070813 Diagnóstico de Sempra Energy del Sector Energético en México

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Estrategia establecida por Sempra Energy, para abordar su relación con las Instituciones Mexicanas, Funcionarios y Políticos mexicanos

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070813 Diagnóstico de Sempra Energy del Sector Energético en México

  1. 1. Strategic Workshop -Mexico’s Energy Sector-Workshop Prepared for Sempra Energy San Diego, California August 13, 2007
  2. 2. Contents1. State of Play of Mexico’s Energy Sector • Key energy institutions • Regulations and legal framework • Where does Mexico’s energy sector stand and how it got there • Operational and financial constraints facing the industry2. Existing Business Lines Controlled by the State and Open to Private Sector • Who controls of different business lines and makes the decisions • Barriers to entry • Government intervention • List of private sector investments to date3. Key Stakeholders in Mexico’s Energy Reform and How Reform Could Evolve • New energy leaders and inter-play • Possible alliance and conflict maps • Consensus in defining energy reform • Legislative voting scenarios • Profiles4. Potential Strategies to Pursue • Opportunities that might emerge from reform • Future projects and priorities of CFE and PEMEX • Other investment opportunities and areas to consider5. Support Slides 2
  3. 3. Stay of Play of Mexico’s Energy Sector8:30 am – 10:00 am 3
  4. 4. Key Energy Institutions 4
  5. 5. Mexico’s Current Energy Sector - Key Institutions SENER - Secretary of Energy - IMP -MexicanEnergy Regulatory Commission Petroleum Institute - IIE -Mexican Electric Energy Savings Commission Research Institute - CNSNS ININ – National Comision Nacional de Seguridad Institute of Nuclear Nuclear y Salvaguardias Research - State Owned Utilities 5
  6. 6. Mexico’s Current Energy Sector - Key Institutions In summary:  Mexico’s 2007 Federal Budget totaled MXP 2,260 billion. This represents a 14.5% increase over the approved 2006 Federal Budget.  In total, Mexico spends 18% of its federal budget on energy with PEMEX accounting for 8%. As a % of Total 2007 Budget Number of Institution 2007 Federal (MXP Million) Employees Budget CFE 191,236.4 8.46% 79,969 PEMEX 182,298.0 8.06% 148,200 LFC 27,972.6 1.24% 40,478 SENER 520.8 0.02% 858 IMP 358.9 0.02% 6,700 ININ 349.0 0.02% 791 CRE 126.2 0.01% 131 IIE 123.3 0.01% 1,090 CNSNS 89.9 0.00% 201 CONAE 57.3 0.00% 95 TOTAL 403,132.3 17.83% 278,513 6Source: IPD Latin America, based on 2007 Federal Budget and information from government entities.
  7. 7. Regulations and Legal Framework 7
  8. 8. Pertinent Energy Regulations Articles 25, 27 & 28 of the Mexican ConstitutionELECTRIC SECTOR HYDROCARBONS SECTOR The Public Service Regulatory Law of Constitutional Article 27 in PEMEX Electric Energy Law Organic (PSEEL) The CRE Act the Field of Petroleum (RLCA27-FP) Law PSEEL Regulation Natural PEMEX RLCA27- Oil Gas Organic FP LPG Activities Regulation Law PSEEL Regulations Regulation Regulation Regulation Regulation with Regard to ContributionsNOM’s, Guidelines and NOM’s, Directives, Resolutions and Standards Resolutions 8
  9. 9. Pertinent Energy Regulations - Mexican Constitution  Mexican energy legal framework starts at the constitutional level from which all other relevant laws and regulations are derived. Electricity Hydrocarbons • Grants the State the exclusive ownership and control of all strategic areas defined inArt. 25 Article 28. • Grants the nation the exclusive • Grants the State direct ownership of all responsibility of generating, hydrocarbon resources located in Mexican transmitting, transforming and territory.Art. 27 distributing electricity intended for • Defines ownership as an absolute and public service*. unassailable right. • Establishes that in these areas, no • Establishes that no concessions or risk-sharing concessions or risk-sharing contracts can be granted. contracts can be granted. • Establishes that exploitation will be undertaken accordingly to secondary regulations. • Defines oil, natural gas, refined products, basic petrochemicals and electricity asArt. 28 “strategic” areas strictly reserved to the State. The State will control and undertake these activities through two public utilities (PEMEX, CFE and LFC). * Article 4 of the Public Service Electric Energy Law defines “public service” as activities related to the operation, maintenance and planning of the National Electricity System and of the generation, transmission, transformation and marketing of electricity. 9
  10. 10. Pertinent Electricity Regulations - ElectricityThe Public Service Electric Energy Law (PSEEL) The PSEEL establishes the basic legal framework for the power sector, detailing the implementation of Constitutional Articles 25, 27 and 28. Grants the State the exclusive responsibility of generating, transmitting, transforming and distributing electricity intended for public service, through CFE (the PSEEL acts as CFE‟s Organic Law). Defines the modalities under which private participation is allowed (as a result of 1992 reforms).PSEEL Regulation: Implements the PSEEL and specifies the regulations that will apply to those activities reserved to CFE (Public Service) and those open to private participation.PSEEL Regulations with Regard to Contributions: Specifies the events and conditions under which state governments, municipalities, etc. have to make economic contributions for the development of work associated with the provision of electric power service. 10
  11. 11. Pertinent Electricity Regulations - ElectricityElectricity Legal and Regulatory Framework in Summary: Generation Transmission Distribution National National CFE & LFC Transmission Transmission Grid Private Third Parties Self-use Others Participation Cogeneration Imports Self Supply Reserved to State (Public Service) IPPs Open to Private Participation Imports Exports Regulated by the CRE 11
  12. 12. Pertinent Energy Regulations - HydrocarbonsRegulatory Law of Constitutional Article 27 on Petroleum This law details how Constitutional Articles 27 and 28 are applied. Among other things, it: • Entrusts PEMEX as the sole entity responsible for the exploration, exploitation, transportation, storage and distribution of petroleum, as well as those “strategic” areas defined in Article 28. • Clarifies - PEMEX is allowed to sign service contracts in the oil & gas sector for work to be performed by private sector companies as long as:  Remuneration is always in cash and under no circumstances payments are linked to the production and/or results derived from the services rendered. The regulatory law was amended in 1995 to allow private sector participation in natural gas distribution, storage, transportation, exports and imports. 12
  13. 13. Pertinent Energy Regulations - HydrocarbonsPEMEX Act Defines the role of PEMEX and its four subsidiaries. Entrusts PEMEX with the central planning and direction of all strategic activities related to the hydrocarbons industry. Allows PEMEX and its subsidiaries to sign contracts with private companies in order to successfully complete their activities.Natural Gas Regulation Implements the Regulatory Law of Constitutional Article 27 on Petroleum. Clarifies the specific regulations governing natural gas in the areas of FHS, transportation, distribution and storage activities. Establishes CRE‟s authority and the essential legal framework that applies to the issuance of natural gas and electricity permits. 13
  14. 14. Pertinent Energy Regulations - Hydrocarbons Hydrocarbons Legal and Regulatory Framework in Summary:  Current legislation allows private participation in the downstream segment of the industry, while the upstream continues to be under exclusive direct control of the State. UPSTREAM MIDSTREAM DOWNSTREAM Exploration Refining Petrochemicals Production Natural Gas LDC PipelinesMexican Constitution reserves all Refining Petrochemical industryupstream activities to the State.  100% controlled by PEMEX, (artificially divided)  State owns the resources - entrusts through its Pemex Refining  Basic Petrochemicals 100% (PR) subsidiary. controlled by PEMEX. PEMEX to undertake all E&P Pipelines  Secondary PetrochemicalsHydrocarbon regulatory laws permit open to private participation.PEMEX to sign Service Contracts with  PGPB maintains monopoly Natural Gas LDCprivate sector. over Nat‟l Pipeline System  1995 legal reforms allowed  Transport, storage, distribution,  Payments must be in cash and private sector to construct, imports and exports open to under no circumstances can be own and operate pipelines. private participation. linked to production or profit. Note: Storage includes LNG 14 Reserved to State Open to Private Participation
  15. 15. Pertinent Regulations – The CRE Act The CRE Act: In 1995 the CRE Act transformed the regulatory commission from a power advisory entity (based on a 1993 decree) in to a decentralized administrative agency in charge of regulating the natural gas and electricity industries (oil does not have a regulator in Mexico): Electricity Natural Gas • Issue private sector generation permits for the • Establishes First Hands Sales (FHS) – activities allowed under PSEEL. Although the intention was to govern the • Review and approve the criteria for setting sale of all natural gas, the regulation only fees related to public electricity service. pertains to the sale of gas from PGPB to third-parties within Mexico. • Participate in setting tariffs for wholesale and final sale of electricity. • Evaluation and award of transportation, storage and distribution permits. • Verify that CFE and LFC purchase electricity at the lowest cost and also offer optimum • Non-discriminatory open access. stability, quality, and safety of electric service. • Unbundling of services. • Approve the methodologies for: • Establishes natural gas and LPG prices • Calculating payments for the purchase and rates (electricity rates are set by of electricity used in public service. Ministry of Finance (Hacienda)). • Calculating payments for electricity transmission, transformation and delivery services. 15
  16. 16. State of Mexico’s energy sector? 16
  17. 17. Snapshot of Mexico’s Energy Sector The Energy Sector in the Mexican Economy  In 2006, the energy sector accounted for: • 17% of GDP • 30% of total exports* • 37% of Federal Revenues Source: SENER, PEMEX and IPD Latin America * Based on Pemex Outlook, July 2007 RATINGS Moody’s S&P Fitch MEXICO Long Term Foreign Currency Baa1* BBB* BBB** PEMEX Long Term Foreign Currency Baa1 BBB* BBB- CFE Long Term Foreign Currency N/A BBB* N/A * Upgraded January 2005, ** Upgraded December 7, 2005 17Source: IPD Latin America, based on SENER, PEMEX and INEGI
  18. 18. Snapshot of Mexico’s Energy Sector Energy Trade Balance 2006 - Imports vs. Exports - $40 Petrochemical . Exports $30 Oil Exports $6.88 Total Exports: $20 $34.71 USD$ 41.59 Billion $10 USD Billion $- Petrochemicals -$10 -$14.40 Fuel Oil -$0.23 -$20 Natural Gas Total Imports: -$2.08 -$30 LPG and Diesel USD$ 28.92 Billion Gasoline -$1.19 -$40 -$11.01 ENERGY BALANCE: S12.67 Billion Average Mexican Oil Export Basket Price: 1998: 10.18 dollars per barrel 2006: 53.04 dollars per barrel 18Fuente: IPD Latin America
  19. 19. Snapshot of Mexico’s Hydrocarbons Sector 2000* 2005 2006 2007** Total Revenue (Billion) US$ 48.9 US$ 86.1 US$ 97.6 US$ 47.1 PEMEX Total CAPEX (Billion) US$ 7.5 US$ 10.8 US$ 13.8 US$ 15.4 Financial Oil Basket Price US$24.8 US$ 42.7 US$ 53.0 US$ 52.3 Statistics Total Debt (Billion) US$14.9 US$ 49.9 US$ 52.3 US$ 50.8 Labor Liabilities (Billion) US$11.2 US$ 33.2 US$ 41.8 US$ 44.8 * Based on PEMEX 20-F **Unaudited results as of June 30, 2007 3.4 3.4 Crude Oil 3.3 3.3 Production 3.2 Crude Oil Reserves (MMB) 3.2 3.1 - As of Jan 1, 2007 - (MMBD) 3.0 Proven 11,047.6 2000 2001 2002 2003 2004 2005 2006 2007* Probable 11,033.9 5.9 5.4 Natural Gas 4.7 4.5 4.4 4.5 4.6 4.8 Possible 9,827.3 Production (BDFD) 2000 2001 2002 2003 2004 2005 2006 2007(*) 19Source: IPD Latin America, based on PEMEX data * Results as of June 30, 2007
  20. 20. Snapshot of Mexico’s Electricity Sector 2000 2005 2006 2007 CFE Capacity (MW) 35,385 45,576 47,857 49,834*Operating Generation (TWh) 190.00 215.63 221.90 111.777*Statistics Transmission Lines (Km) 35,271 45,767 47,485 47,884** Distribution Lines (Km) 579,300 642,700 653,200 655,700** Substations Capacity (MVA) Transmission 107.8 134.7 137.0 137.5** Distribution 31.7 39.7 41.0 41.7** * Information as of July 2007; ** Information as of March, 2007 Source: IPD Latin America, based on CFE2007 Capacity: 49,834 MW 2007 Generation: 111.777 TWh 23% 29% 77% 71%CFE: 38,377 MW IPPs: 11,457 MW CFE: 78.847 TWh IPPs: 32.929 TWh 20
  21. 21. Impetus to the Energy Sector’s CurrentState of Affairs 21
  22. 22. Hydrocarbons Sector 22
  23. 23. Hydrocarbons – All Trends Moving in the Wrong Direction PEMEX has faced years of under-investment: Average 1980’s 1990’s 2000- 2007* Oil ProductionCAPEX CAPEX MMBDUS$ Billion 3.27 3.22 10.2116 (US$ Billion) 4.0 Oil Production 2.49 2.77 3.2214 (MMBD) 3.5 15.4 *Note: 2007 values are estimates.12 13.8 3.0 10.810 2.5 10.1 10.1 8 8.3 2.0 7.8 6 6.8 6.9 1.5 6.4 5.8 5.5 5.1 4 4.2 1.0 3.1 3.1 2.5 2.8 3.0 2 0.5 2.0 1.8 1.6 1.9 2.1 2.0 1.6 1.0 1.1 0 0.0 2004 2006 2002 1980 1986 1988 1982 1984 1990 1992 1994 1996 1998 2000 23Source: IPD Latin America, based on PEMEX and SENER
  24. 24. Hydrocarbons – All Trends Moving in the Wrong Direction 72,500 70,000 66,450 Total Hydrocarbon Reserves 65,000 58,204 - At the Beginning of the Year- 60,000 (MMBECO) 45,376.4 55,000 50,000 45,000 2007* 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Total Crude Oil & Gas Proven Reserves - At the Beginning of the Year- Crude Oil (MMB) Natural Gas (BCF) 24,700 23,660 50,000 45,063 41,383 20,000 40,000 15,123 15,000 12,882 30,000 11,047 21,626 20,433 18,957 10,000 20,000 5,000 10,000 0 0 1999 2000 2001 2002 2003 2004 2005 2006 2007* 1999 2000 2001 2002 2003 2004 2005 2006 2007*Source: IPD Latin America, based on PEMEX 24*Note: 2007 estimated data
  25. 25. PEMEX – Trends All Moving in the Wrong Direction Thousand B/D Mexico’s Projected Crude Production 4,000 Without Major New Discoveries 3P Reserves Discovered (MMBECO) 3,500 3,383 3,000 2,445 2,500 916 950 966 2,000 612 709 313 216 1,500 2000 2001 2002 2003 2004 2005 2006 1,000 500 - 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1P and 3P Replacement Ratio Cantarell Other Fields Threat of significant crude production 2000 2001 2002 2003 2004 2005 2006 declines without major E&P efforts3P 21% 14% 41% 45% 57% 59% 60%1P -1% -19% -614% 26% 23% 26% 41%Note: The majority of the 2006 1P and 3P increases come fromreserves reclassification and not because of new discoveries 25 Source: IPD Latin America, based on PEMEX data
  26. 26. Operational ConstraintsPRODUCTION CONSTRAINTS: Cantarell has started to decline (in 2006 it declined 12%, and in 2007 it is expected to decline around 12% - 14%)* Lifting costs continuing to rise (@ $4.2/b at year end 2006 vs. $3.8/b in 2004. Chicontepec extraction cost is believed to be in the range of $14/b). Continued decline in hydrocarbon reserves Principal production focus: “low-hanging fruit” & enhanced recovery Major infrastructure investment needed for enhanced recovery efforts PEMEX lacks technology, know-how and financial resources to pursue riskier/ complicated projects on its own (deepwater, marginal fields, Chicontepec) Deepwater efforts only starting (Lakash: 935 meters, Q4 – 2006 -- Noxal: 951 meters, Q4 - 2005 -- Nab-1: 681 meters, discovered Nov. „04); besides technology, lack risk capital Natural gas demand continues to outstrip supply* According to Morales Gil comments, when presenting the Development Plan 26
  27. 27. Operational ConstraintsPOWERFUL AND COSTLY UNIONIZED WORKFORCE:  Over 148,000 employees and growing; approximately 80% are unionized.  Collective bargaining agreement contains provisions that shares increased windfall with union when oil prices increase.  5 of 11 PEMEX Board members are union representatives.  PEMEX‟s retired employees or their survivors receive same benefits as existing union workers under all ongoing labor negotiations.  Historically limited flexibility to move unionized workers to other regions/projects, e.g. Poza Rica; Only local field experience is created.  Total pension liabilities as of June 30, 2007 have quadrupled when compared to the level registered in 2000. 27
  28. 28. Operational ConstraintsABSENCE OF CUTTING EDGE RESEARCH & DEVELOPMENT:  Mexico‟s hydrocarbons R&D department (IMP – Instituto Mexicano del Petróleo) is quasi-independent of PEMEX but receives no direct funding from it; has functioned more as an academic and privileged early retirement destination for senior technical PEMEX staff.  IMP not known as a world-class lead technology developer.  Functions more as a workforce contracting agency for PEMEX than anything else.  IMP not allowed to initiate new initiatives on its own (only permitted upon PEMEX request/ agreement).www.imp.mx  IMP lacks sufficient funds to carry out long-term R&D efforts.  Attractive retirement and post-retirement benefits have created a brain drain of senior technical PEMEX staff; coupled with massive workforce leads to delayed and pyramid decision making. 28
  29. 29. Financial Constraints PEMEX’s Punitive Tax Burden:PEMEX remains largest single tax contributor – more than 1/3 of government revenues Budgetary constraints have limited investment in new technologies and exploration Budgetary constraints have dictated focus on crude oil projects over non-associated natural gas projects CAPEX investment increasingly dependent on use of debt Severe under-investment across all PEMEX business lines Increased Unfunded Labor Obligations 29
  30. 30. Financial Constraints Taxes and Duties paid by PEMEX (1998 – 2007*) $60 $53.69 $53.55 $50 $42.11 $40 USD Billions $34.04 $30.69 $29.11 $30 $28.47 51.81 25.28 $21.84 37.25 25.66 $20 $16.43 23.42 18.70 17.37 12.60 9.31 $10 9.24 10.41 11.10 7.12 7.27 8.37 4.86 1.88 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 IEPS Hydrocarbon Duties and othersSource: IPD Latin America, based on PEMEX 30*Note: 2007 figures are estimates as of June 30, 2007
  31. 31. Financial Constraints$60 $52.32 $50.83 $49.80$50 $40.16 PEMEX Consolidated Debt$40 $32.87 (US$ Billion)$30 $24.33 $18.61$20 $14.91 $12.46$10$- 1999 2000 2001 2002 2003 2004 2005 2006 2007* Peso-denominated debt Debt in other currencies $50 $44.8 $41.8 $40 $34.9 $27.1 PEMEX Labor Liabilities $30 $25.7 $25.4 (US$ Billion) $20 $14.5 $11.2 $8.7 $10 $- 1999 2000 2001 2002 2003 2004 2005 2006 2007*Source: IPD Latin America, based on PEMEX 31*Note: 2007 figures are estimates as of June 30, 2007
  32. 32. Financial Constraints PEMEX Equity vs. Total Sales (US$ Billion) 120 97.6 100 86.2 Total 80 69.7 Sales 58.8 60 50.0 50.0 52.5 36.3 Equity 40 20 17.0 15.7 13.4 9.8 4.3 3.0 3.7 0 1999 2000 2001 2002 2003 2004 2005 2006 -20 -2.5 Mexican Oil Price Average Price (US$/barrel)PEMEX 2007 data (As of June 30):Total Sales: US$ 47.4 billion 1999 2000 2001 2002 2003 2004 2005 2006 2007*Equity: US$ 6.7 billion 15.57 24.79 18.61 21.52 24.78 31.05 42.71 53.04 52.32Source: IPD Latin America, based on PEMEX 32*Note: 2007 figures are estimates as of June 30, 2007
  33. 33. Electricity Sector 33
  34. 34. Operational ConstraintsPRODUCTION ISSUES:  A sizeable portion of CFE‟s generating capacity is quite old and inefficient (around 15% of CFE capacity is more than 30 years old).  Reserve margin currently exceeds 42% as a result of lower economic growth and high rainfall that has increased the amount of hydro power required. The Calderon Administration is exercising increasing pressure to lower reserve margin capacity through shutting down obsolete power plants.  Lack of fuel supply alternatives.  The real issue, natural gas supply. 60.00% 50.00% Minimum Reserve 40.00% Margin: 27% 30.00% 20.00% Minimum Operating Reserve Margin : 6% 10.00% 0.00% 2008 2009 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2010 2011 2012 2013 34
  35. 35. Operational Constraints  CFE latest planning scenarios (2007-2016) call for the construction of 66 new power plants that amount to 27,037 MW.  12,184 MW of natural gas-fired combined cycle power plants.  CFE has now recognized that most of the “undesignated” power plants will have to be fueled by natural gas, adding an additional 6,021 MW of natural gas. Thus, total natural gas dependency will be 67%. CFE’s Future Installations Gas Turbine, 379 MW Others, 519 MW Wind and Geothermal, 747 MW Coal, 3,478 MW Combined Cycle, Hydro, 3,709 MW 12,184 MW Undesignated, 6,021 MW 35Source: IPD Latin America, based on CFE
  36. 36. Operational Constraints GROWING DEPENDENCE ON NATURAL GAS (NG):  Mexico‟s power sector has become increasingly dependent on NG. CFE‟s projections indicate that by 2012 around 65.5% of power generation will come from NG. Mexico has been unable to increase its own NG production. As a consequence, NG supply will not be met by domestic production for the foreseeable future. 8.38 8.63 8.66 7.68 8.03 7.22 7.43 Total National 6.55 6.67 6.73 Demand: 5.89 6.99 7.05 7.01 Natural 6.74 6.87 6.82 6.64 Total National 6.27 6.48 Gas 5.68 Balance Production 5.05 2005 - 2015 (BCFD) 2.66 2.98 3.22 3.44 3.50 1.68 1.99 1.91 2.04 2.37 2.44 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Electric Sector Demand National Production Others Natural Gas Deficit (MMCFD) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 844 867 399 246 488 441 628 1,020 1,511 1,814 2023Source: CFE, March 2007. 36NOTE: The graph does not include natural gas imports.
  37. 37. Financial Constraints  High subsidies in electricity tariffs 2005 2006 Average Price Price/Cost Subsidies Average Price Price/Cost Subsidies TARIFF of Electricity Ratio (MXP Million) of Electricity Ratio (MXP Million) (MXP/KWh) (MXP/KWh)CFE TOTAL 1.00 0.70 63,660 1.08 0.69 77,068 Residential 0.91 0.42 45,117 0.95 0.40 53,399 Commercial 2.09 1.11 0 2.28 1.09 0 Services 1.45 0.82 1,481 1.54 0.79 2,011 Agriculture 0.44 0.28 8,740 0.42 0.25 10,171 Industrial 0.94 0.92 8,321 1.04 0.92 11,487LFC TOTAL 1.17 0.53 31,111 1.16 0.54 33,064 Residential 0.99 0.28 16,033 1.07 0.32 15,148 Commercial 1.97 0.59 5,284 1.92 0.60 5,163 Services 1.55 0.69 1,305 1.64 0.81 794 Agriculture 0.50 0.20 148 0.42 0.14 159 Industrial 1.20 0.68 8,341 0.96 0.66 8,800 Source: IPD Latin America, based on CFE and LFC data 37
  38. 38. Financial Constraints Distribution of Electricity Sales Distribution of Electricity Sales by Sector 1995 – 2005 by Sector 2005 (GWh) Agricultural Residential 42,531 5% Residential 24% Commercial 12,989 Services 6,450 Industrial 99,720 Industrial Commercial 59% 8% Agriculture 8,067 Services Total 169,757 4% CFE and LFC Results 2005 2006 - Thousands of MXP - CFE LFC CFE LFC Revenue (loss) before government transfers (11,894,447) (28,294,486) 1,953,094 (32,074,561) Government transfers 69,879,995 25,207,263 51,910,250 33,530,681 Net Revenue (loss) 5,030,548 (3,087,223) 2,080,381 1,456,120Source: CFE and LFC 38
  39. 39. Existing Business Lines Controlled by theState and Open to Private Sector(10:15 am – 12:15 pm) 39
  40. 40. Mexico’s Energy SectorOil, Gas & Power Industries – Existing Business Lines 40
  41. 41. Mexican Energy Sector – Public Sector Players  The Mexican Constitution states that the production, distribution, and marketing of energy supplies are (with a few exceptions) under the control of the State, which undertakes operation of these activities through two* state-owned utilities: PEMEX: this state monopoly is responsible for all the exploration, exploitation, production and commercialization of Mexican hydrocarbons, and most of its derivatives. CFE: this state monopoly is responsible for all generation, transmission and distribution of electrical power in the country. In order to attract investment and free up public resources in the 1990‟s, the government started a process of “liberalization” in the energy sector, opening up certain areas for private participation.* Although LFC is also an electricity state owned utility , it is basically in charge of distributing electricity in Mexico Cityand the surrounding Estado de Mexico, Hidalgo, Morelos and Puebla. 41
  42. 42. Who controls which business lines  In 1992 PEMEX was divided into four decentralized subsidiaries that are coordinated by PEMEX Corporate PEP (Pemex PGPB (Pemex Exploration and Gas and Basic PR (Pemex PPQ (Pemex Production) Petrochemicals) Refining) Petrochemicals)Exclusively responsible 1) Exclusively responsible 1) Exclusively 1) Manufacturesfor all exploration and for processing all domestic responsible for converting and marketsproduction of Mexico‟s natural gas and liquids; oil into gasoline, jet fuel, secondarycrude oil and natural 2) Transports, distributes diesel fuel, fuel oil and petrochemicalsgas and markets basic LPG; along with the petrochemicals* 2) Distributes and private sector markets these products * Methane and natural gas liquids: ethane, propane, butane and condensates 42
  43. 43. Who controls which business lines – Crude Oil All hydrocarbons are the exclusive property of the nation • PEMEX is responsible for the exploration, exploitation and commercialization of Mexican hydrocarbons. However, there are options for private companies to work along with PEMEX: Reserved to the STATE  Ownership of Resources: Mexico  Ownership of Resources: Mexico  Responsible Entity : PEP  Revenues from Production: PEMEX  Private sector participation:  Responsible Entity : PMI (PEMEX • Service Contracts: Drilling, Seismic, International Trading) Infrastructure supply, future Alliance Contract • Technical Exchange agreements 43
  44. 44. Who controls which business lines – Oil & Gas  PEP uses a significant number of service companies as subcontractors. Hydrocarbons produced by subcontractors are not differentiated from production from PEMEX.  Given that PEMEX does not function as a corporation but rather a state- owned entity, PEMEX does not have full control of all of its activities. What PEP controls? What PEP does not control?  Exclusive right to explore  Pricing of its products is set by the (determine location, timing, etc.) Ministry of Finance  Once financing has been obtained,  Debt issuance is made in PEP has a large amount of coordination and with approval of flexibility in how it allocates those the Ministry of Finance resources  Marketing of its products is done  Perform all FHS of domestically by other PEMEX subsidiaries produced products  Cannot negotiate directly with its  Once a project is implemented, union PEP leads all planning efforts 44
  45. 45. Who controls which business lines – Natural Gas Reserved to the STATE Open to PRIVATE PARTICIPATION Activities Regulated by the CRE Responsible Entity: • E&P: PEP  Reforms to the Regulatory Law of Article 27 on • Processing and First Hand Petroleum (1995) allowed private sector Sales: PGPB participation Private sector participation: Private Participation in Natural Gas and LPG • Service Contracts: Drilling, Seismic, Infrastructure supply • 21 LDCs • Multiple Service Contracts • 17 major private sector open access (MSC) pipelines • Technology transfer • 3 LNG projects under way agreements • 350+ LPG Disco’s (controlled by 5 families) 45
  46. 46. Electricity Industry Structure In 1992, the Electricity Public Sector Law (LSPEE) was amended to allow private participation in generation under the following schemes: Generation Transmission Distribution National National CFE & LFC Transmission Transmission Grid Grid Private Third Parties Self-use Others Participation Cogeneration Imports Reserved to State Self Supply Independent Prod (IPPs) Open to Private Participation Imp / Exp CRE Regulated 46
  47. 47. Who controls which business lines – Power As a result of the 1992 amendments to the Constitution and the LSPEE, over 336 generation permits have been authorized by the CRE.  IPP‟s: 21 projects accounting for 11,457 MW (equivalent to 23% of CFE‟s total generation capacity)  Cogeneration: 35 projects accounting for 1,685 MW  Self-supply: 246 projects accounting for 4,685 MW  Import and Export: there are 35 projects combined, accounting for 1,830 MW Private Projects – Installed Capacity Import - Export 9% Self-supply 24% IPP 58% Cogeneration 9% 47
  48. 48. Mexico’s Energy SectorWho really makes the decisions in Mexico? 48
  49. 49. Key Players in the Mexican Energy Sector SENER, SEMARNAT, Hacienda and the Presidency Office  SENER is in charge of planning. State-owned utilities provide opinions only.  Hacienda is responsible for approving the financing scheme to be undertaken for every government-sponsored energy project.  Hacienda is also responsible for establishing transfer prices among PEMEX subsidiaries.  SEMARNAT is in charge of enacting the environmental regulations and establishing the mitigation measures to be followed by each project.  The Presidency Office, defines the priority of each of the projects to be undertaken, based on suggestions made by the President‟s Cabinet. 49
  50. 50. Other Key Players in the Mexican Energy Sector  Each of the Mexican SHCP: funding, states issues a state transfer prices among development plan, PEMEX subsidiaries which is SENER: planning & renewed/updated energy policy Federal every time a new State administration takes SEMARNAT: office. environmental  State authorities and regulations governors oversee CNA : water use and land use, i.e. discharges industrial, farming, etc. Municipal  Municipal authorities issue the construction permits, as well as manage the public recording of land use in the area. 50
  51. 51. Mexico’s Energy SectorBarriers to Entry 51
  52. 52. Barriers to Entry – Crude oilLegal barriers in the oil sector include:  Ownership of all hydrocarbons extracted and produced in Mexico is restricted to the State, to be exclusively developed by PEMEX.  Mexican Constitution does not allow any form of PSAs, or any contract that ties performance or production with final payment.  Consequently, PEMEX is only able to enter service agreements and not JV’s, within Mexican territory.  After the catastrophe seen in the reconfiguration and upgrade of the Cadereyta and Madero refineries, the Mexican government started restricting participation in certain projects to companies based in countries with signed FTAs with Mexico. 52
  53. 53. Barriers to Entry – Crude oilLegal barriers in the oil sector include:  Special drilling projects require that the potential investor has previous work experience with PEMEX.  Minimum local content requirements (10%- 50%).  Rigidity in submitting bid proposals  PEP‟s restricted bids and direct assignments (FSO, FPSO, seismic, nitrogen injection, etc.) 53
  54. 54. Barriers to Entry – Natural GasPipelines:  The permanent FHS regime has not been implemented, allowing the following dynamics:  No real open access to the National Pipeline System (NPS);  PGPB controls all cross-border interconnection points;  No real Chinese Walls between PGPB‟s marketing and transportation companies.  As a result, PGPB‟s has a de-facto monopoly over the natural gas industry as it can offer bundled-service packages including supply and transportation.*  Other barriers to entry related to development, include a poor, deficient, public land record, which creates further uncertainty when negotiating ROW‟s with local landowners.* Plus an “administrative charge” in addition to the established tariffs. 54
  55. 55. Barriers to Entry – Natural GasPipelines:If a FHS regime were fully-implemented, the following activities would follow:  An open season on the NPS would take place  PGPB would have to offer unbundled natural gas services  Any private company in Mexico could purchase natural gas at the border or at PGPB‟s processing centers (Reynosa or Cd. PEMEX) and have it delivered to a location of its convenience  A natural gas user (industrial, LDCs, IPPs) would still have the ability to purchase natural gas from PGPB and have it delivered at location of its choice (as currently takes place)  Purchase of domestically produced gas would still only be made through PGPB 55
  56. 56. Barriers to Entry – Natural Gas Local Distribution Companies (LDC’s):  Regulation based on maximum-income tariffs.  Disloyal competition with LPG.  LPG has enjoyed substantial subsidies  Local distribution companies are “enforcers” of their market share.  Given subsidies and familiarity, natural gas has not fully accepted as the fuel of choice by households and industry. 2,500,000 14.3% average 1,945,382 2,000,000 growth since 2001 1,500,000 Users 1,000,000 852,348 500,000 33,388 - 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 56Source: CRE
  57. 57. Barriers to Entry – Natural GasNatural gas storage:  Under the existing regulation, LNG is considered a storage activity.  LNG projects, to date, are dependent on anchor clients, which due to the credit ratings and volume required can only be offered by state-owned utilities.  Similar to what the pipeline business has experienced, the lack of a reliable public land record creates uncertainty and excessive costs to obtain site  Injunctions  Limited ability to sell excess capacity to third parties.  Complex process to undertake open-season procedures to seek additional customers/capacity.  Who should pay? And can the cost be passed through? 57
  58. 58. Barriers to Entry – PowerIPPs:  No ability to sell to third-parties (all capacity is committed to CFE)  Obscure dispatch rulesSelf-Supply & Cogeneration:  Limited ability to sell excess capacity to third-parties; Max: 20% of the installed capacity  No true access to the electricity grid  Wheeling Charges - A Black Box  Unattractive back-up supply contracts have to be signed with CFE; can make a project uneconomic 58
  59. 59. Mexico’s Energy SectorGovernment Intervention in the Sector 59
  60. 60. Government Intervention in E&P activitiesPEP does not function as a company but rather as a state-owned entity. As such,many different government agencies are involved in PEP operations.  All marketing, planning activities are controlled 100% by the state.  SENER, in conjunction with PEMEX (and Congress) determines the production and export platform.  The Ministry of Finance (Hacienda) dictates the level of debt to be raised in capital markets.  Hacienda requires PEMEX to pay guaranteed taxes on a monthly basis.  State and local government influence and intervention often results in political vs. economic decision making.  All these perverse dynamics have forced PEMEX to focus almost singularly on exploitation efforts to the detriment of exploration and other business activities. Given its lower profitability, natural gas E&P activities play second fiddle to crude oil projects. 60
  61. 61. Government Intervention in the Natural Gas Sector  Relatively low natural gas prices.  No use of risk management techniques by majority of large consumers. Natural gas prices escalated, and consumers looked for government relief.1997 2000 2001 2003 2005 Residential subsidy: In April 2005, the January 2001, the government offered a “4 X 3 scheme”  In November 2003 PGPB sliding scale subsidy starts offered three “real” hedging based on options depending on a consumption. customers view of prices and appetite for risk. 61
  62. 62. Government Intervention in the Natural Gas Sector• Natural gas prices reached US$ 9.57/ MMBTU in January 2001. Price escalation resulted in massive outcry by industrialists and large consumers.• Artificial price of US$ 4/MMBTU for a 3 year term established by the CRE in February 2001, retroactively enacted from Jan. 1, 2001 until Dec. 31, 2003. Gas Price (HH) vs. 4x3 Scheme $12.00 $10.00 $8.00 US /MMB T U $6.00 $4.00 $2.00 $0.00 Apr-00 Apr-01 Apr-02 Apr-03 Jan-00 Jul-00 Oct-00 Oct-01 Oct-02 Oct-03 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 62
  63. 63. Government Intervention in Electricity and LPG The government also provides significant subsidies to CFEs customers as we have discussed: Subsidies to CFE’s Electricity Tariffs Tariff Subsidies 2001 2002 2003 Industrial 14% 11% 12% Residential 59% 51% 58% Agriculture 71% 70% 73% Services 11% 2% 7% Another example of government intervention can be found in LPG prices. • Since March 2001, LPG prices paid by final consumers have been subject to a price cap mechanism set by the Economy Ministry. (LPG FHS are set by the CRE and based off of Mont Belvieu). • The argument used for justifying this intervention was that LPG is consumed by 70% of Mexican homes, and as such, its price affects the national economy. 63
  64. 64. Government Intervention – In Sum As can be concluded from the previous examples provided, government intervention is common practice in Mexico‟s energy sector. Government intervention is always focused on the end consumer. Political objectives maintain a government focus on short term relief over long term viable solutions. The one interesting exception is gasoline. However, this results from the direct impact it has on PEMEX budget and SHCP tax take. Mexico has had the luxury to subsidize its energy sector to date but this may not be the case on a go-forward basis given social demands. As long as CFE and PEMEX continue as monopolies, we do not foresee a change in the government’s use of this strategy 64
  65. 65. List of Private Sector Investment to Date 65
  66. 66. CFE – Increasingly Important Player in Natural Gas CFE is the main driver behind LNG projects 4,000 3,500 8.4% demand 3,000 growth per year 2,500 MMCFD 2,000 3,439 3,496 3,215 1,500 2,975 2,664 2,371 2,435 1,000 1,991 1,913 2,036 1,680 500 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 66Source: Eugenio Laris presentation in La Jolla, May 2007
  67. 67. Natural Gas – Natural Gas Infrastructure 9 MEXICALI Constructed Open Access Pipelines IMPORTS IMPORTS 1 Kinder Morgan 11 2 Gasoductos de Chihuahua 10 12 . CD JUAREZ 2 Nogales 3 Igasamex Bajío Naco 4 Energía Mayakán Santa Cananea Ana 5 Tejas Gas de Toluca IMPORTS 6 FINSA Energéticos HERMOSILLO CUAUHTEMOC CHIHUAHUA 7 Transportadora de Gas Zapata ANAHUAC Gasodutos del BajíoEnergia GUAYMAS Delicias PIEDRAS NEGRAS 8 EMPALME 9 TGN Costa Pto. Libertad Cd. Camargo NUEVO Azul Química 10 Pemex Gas y Petroquímica Básica Jiménez del Rey LAREDO Pandura IMPORTS 11 Gasoductos Baja Norte Escalón Miguel 1 14 Castaños Alemán 6 12 Ductos de Nogales Gómez P. MATAMOROS RAMOS REYNOSA RIO 13 Gas. de Tamaulipas (San Fernando) Cd . Lerdo Parras MONTERREY Topolobampo Torreón ARIZPE Cadereyta Sn. BRAVO 16 14 El Paso Gas Transmission de México SALTILLO ARTEAGA Fernando 13 15 PGPB (National Pipeline System) 15 16 Gasoducto del Rio ALTAMIRA 17 Gas Natural de la Huasteca C.F.E. ColinasGeographic Zones Sn. TAMPICO Campo Tam . Luis PotosíPEMEX National Pipeline System 8 17 CD. MADERO Altamira CAN CUNOpen Access Private Pipelines AGUASCALIENTES 3 ValladolidInjection Points Guadalajara Tlalchinol Poza MERIDA LEON SILAO Rica IRAPUATO C.F.E. El Verde Tula SALAMANCA Sta .Potential LDCs CELAYA Ana PACHUCA 5 TOLUCA DF TLAX. 4 LNG In Operation PUEBLA Atasta Manzanillo 7 Nvo . Teapa Cactus y LNG Under Construction Nuevo Pemex LNG Proposed Site 67
  68. 68. Natural Gas - Transport Open Access Transportation Permits Granted by the CRE COMPANY LENGTH CAPACITY INVESTMENT (km) (MMCFD) (US$ Million)1. Kinder Morgan Gas Natural 137.2 374 82.02. Gasoductos de Chihuahua (El Paso (50%) – PGPB 38.0 328 18.2(50%))3. Igasamex Bajío 2.5 13 0.34. Energía Mayakan Pipeline 710.0 285 276.9(Gaz de France (67.5%) GE (22.5%))5. Tejas Gas de Toluca (Alliance between Westpark 123.2 96 31.0Resources and Grupo Fermaca)6. Finsa Energéticos 8.0 8 0.27. Transportadora de Gas Zapata (OneOk International (38%), Williams International Ventures 164.2 166 75.9 (37%) Compañía Mexicana de Gas Natural (25%)8. Gasoductos del Bajío (TCPL (95%), GUTSA (5%)) 203.0 90 56.59. Transportadora de Gas Natural de Baja California (Gasoducto Rosarito (99%) and Sempra 36.0 300 28.2 (1%))10. Pemex-Gas y Petroquímica Básica (Naco- 339.0 110 22.1 Nogales) 68
  69. 69. Natural Gas - Transport Open Access Transportation Permits Granted by the CRE COMPANY LENGTH CAPACITY INVESTMENT (km) (MMCFD) (US$ Million) 11. Gasoducto Bajanorte (Sempra) 217 400 124.6 12. Ductos de Nogales (Compañía Energética de México 14.9 15 4.1 (48.57%), Operadora de Empresas y Servicios (50%)) 13. Gasoductos de Tamaulipas (Gasoductos de Chihuahua 114.2 2,460 238.7 100%) 14. El Paso Gas Transmission de México (El Paso, 100%) 12.5 215 6.6 15. Pemex-Gas y Petroquímica Básica 8,704.0 5,107 436.5 16. Gasoductos del Río (EDF International 99%) 57.9 410 39.3 17. Conceptos Energéticos Mexicanos (Integrated Gas 1.6 9 0.8 Services de Mexico (60%), International Project Opportunities Group (40%))* 18.Transportadora de Gas Natural de la Huasteca (TCPL 198.0 339 225.7 100%)* 19. Tejas Gas de la Península* 234.5 300 139.5 20. Terranova Energia (Tidelands)* 256.9 1,200 N.A. TOTAL 11,573.9 12,437.8 1,807.1*Permits have been awarded but construction has not started yet 69

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