MEXICO S ENERGY REFORM · 2017-02-22 · MEXICO’S ENERGY REFORM Lourdes Melgar, Ph.D. The Robert E. Wilhelm Fellow Center for International Studies Massachusetts Institute of Technology

MEXICO’S ENERGY REFORM

Lourdes Melgar, Ph.D.

The Robert E. Wilhelm Fellow

Center for International Studies

Massachusetts Institute of Technology

February 14th, 2017

@lourdesmelgar

2

HISTORICAL POLITICAL ACHIEVEMENT

MEXICO 2012:

URGENT NEED FOR AN ENERGY REFORM

3

In 2012, Mexico’s energy sector was showing serious signs of strain, despite Energy reform

of 2008 and growing investment:

• Declining oil and gas production.

• Increasing power production costs.

• Stagnant investment in renewables.

• Ageing infrastructure and limited investment.

• Limited technological development.

• Widening human resources gap.

• Increasing dependency on natural gas and oil products imports.

Investment in O&G

exploration and production

(Billion USD)

Oil Production

(MMbd)

3.0

3.4

2.42.3

3.1

10.0

23.4

23.0

-

5.0

10.0

15.0

20.0

25.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Source: Pemex Institutional Database, 1997-2015.

ELECTRICITY RATES PRE-REFORM

• Average rates: 25% higher than in the US

• Without subsidies: difference would be 73%

• Subsidies equal to 0.75% of GDP

Sources: Sistema de Información Energética (Mexico), Energy Information Administration (USA)

0

50

100

150

200

250

300

350

400

ResidencialAlto Consumo

Comercial Servicios Industrial Residencial Agrícola Promedio

Average rates, first quarter 2013 (cents/ kWh)

Subsidio

México

EE.UU.

Subsidized

Rate

+73%Real

Rate

+123%

+149%

+25%

-24%

+134%

+69%

+84%

Residential High

ConsumptionComercial

Public

ServicesIndustrial Residential Agriculture Average

Subsidy

Mexico

USA

4

GOALS OF THE REFORM

555

• Energy Security

• Promote clean energies, comply with climate change commitments

• Attract investment and state of the art technology

• Optimize the use of oil revenues

• Boost economic growth

• Job creation

• Competitiveness of Mexican economy

Electoral commitment: Energy reform to reduce electricity rates

MEXICO’S NEW ENERGY MODEL

6

STATE

OWNED

MONOPOLY

OPEN AND

COMPETITIVE

MARKETS

RULE OF

LAW

STRONGER

INSTITUTIONSSUSTAINABILITY TRANSPARENCY

HYDROCARBONS

BELONG TO THE

NATION

NEW LEGAL FRAMEWORK AND

INSTITUTIONAL ARRANGEMENT

3Articles of the

Constitution

22Laws

25Regulations

4New

Institutions

2Regulators

Strengthened

2State

Productive

Enterprises

Arts.:

25, 27 y 28

10 new

12 ammended

ISO

INDUSTRIAL

SAFETY AND

ENVIRONMENTAL

PROTECTION

OIL REVENUES

ADMINISTRATION

2013 2014

ENTITLEMENTS

(ASIGNACIONES)CONTRACTS

UPSTREAM

8

PEMEX can partner up with other companies to access capital and technology

through associations that require a bidding process conducted by the State.

ROUND ZERO

83% OF

MEXICO’S 2P

RESERVES

21% OF

PROSPECTIVE

RESOURCES

ROUND ZEROAUGUST 2014

9

UPSTREAM CONTRACTING MODEL

LICENSE CONTRACTS

PRODUCTION SHARING

CONTRACTS

PROFIT

SHARING CONTRACTS

Concessions are banned by the Mexican Constitution.

Mexico’s new upstream contracting model is designed to:

• Attract investment

• Facilitate access to state of the art technology

• Balance risks as we move into frontier fields

• Awarded through bidding process

10

SERVICE

CONTRACTS

ROUND ONEFIRST APPROACH, ANNOUNCED AUGUST 13, 2014

11

Round OneDec 2014-Dec 2016

12

1st Bid:

Exploration in Shallow Waters

• Production Sharing Contract

• 2 contracts awarded on

July 15, 2015

• First oil: 2019

• Peak production: 79 Mboed

• Estimated Investment:

2.7 billion USD

2nd Bid:

Extraction in Shallow Waters

• Production Sharing Contract

• 3 contracts awarded on

Sept. 30, 2015

• First oil: 2018

• Peak production: 124 Mboed

• Estimated Investment:

3.1 billion USD

3rd Bid:

Extraction in Onshore Fields

• License Contract

• 25 contracts awarded on

Dec. 15, 2015

• First oil: 2016-2017

• Peak production: 77 Mboed

• Estimated Investment:

1.1 billion USD

Mboed: thousand barrels of oil equivalent per day.

Awarded blocksNon-awarded blocks

Awarded blocksNon-awarded blocks

Round 1.4Bidding Dec. 5, 2016

8 CONTRACTS AWARDED34

BILLION USD

EXPECTED INVESTMENT

• CNOOC

• Total-Exxon Mobil

• Statoil-BP-Total

• Chevron-Pemex

• Petronas-Sierra Oil&Gas

• Murphy-Ophir-Petronas-

Sierra O&G.

14

PEMEX E&P PROJECTSTRION: FIRST FARM OUT

• First farm-out

• First tie offer

BHP Billiton will partner

with Pemex in Trión.

PEMEX can partner up with other companies through farm-outs to access the

capital and technologies required to develop advanced projects.

E&P FIVE YEAR PLAN

2015-2019

*Available at: http://www.gob.mx/sener/acciones-y-programas/plan-quinquenal-de-licitaciones-para-la-exploracion-y-extraccion-de-hidrocarburos-2015-2019-7652 15

ROUND TWOBEGAN JULY 2016

16

1st Bid:

Exploration and Extraction in

Shallow Waters

• Production Sharing Contract

• 15 contracts

• Awarding: March 2017

2nd Bid:

On-Shore Exploration and

Extraction

• License Contract

• 12 contracts

• Awarding: July 2017

3rd Bid:

On-Shore Exploration and

Extraction (small fields)

• License Contract

• 14 Contracts

• Awarding: July 2017

INCREASING THE AVAILABILITY OF

GEOLOGIC INFORMATION

17

* Authorizations for Recognition and Surface Exploration granted by CNH.

• Creation of the National Center of Hydrocarbons Information (CNIH)

• Registry of authorized surface exploration companies

43 AUTHORIZED

RECOGNITION AND

SURFACE EXPLORATION

PROJECTS

2.4 TIMES THE AVAILABLE

3D WAZ SEISMIC DATA

2 BILLION USD

18

MANAGING OIL REVENUES

Federal Budget(4.7% GDP)

When saving exceed 3% of GDP, up to 60% of

the surplus will be spent in:Long term

savings

Research and

Development

O&G projects and

Infrastructure

10%

30%

10%

10%

Financial information related to the Mexican Petroleum Fund is available at:

www.fmped.org.mx

The Mexican Petroleum Fund is designed to optimize the use of Mexico’s oil revenue

following unprecedented transparency and accountability standards, contributing to the

stabilization of Mexico’s public finances, and fostering industrial and human development

in the medium and long term.

OIL

REVENUE

Universal Pension

Fund

Scholarships,

Connectivity

Projects, Regional

Development• First transfers from Pemex: January 2015.

• First payments derived from Round One: October 2015.

ELECTRICITY

MARKET

NATURAL GAS

MARKET

LPG

MARKET

GASOLINE

MARKET

CREATING ENERGY MARKETS

NATURAL GAS

20

CENAGAS

INDEPENDENT SYSTEM

OPERATOR

NEW PRICE

REFERENCES

LIBERALIZATION OF

NG MARKETS

EXPANDING NATURAL GAS INFRASTRUCTURE

21

2012 2016

El Encino

Aguascalientes

Zacatecas

Puerto Libertad

Los Ramones

Guaymas

HuexcaCiudad

Pemex

Nuevo

Pemex

Nativitas

2019

Cempoala

Acapulco

Lázaro Cárdenas

El Oro

Topolobampo

Mazatlán

Apaseo el Alto

San

Luis

Potosí

La

Laguna

Tuxpan

Tula

Samalayuca

Jáltipan

Salina

Cruz

Guadalajara

Durango

According to the Gas Pipelines Five Year

Plan* Mexico will have the following

infrastructure by 2019:

• 10 New strategic gas pipelines

• 2 Social coverage pipelines

• 5 new interconnections with the USA

• 9 Bcf import capacity (currently at 5 Bcf)

* Available in Spanish at:http://www.gob.mx/sener/acciones-y-programas/plan-quinquenal-de-gas-natural-2015-2019** Excluded from the Five Year Plan

Estimated Investment:16 billion USD

Merchant pipelines

can be developed

through permits at

investors own cost

and risk.**

Escobedo

Altamira

Naranjos

TapachulaTo Central

America

Naco

Cd. Juárez

KM Monterrey

Reynosa

Argüelles

Río BravoPiedras Negras

Camargo

Sur de

Texas

Sásabe

Colombia

Los Algodones

Los Algodones bis

San Isidro

Ojinaga

Mexicali

Nogales

Agua Prieta

Gloria a Dios

Cd. Acuña

MID & DOWNSTREAM

INCREASING DEMAND

FOR FUELS

OPEN ACCESS TO

INFRASTRUCTURE

LIBERALIZATION OF

IMPORTS

23

MARKET LIBERALIZATION:

LPG

Interested parties can import LPG

The implementation of a focalized support program aimed at low income sectors.

Imports: Pemex

2015 20172016

Maximum prices scheme open to adjustments

based on international prices development.

Prices defined by the market.

24

Mexico imports:

Petrochemicals 75%

Gasolines 53%

Diesel 38%

Jetfuel 34%

LPG 36%

Natural gas 40%

The variety of North American crudes (light and sweet vs. heavy and sour) allows for

the optimization of existing regional refining infrastructure to fulfill the current and

growing demand for fuels and other oil derived products.

MID & DOWNSTREAM:INVESTMENT OPPORTUNITIES IN INFRASTRUCTURE

Storage baseline:

• 77 Storage and Distribution Terminals

• 5 Maritime Operation Terminals

• Nominal capacity: 30.5 Million

barrels

• Useful capacity: 23.7 Million barrels

DEREGULATION OF FUEL PRICES

THROUGH OUT 2017

POWER SECTOR

WHOLESALE POWER

MARKET

ENERGY

TRANSITION LAW

INDEPENDENT

SYSTEM OPERATOR

27

Generation

System Control

and

Power Market

Qualified Users

Basic Service

Users

ConsumptionRetail

Private

PartiesRegulated

SupplyLong Term

Contracts

Spot

Market

Auctions

Short Term

Transactions

and

Contracts

Transmission Distribution

Unregulated

Supply

Subsidiary “B”

Subsidiary “A”

Subsidiary “C”

and

Contracts

MEXICO’S WHOLESALE

POWER MARKET

CLEAN ENERGY POTENTIAL

28

Renewable Energy Potential

Installed Capacity2° semester 2014

(MW)

Actual GenerationYear 2013

(% of total GWh)

Actual Generation+ Proven Resources

Actual Generation+ Proven Resources+Probable Resource

Actual Generation+ Proven Resources

+Probable Resources+Possible Resource

Wind 1,900 1.4% 5.3% 5.3% 34.8%

Geothermal 823 2.0% 2.2% 22.5% 40.0%

Solar 64 0.01% 0.6% 0.6% 2,189.4%

Mini Hydro 419 0.5% 1.7% 9.5% 24.4%

Total 3,206 4.0% 9.9% 37.9% 2,288.6%

Solar Resources Wind Resources Geothermal Resources

Clean Energy Goals:

35% in 2024, 40% in 2035 and 50% in 2050

MARKET FEATURES

Market Periodicity Market Type

Energy and Ancillary

ServicesDaily, Hourly Cost Based

Capacity Yearly Administered

Clean Energy Certificates Yearly Unrestricted offers

Financial Transmission

RightsYearly / Monthly Unrestricted offers

CRE will set requirements for retailers to contract forward energy and

associated products.

Basic Service Retailers may only contract forward through auctions

operated by CENACE.

Auctions and Long Term Contracts

29

WHAT IS THE ELECTRICITY MARKET?1ST + 2ND LONG-TERM AUCTIONS

CLEAN ENERGY CERTIFICATES

Investment by source

Approx. 6.6 billion dollars of total

investment.

15 states with investment in new projects.

SOLAR

Wind

HyDRO

solar-Wind

Baja California

Tamaulipas

San Luis Potosí

Puebla

OaxacaMorelos

Aguascalientes

Coahuila

ChihuahuaSonora

Nuevo León

Baja California sur

Jalisco

Guanajuato

Yucatán

Clean Energy: Solar & Wind

2,861

2,085

2,804*

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Capacity since1998 to 205

1st Long-TermAuction

2nd Long-Term Auction

MW

Installed Capacity: Solar & Wind

Wind

Solar

WHAT IS THE ELECTRICITY MARKET?INTERNATIONAL COMPARISON

WindSolar

By C

ou

ntr

y a

nd

Te

ch

no

log

yB

y C

ap

ac

ity

France, 130.6

India, 115.4

India, 74.7 Jordan, 70.2

1st Mexican Auction, 45.2

2nd Mexican Auction, 31.9

Peru, 47.9 Saudi Arabia, 50.0

South Africa, 61.9 United Arab Emirates, 58.5

United Arab Emirates, 29.7

United Kingdom, 98.8

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2014 2015 2016

US

D)/

MW

h

Solar

Brazil

France

Germany

India

Jordan

1st Mexican Auction

2nd MexicanAuction

Peru

Saudi Arabia

South Africa

United ArabEmirates

United Kingdom

Australia, 67.0

Australia, 60.6 Brazil, 57.1 1st Mexican Auction,

55.4

2nd Mexican Auction, 35.8

Peru, 37.3

South Africa, 48.8

United Kingdom, 145.5

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2014 2015 2016

US

D)/

MW

h

Wind

Australia

Brazil

1st MexicanAuction

2nd MexicanAuction

Peru

South Africa

United Kingdom

3,483

800

184 100

-

400

800

1,200

1,600

2,000

2,400

2,800

3,200

3,600

4,000

1st & 2nd MexicanAuctions

United ArabEmirates

Peru India

MW

Solar. Assigned Capacity (MW), 2016

1,406

200 162

-

200

400

600

800

1,000

1,200

1,400

1,600

1st & 2nd MexicanAuctions

Australia Peru

MW

Wind. Assigned Capacity (MW), 2016

32

CAPTURING MEXICO’S GEOTHERMAL POTENTIAL: SPECIFIC LAW AND GEOTHERMAL BIDDING ROUND

BEFORE THE REFORM

(1959 - 2014)

ONLY 4 GEOTHERMAL FIELDS IN

OPERATION15 EXPLORATION PERMITS

11 FILED REQUESTS UNDER EVALUATION

AFTER THE REFORM

(2014 - 2015)

1 GENERATOR IN 4 STATES

4 + 2 EXPLOITATION CONCESSIONS

50% INCREASE

4 GENERATOR IN 10 STATES

PRODESEN:GENERATION & TRANSMISSION NEEDS

33

33

25,000 km expansion of the national transmission network:

• Total Interconnection

• Interconnection with North and Central America

REQUIRED INVESTMENT IN THE NEXT 15 YEARS*(Generation, Transmission and Distribution)

131.6 BILLION

US DOLLARS

Energy reform will generate 135,000 new direct jobs.

Human Resources Development Program to:

Inform decision making processes.

Provide qualified personnel (technical level).

Talent that generates knowledge (R&D, senior

management).

Attract and retain talent within the energy sector.

• Scholarships: 60 thousand by 2018.

• Global partnerships (Universities, Research Institutes,

Companies)

DEVELOPING MEXICO’S

NEW ENERGY INDUSTRY

DEVELOPING MEXICO´S

NEW ENERGY INDUSTRYInvestment in R&D:

Strengthening of existing institutes:

Instituto Mexicano del Petróleo

Instituto Nacional de Electricidad y Energías Limpias

Creating Centers for Clean Enegy Innovation (CEMIEs) 5 centers have been created: solar, wind, geothermal, bio

fuels, wave energy.

New centers are being created

Investing in R&D:

!00 Millions pesos invested in R&D

Mission Innovation commitment to double investment.

36

MEXICO’S ENERGY REFORM:

CHALLENGES AHEAD

1. Increase O&G production and availability of refined

products

2. Succeed in the creation of competitive markets

3. Implement a security of supply policy

4. Strengthen PEMEX and CFE

5. Succeed in the social licensing of projects

6. Generate benefits at the local level

7. Develop value chains to supply the energy sector

8. Widen Public understanding and acceptance of the

Reform

[email protected]

@lourdesmelgar