Mexico’s Energy Reform

Mexico’s Energy Reform

Lourdes Melgar, Ph.D.

Undersecretary of Hydrocarbons

Ministry of Energy

February 7, 2014

CONSTITUTIONAL AMENDMENT

A historic constitutional energy reform was approved in Mexico in December 2013. This is the

most significant overhaul of the energy sector in this country in more than half a century: a

truly major, better-than-expected reform.

Article 25.- Government will:

• Continue to be in charge of

strategic areas. Maintain

property and control of

entities and new State

Productive Enterprises

(SPEs).

• Provide the right conditions

to include the private sector

in the national economic

development.

• To be in charge of energy

planning. Social equity,

productivity and

sustainability.

Article 27. –

• Hydrocarbon resources will remain

Mexico’s. Petroleum exploration and

extraction activities will be carried out

by the State through SPE leases and

contracts

• SPEs may work with the private

sector. Subsoil hydrocarbons belong to

the nation and this should be stated

explicitly in leases and contracts.

• Planning and control of the electric

system will be carried by the state. In

the case of transmission and

distribution of electricity the state will

be able to contract the private sector.

Article 28.–

• The Mexican Petroleum

Fund (a public trust) is

established

• The National

Hydrocarbon

Commission (CNH) and

Energy Regulatory

Commission (CRE) are

considerably

strengthened, becoming

Constitutionally

Coordinated Entities.

Transitory provisions through twenty one articles define the way that secondary laws should be drafted to implement the Constitutional Reform.

Oil and Gas

REFORM TO ARTICLES 25, 27 AND 28, WITH 21 TRANSITORY

ARTICLES ALLOW PRIVATE INVESTMENT IN UP, MID AND

DOWNSTREAM.

5. Constitutional Article 28 and Transitory Article 10


Transportation, Storage,

Distribution and

Commercialization

Exploration and

Production

Refining and Natural

Gas Processing

Oil and Gas

Reserves

Permits for all

transportation,

storage, distribution

and

commercialization

activities through

pipelines, granted by

the Energy

Regulatory

Commission (CRE)

to Pemex and/or the

private sector6

The Mexican State,

through SENER,

manages the

country’s oil and gas

reserves (selection of

bidding areas)

Permits for

refining and natural

gas processing

(including

petrochemicals),

granted by SENER

to Pemex and/or the

private sector5

Service,

profit/production

sharing and license

contracts, awarded by

the National

Hydrocarbons

Commission (CNH) to

Pemex and/or the

private sector

Entitlements granted

by SENER to Pemex

(Round Zero)

OVERVIEW OF THE OIL AND GAS REFORM

E&P contracts for public and private companies: license contracts,

production sharing contracts, profit sharing contracts, service contracts or a

combination thereof.

Round Zero.

Permit schemes for midstream and downstream.

Conversion of PEMEX into a company with freedom to form partnerships,

financial and operational autonomy, and freedom to establish its

employees’ wages.

New Tax Regime for PEMEX and private companies.

Open market for Gas Stations.

Independent System Operator for Natural Gas.

Strengthening of the Regulators.

Mexican Petroleum Fund for Stabilization and Development.

Financial Transparency in every contract and bidding round.

NEW CONTRACTUAL FRAMEWORK FOR OIL AND

GAS EXPLORATION AND PRODUCTION

A flexible contracting framework with standard, well-known-by-industry models

was established to enable better use of Mexico´s resources in order to maximize

revenue for the nation:

The approved reform allows companies to report, for accounting and financial

purposes, the extent of the contract signed with the Mexican State as well as the

expected benefits, as long as it is clearly stated on those leases or contracts that

all solid, liquid or gaseous hydrocarbons in the subsoil are Mexico’s property.

1. Constitutional Article 27.

2. Transitory Article 4

i. Service: Fixed or variable payment where the operator is the responsible

for the operations.

ii. Profit sharing: % of profits

iii. Production sharing: % of production

iv. License: Onerous transmission of the hydrocarbons once they have been

extracted from the subsoil

v. A combination thereof.

EXPLORATION AND EXTRACTION LEGAL FRAMEWORKS IN

THE TOP 20 OIL PRODUCING COUNTRIES

Ranking

2012 Country

Production

(2012)

mmbd

Concessionary/Contractual Framework

1 Russia 10,427 Concessions and production sharing contracts

2 Saudi Arabia 9,813 Concessions

3 United States of America 6,401 Concessions

4 China 4,122 Production sharing contracts

5 Canada 3,127 Concessions

6 Iran 3,000 Profit sharing contracts

7 Iraq 2,918 Profit and production sharing contracts

8 Kuwait 2,754 Service contracts

9 United Arab Emirates 2,653 Concessions

10 Mexico (Before the Reform) 2,548 Service contracts

Mexico (With the Reform) 2,548 Service, profit or production sharing contacts and licenses

11 Venezuela 2,479 Concessions

12 Nigeria 2,092 Concessions and production sharing contracts

13 Brazil 2,061 Concessions and production sharing contracts

14 Angola 1,756 Concessions, profit and production sharing contracts

15 Norway 1,618 Concessions

16 Kazakhstan 1,583 Concessions and production sharing contracts

17 Libya 1,402 Production sharing contracts

18 Algeria 1,165 Concessions

19 United Kingdom 890 Concessions

20 Qatar 741 Production sharing contracts

Source: World Rating of Oil and Gas Terms; PFC Energy, Van Meurs Corporation and Roger Oil & Gas Consulting. Production: Oil and Gas Journal

(crude oil).

STRENGTHENING OF PEMEX

Pemex will be transformed into a “State Productive Enterprise”, with budgetary,

technical and operational autonomy (2-year transition).7

There will be a “Round Zero” to ensure Pemex’s exploration and production

investment portfolio.8

Associations in exploration and production of oil and gas, refining and

petrochemicals.

Pemex will have a new corporate governance structure, in line with international

best practices.9

Pemex’s new Board of Directors will be composed of 5 board members

representing the Federal Government (including the Energy Minister who will

chair the Board), and 5 independent board members.

Pemex will have a more flexible and competitive fiscal regime, so it can retain a

larger share of its profits for reinvestment.10

7. Constitutional Article 25 9. Transitory Article 20

8. Transitory Article 6 10. Secondary Legislation

ROUND ZERO FOR PEMEX1

The Ministry of

Energy, with

technical assistance

from the National

Hydrocarbons

Commission (CNH),

shall review

Pemex’s request,

and issue the

corresponding

resolution.

(180 days)

Pemex will submit to the

Ministry of Energy, the

entitlement applications

for the exploration areas

and the production fields

that it is able to operate

through entitlements.

(90 days)

Pemex will maintain

exploration entitlements

in those areas where it

has made commercial

discoveries or

exploration investments.

(3-5 year period)

Pemex will

maintain extraction

entitlements in

fields in production.

Pemex may

propose to the

Ministry of Energy

for its approval, the

migration of the

allocated

entitlements into

new contracts.

The Ministry of Energy shall

determine the technical and

contractual guidelines of the

bidding round, the Ministry of

Finance will establish the fiscal

terms, and the CNH shall

conduct the bidding round to

select the contractor.


1 2 3

6 5 4

OIL AND GAS EXPLORATION AND PRODUCTION

CONTRACTUAL FRAMEWORK2

Source: World Rating of Oil and Gas Terms; PFC Energy, Van Meurs Corporation and Roger Oil & Gas Consulting. Production: Oil and Gas Journal

(crude oil).

3

4

5

• Block selection, with

technical assistance

of the CNH.

• Technical guidelines of the

bidding rounds.

• Technical design of contracts.

2

6 7

1

• Fiscal terms of contracts.

• Conducts the bidding rounds.

• Decides on the winning bids.

• Awards and signs the

contracts on behalf of the

Mexican State.

• Technical management

of contracts. • Mexican Petroleum

Fund for Stabilization

and Development makes

payments and manages

government cash flows.

TRANSPARENCY AND ANTI-CORRUPTION POLICIES IN OIL

AND GAS CONTRACTS5

Bidding rounds

and their

guidelines will

be public.

Transparency

clauses will be

included in oil

and gas

contracts.

Full disclosure

of all payments

associated to

oil and gas

contracts.

External audits

to supervise

cost recovery

and accounting

aspects.

1 2 3 4

The reform mandates the establishment of legal mechanisms to prevent,

investigate, identify and punish actions or omissions against the law, as

well as acts of corruption in general in the energy sector.6



MEXICAN PETROLEUM FUND FOR STABILIZATION AND

DEVELOPMENT

Universal Pension System

Expenditure

Federal Budget -

PEF

(Constant at 4.7%

of GDP)

When long-term

savings surpass 3%

of GDP, the excess

balance will be

allocated as follows:

Long-term

savings

(Up to 3% of

GDP)

Up to 10%

Up to 30%

Up to 10%

Up to 10%

Scholarships, connectivity enhancement projects

and regional industrial development

Science & technology and renewable energy

projects

Oil and gas project investment vehicle and

infrastructure development

Long-term savings (until savings reach 10% of

GDP). At least 40%

Payments

established in oil and

gas exploration and

production

entitlements and

contracts

1 2 3 4


Electricity

OVERVIEW OF THE ELECTRICITY REFORM

Private investment in Generation will be allowed.

An independent system operator (CENACE) will

implement a Competitive Electricity Market.

Joint ventures in Transmission and Distribution between

CFE and private companies.

CFE will be converted into an energy company with

freedom to form partnerships, financial and operational

autonomy, and freedom to establish its employees

wages.

Regulators will be strengthened.

OVERVIEW OF THE ELECTRICITY REFORM

Generation

• Generators can sign long term contracts

to reduce their market exposure.

• The spot market will be based on the

short-term optimal dispatch.

• CFE will operate its generation

independently from its other activities,

and will compete on a level playing field.

Marketing

• Standard Users will receive their service

from CFE-Retail, which will buy energy in

the spot market and under contract.

• Qualified Users will be able to buy energy

directly or through a retailer.

• The threshold to be a Qualified User will

decrease over time.

Power Market

• Generators and marketers will make their supply and demand offers each day.

• CENACE will establish the optimal dispatch and will calculate the equilibrium prices.

• Long term contracts will cover the majority of demand; a relatively small volume will be

purchased on the spot market.

• Capacity markets will be implemented to ensure resource adequacy.

Transmission and Distribution

• The T&D companies will not buy or sell energy; they will only operate the wires.

• They will charge rates established by the CRE, under incentive-based regulation.

• CENACE will process payments between market participants and the T&D companies.

Further actions

FURTHER ACTIONS

Pemex

proposal

Round

zero

April March Sept

Secondary

law

Resolution

for round

zero

Aug

Regulation

exploration

Dec

Creation of CENAGAS

and CENACE

2014

June

2015

Kick off First

Bidding Round CFE and PEMEX

as State

Productive

Companies

Kick off of the

Electricity Market




Ministry of Energy

February 7, 2014

DESPITE AN INCREASE IN INVESTMENT IN EXPLORATION AND

PRODUCTION, MEXICAN OIL PRODUCTION HAS DECLINED FROM 3.4

MILLION BARRELS PER DAY IN 2004 TO 2.5 MILLION IN 2012.

3.0

3.4

2.5

4.7

11.7

20.7

0

5

10

15

20

25

1.5

Sources: Average price of the Mexican Crude Export Mix, PMI Comercio Internacional 1997 – 2012. Production: Pemex Institutional

Database, 1997– 2012. Investment: Pemex Annual Statistics, 1997-2012.

13

31

103

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Oil Production

(Million of barrels per day)

Price of Mexican Crude Export Mix

(Dollars per barrel)

19

Investment in exploration and extraction

(Billions of dollars)

BETWEEN 1997 AND 2012, NATURAL GAS IMPORTS INCREASED FROM 3% TO

30% AS A PERCENTAGE OF NATIONAL CONSUMPTION; THIS TREND HAS

DEEPENED SINCE 2008, DUE TO THE DECREASE OF THE PRICE OF NATURAL

GAS IN NORTH AMERICA.

20

4,467

6,534 5,651

109

1,258

2,356

4,576

7,792

8,007

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

The “Natural Gas Consumption” line reflects the addition of Pemex’s gas production and total imports. The

“Natural Gas Production” line reflects Pemex’s total natural gas production, including the gas it uses in its

industrial processes and the supply to final consumers.

Source: Mexican Energy Ministry, Energy Information System, 2013.

* January – July, 2013.

Mill

ion

cu

bic

fe

et p

er

da

y

Natural Gas

Production

Natural Gas

Imports

Natural Gas

Consumption

(70%)

(30%)

(97%)

(3%)

(100%)

(100%)

GASOLINE IMPORTS REPRESENTED 25% OF TOTAL CONSUMPTION IN

1997; BY 2012, THAT PERCENTAGE HAD INCREASED TO 49%.

21

127

54

395 376

455 416

503

752

811

0

100

200

300

400

500

600

700

800

900

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Gasoline

Production

Gasoline

Imports

Gasoline

Consumption

(51%)

(49%) (75%)

(25%)

(100%)

(100%)

Th

ou

sa

nd

s o

f b

arr

els

pe

r day

Source: Pemex, annual average 1997-2012.

IN 1997, MEXICO IMPORTED 41% OF THE PETROCHEMICALS IT

CONSUMED; IN 2012, 66% OF DEMAND WAS MET WITH IMPORTED

PETROCHEMICALS.

22

3.62

6.64

7.62

2.47

12.72

14.47

6.09

19.36

22.09

0

3

6

9

12

15

18

21

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Demand

Net Imports

Production

Source: Mexican Energy Ministry, with data provided by Pemex-Petrochemicals and the Mexican Central Bank.

Bill

ions o

f d

olla

rs (66%)

(34%)

(59%)

(41%)

(100%)

(100%)

THE AVERAGE CFE RATE IS 25% HIGHER THAN IN THE US.

WITHOUT SUBSIDIES, THE AVERAGE DIFFERENCE IS 73%

0

50

100

150

200

250

300

350

400

ResidencialAlto Consumo

Comercial Servicios Industrial Residencial Agrícola Promedio

AVERAGE ELECTRICITY RATES AT FISRST QUARTER OF 2013 (MEX CENTS/ KWH)

Subsidio

México

EE.UU.

+123%

+149%

-24%

+135%

+69%

+84% +25%

+73%

Source: Sener. SIE. DOE, EIA.

Rates converted to Mexican pesos with an exchange rate of 12.64 pesos/dollar, 1Q2013.

Domestic High

Consumption Commercial Public Service Industrial Domestic Farming Average




Ministry of Energy

February 7, 2014

Mexico’s Energy Reform

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