Center on Global Energy Policy Columbia University April 17, 2014 The Mexican Energy Reform of 2013 Adrian Lajous
Center on Global Energy Policy Columbia University
April 17, 2014
The Mexican Energy Reform of 2013
Adrian Lajous
Topics to be covered
• Nature, objec-ves and scope of energy reform • Drivers of the reform effort • Principle unresolved issues • Implementa-on of reform • Main risks • Some implica-ons
The begining of the end of a 75/53 year State energy monopoly
Constitutional Amendment
Objec-ves
• Introduc-on of compe--on
• Opening of oil and electricity to private investment
• Mantaining State ownership and control of subsoil resources
• Selec-ve priva-za-on with limited Pemex and CFE asset sales
• Moderniza-on of State energy companies
• Reduc-on of direct government interven-on in energy sector
• Development of new regulatory frameworks and ins-tu-ons
Scope
Upstream Midstream Downstream
Oil and natural gas Electricity
Genera-on Transmission Distribu-on
Art. 25 Establishes exclusive ownership and control of State companies that
perform produc-ve ac-vi-es.
Art. 27 E&P ac-vi-es can be carried out under licenses (asignaciones) granted to NOC and contracts with NOC and private companies; concessions are prohibited
Art. 28 Defines the following ac-vi-es as strategic: • Planning and control of na-onal electricity system • Transmission and distribu-on of electricity • Hydrocarbon E&P
Recognizes at a Cons-tu-onal level:
• Regulatory Commissions (CRE + CNH) • Mexican Petroleum Fund
Transi4onal ar4cles
Give specific instruc-ons with respect to the content of secondary legisla-on
Cons4tutu4onal Amendments
Drivers of Mexican energy reform
• Slow economic and produc-vity growth • Low investment in rela-on to GDP and in public goods • Fall in crude oil produc-on and exports • Natural gas produc-on stagnant and 2012-‐13 supply crisis • Increasing oil product and natural gas imports • Uncompe--ve electricity tariffs
• Public finance constraints and financial weakness of the State
6
Mexico’s annual GDP growth from 1950-‐1980 was more than twice as fast as in the past three decades
Source: McKinsey Global Ins-tute
GDP growth rates, based on 2012 US$ Compound annual growth rate, %
6.4
1970-‐1980
6.6
1960-‐1970
6.5
1950-‐1960
6.1
2.4 1.8
1980-‐1990
1.8
2000-‐2010
3.5
1990-‐2000
Rapid and stable growth Recurrent economic and financial crisis
Low growth, stable prices
Graph 1
Mexico: investment flows Graph 2
60.4 63.6
98.6
85.6
40
50
60
70
80
90
100
110
2010 2011 2012 2013
Direct foreign investment
Direct foreign investment (current US billion dollars)
Source: Banco de México
Gross fixed capital formation (percent of GDP)
Source: INEGI
6 5 5 5 0
5
10
15
20
25
2010 2011 2012 2013
20 21 22 21
Mexico: crude oil production, 2003-2013 (million barrels per day)
• 25% reduc-on from 2004 peak • Fall due to Cantarell`s rapid
decline • Par-al compensa-on by increase
in Ku-‐Maloob-‐Zaap and offshore Tabasco
• Rest of country essen-ally flat • Low decline rate since 2010, but
underes-mated due to measurement issues
Graph 3
0
0.5
1
1.5
2
2.5
3
3.5
4
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Heavy
Light
Total
Mexico: exports of crude oil to the US, 2003-2013 (Thousand barrels per day)
• Mexican crude exports have contracted 682 th b/d from their peak, a 36% drop.
• Fall of heavy crude oil exports due to Cantarell`s rapid decline
• Recent displacement of Isthmus
and Olmeca crude imports in US Gulf Coast
• Poten-al displacement of Maya
crude imports via Keystone XL, other pipelines and rail
Graph 4
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total
US
Heavy
Light
Mexico: oil imports, 2003-2012 • Value of product imports is 51%
of crude oil exports
• Share of exports to Mexico is 15% of total US product exports
• Product imports should con-nue to increase if economic growth accelerates
• Import growth may be tempered by elimina-on of subsidies
• Domes-c product supply may increase due to beier yields, change in crude slate and refinery reconfigura-ons
Graph 5
% domestic requirements Th b/d
48
27
33
375
107
80
Gasoline
LPG
Diesel
(Bcfd) natural gas 2.3
28
Mexico: natural gas production and consumption (Billion cubic feet per day)
5.2
5.4 5.4
5.2
5.1 5.1
5
5.1
5.2
5.3
5.4
5.5
2008 2009 2010 2011 2012 2013
Net production
5.3 5.3 6.5
5.6 5.7 5.7
0
1
2
3
4
5
6
7
2008 2009 2010 2011 2012 2013 P
Domestic dry gas sales
1.2 1.2 1.4
1.7
2.1 2.3
0
0.5
1
1.5
2
2.5
2008 2009 2010 2011 2012 2013
Net imports
2.8
2.9 2.9
3.1 3.1
3.2
2.75 2.8 2.85 2.9 2.95
3 3.05 3.1 3.15 3.2 3.25
2008 2009 2010 2011 2012 2013 P
Gas for power generation
Graph 6
Mexico: natural gas consumption, by sector, 2003-2012 (billion cubic feet per day)
• 50% of power genera-on used natural gas in 2012, up from 29% in 2003
• 70% of total consump-on increase due to electricity sector
• 47% of natural gas was consumed by the electricity sector in 2012
• Industry improved energy efficiency significantly
Graph 7
0
1
2
3
4
5
6
7
8
2004 2006 2008 2010 2012
Electricity
Oil
Industry
Mexico: power generation, 2003-2012 (twh)
• Extensive subsidies and cross-‐subsidiza-on
• High losses mainly due to thel
• High cost for industry affects manufacturing industry compe--vness
• Fundamental tariff redesign is impera-ve
Graph 8
0
50
100
150
200
250
300
350
2004 2006 2008 2010 2012
Total
Self-‐supply
Other
Industry
14
Cost of power in Mexico is rela4vely high
Source: McKinsey Global Ins-tute
Commercial electricity cost, 2011–12 Cents per kWh
2
3
4
6
6
6
7
7
9
11
12
13
13
17
United States
Qatar
Iceland
Argen-na
Norway
Ecuador
Peru
Bolivia
New Zealand
India
Mexico
Switzerland
Spain
Brazil
+73%
Graph 9
15
Graph 10
Mexico: oil revenues and taxes, 2013
Pemex taxes
Pemex E+P taxes
Share of federal revenues
Share of GDP
Share in income before taxes
37
67
Share of total revenues
91 5.9
9.9
15.8
Other
Pemex
• Cons-tu-onal amendments were the first step of an ambi-ous and lengthy process
• Secondary legisla-on package has yet to be sent to Congress
• From entrenched State monopolies to a more compe--ve environment with private par-cipa-on
• Establishment of a new oil regime with own: rules, ins-tu-ons, players, paierns of engagement and policy op-ons
• Risk that exuberant expecta-ons can be frustrated
• Mid/term elec-ons in July 2015 may delay cri-cal decisions
• Outcomes of reform are difficult to predict and unintended consequences are sure to arise.
Reform process
New Mexican energy sector structure Graph 11
Department of Energy
Department of Treasury
Bank of Mexico
Pemex
CFE
State Produc-ve Companies
Mexican Oil Stability and Development Fund
Na-onal Energy Control Center
Na-onal Natural Gas Control Center
Na-onal Safety and Environmental Protec-on Agency
Energy Regulatory Commision
Na-onal Hydrocarbon Commision
Descentralized State En--es Coordinated Regulatory Bodies Public Trust
Round zero: initial oil and gas asset allocation to Pemex
Pemex request
• Producing fields
• Commercial discoveries, including undeveloped deepwater assets
• Retains small share of es-mated shale resources
• Relinquishes major areas in Chicontepec
First step in upstream reform
Timing 2014 Pemex request by March 21
Sener allocation by September 17
Allocation criteria Producing fields & exploration areas
• Prove capacity to operate efficiently and competitively
• Demostrate operative, technical, financial and execution capabilities
Pemex must compete for additional acreage in subsequent
bidding rounds
Graph 12
Pemex: request of hydrocarbon assets in round zero
Prospective resources
Reserves
82 63
Onshore
Shallow water
29
Deepwater
15
Shale
97
1P
83
2P
75
3P
Graph 13
(percent)
Some key industry issues
Downstream
• Retail prices that reflect transport costs • Free third party imports and qualifica-on of importers • Transi-on to compe--ve pricing
Midstream
• Common carrier, open access, eminent domain differences in gas and liquids pipelines
• Pemex role in liquids pipelines and logis-cs infrastructure • Regula-on of oil product road transport
Upstream
• Concessions vs license contracts • Pemex joint venture par-cipa-on in round zero assets
and in other bidding rounds • Contractual variability and adequacy
• Priority given to mobilizing upstream private investment
• Key ini-al tasks are the execu-on of round zero and the design of new contracts
• Government expecta-on of signing ini-al round of contracts in the first half of 2015 might not be realis-c
• Energy Department and regulators are not adequately equipped for the challenge of reform
• Must deploy implementa-on strategy and develop tac-cal posi-oning
• Mul-tude of tasks require high selec-vity
• Government must transmit clear sense direc-on, with some quick wins to mark adance
Implementa4on strategies, 4ming and sequencing
Electricity Sector Reform
Regula4on • Energy Regulatory Commission (CRE) will be the regulator • Na-onal Center for Energy Control will be the independent system operator • Centralized wholesale energy markets • Open access to transmission and distribu-on grids on a cost of service basis
Private sector • Permi-ng regime for private power genera-on • Contractual arrangements for financing, building, mantaining, managing,
opera-ng and expanding transmission and distribu-on infrastructure on behalf of the State
State sphere • Planning and control of na-onal electricity system • Transmission and distribu-on will remain a public service • CFE will transit from decentrailized State en-ty to a State company that
performs produc-ve ac-vi-es
Mexico: merchandise exports, 2013 (percent)
• Explosive growth of exports since 1995
• Growing share of manufacturing • Predominance of automobile and
auto-‐parts • High share of exports to US (82%)
81
Oil 15
Other 4
Manufacturing
Total: 380 billion dollars
Graph 14
Mexican manufacturing exports to U.S., 2013 (percent) • Significant overall market share
increase in 2009-‐13 (2.2%) • China`s share increased by 2.4 but
its level is almost twice thatof Mexico
• Share of local content in exports
stable, not growing • Low value added exports typical of
reassembler • Weak supply chain integra-on
• Slow growth of domes-c demand for manufactures
Source: UBS
NAICS Classification
Share of manufacturing
exports
Market share of
US imports
Total 81.9 12.3
Transport 28.2 23.6
Computer & electronic 18.8 14.6
Electrical equipment 7.6 23.7
Machinery 5.6 10.7
Primary metals 3.9 11.5
Fabricated metals 2.5 11.1
Food 2.3 11.7
Other 13
Table 1