promexico y Secretaría de Economía; Energías Renovables.
Source: PwC, SENER “Initiative for the development of the cogeneration potential in Mexico” March 2013.
6
7
Wind energy
Mexico has 1551 MW of wind power in operation and 2409MW under or pending to start
construction, according to the Regulator. Although there are various projects around the country,
Oaxaca is the state in which most projects are located8.
Key players in the wind sector
Some relevant players are Iberdrola, Acciona, EDF, Renovalia, Eyra, GSEER, Mcquaire (Preneal),
Enel, Next Energy de México, Geomex, Sempra Energy, Vestas, Gamesa, Clipper and Siemens.
Potential
•Consolidated and sustainable growth with clean energy and job opportunities through new
investment
Barriers
•Administrative: Efficient regulatory framework consistent with the interconnection network
•Financial: Firms’ credit ratings hinder access to financing for self-supply regime
Actions
•By developing a robust policy and regulatory framework - Support for the Mexican government’s
national climate change strategy – (IDB-policy-based loan) for the institutional framework and
legislation9
Solar energy
According to CRE, Mexico has a production of 43MW of photovoltaic power and 277MW under
construction as of 201310.
Potential
•Mexico is in the “sun belt”, with solar radiation of over 5kWh per m2 per day. Mexico is amongst the
most attractive countries in the world for investing in solar PV projects.
Barriers
•Regulatory: Uncertainty regarding the purchase value of the production for small producer regime
•Financial: Firms’ credit ratings hinder access to financing for self-supply regime
Actions
•Providing long-term information on purchase prices
•Setting technical interconnection standards and requirements for the network that fit the technical
features of the project
Source: CRE.
Source: PwC Mexico, SENER “Initiative for the development of Wind Power in Mexico”, ProMexico, SENER, “Energías renovables 2013”;
Iniciativa para el desarrollo de las energías renovables en México” 2012.
10
Source: CRE.
8
9
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Biomass energy
Although biomass energy promotes development of the rural sector in Mexico, its development is
subject to securing access to resources in the long term.
According to CRE, in 2013, there were 23 projects with 279 MW in operation and 15 projects under
construction with 120MW additional capacity11.
Potential
•Sugar mills: possibility of using agricultural waste
•The paper and cellulose industry
•Municipal waste, although this entails major technical financial and regulatory uncertainties
Barriers
•High logistics costs and uncertainty with regard to access to resources eventually result in the
current potential for biomass generation being limited to industries producing useable waste.
•Legal: Lack of certainty concerning feed stock in the long term
•Resources: Sustained access to long-term resources
•Transmission networks: The distance between sugar mills and other residue sites and the grid
•Technical training for finance providers
Actions
•By issuing regulations to provide municipalities with greater legal certainty
•By maximising actions through synergies. Garbage removal from tourist areas and big cities
(landfills) for generating electricity.
•By building a potential cluster of biodigestor networks
•By ensuring that remuneration is based on capacity and energy
•By using the full potential of sugar-mills under a self-supply model, linked to the acquisition of the
respective energy surplus (small producer rate)
22
Nordic investment in Mexico
11
12
Source: CRE.
Source: PwC Mexico, SENER; “Initiative for the development of biomass energy in Mexico” March 2013
Conclusion
As is the case with Oil & Gas sector, there are some key elements that the Secondary Laws of the
Reform will define in the coming months. However, the changes that the Constitutional Reform has
enabled will imply a much stronger competition and important opportunities for the private sector to
develop power generation projects, both fossil and renewable, as well a more efficient collaboration
between CFE and the private sector to expand and enhance the T&D grid.
The unbundling of CFE and the CENACE (now as an Independent System Operator) should warrantee
a more transparent and competitive market. Not only private electric companies will benefit of this
opportunity, but the objective of the Reform is also benefit consumers (companies and households) in
receiving more competitive options for their electricity.
PwC Mexico
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