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Mexico’s Energy Reform


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Mexico’s Energy Reform

  1. 1. Mexico’s Energy Reform Lourdes Melgar, Ph.D. Undersecretary of Hydrocarbons Ministry of Energy February 7, 2014
  2. 2. 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.
  3. 3. Oil and Gas
  4. 4. REFORM TO ARTICLES 25, 27 AND 28, WITH 21 TRANSITORY ARTICLES ALLOW PRIVATE INVESTMENT IN UP, MID AND DOWNSTREAM. Oil and Gas Reserves Exploration and Production Refining and Natural Gas Processing Transportation, Storage, Distribution and Commercialization The Mexican State, through SENER, manages the country’s oil and gas reserves (selection of bidding areas) Entitlements granted by SENER to Pemex (Round Zero) Permits for refining and natural gas processing (including petrochemicals), granted by SENER to Pemex and/or the private sector5 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 Service, profit/production sharing and license contracts, awarded by the National Hydrocarbons Commission (CNH) to Pemex and/or the private sector 5. Constitutional Article 28 and Transitory Article 10 6. Constitutional Article 28 and Transitory Article 10
  5. 5. 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.
  6. 6. 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: 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.  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
  7. 7. EXPLORATION AND EXTRACTION LEGAL FRAMEWORKS IN THE TOP 20 OIL PRODUCING COUNTRIES Ranking 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Country Russia Saudi Arabia United States of America China Canada Iran Iraq Kuwait United Arab Emirates Mexico (Before the Reform) Mexico (With the Reform) Venezuela Nigeria Brazil Angola Norway Kazakhstan Libya Algeria United Kingdom Qatar Production (2012) mmbd 10,427 9,813 6,401 4,122 3,127 3,000 2,918 2,754 2,653 2,548 2,548 2,479 2,092 2,061 1,756 1,618 1,583 1,402 1,165 890 741 Concessionary/Contractual Framework Concessions and production sharing contracts Concessions Concessions Production sharing contracts Concessions Profit sharing contracts Profit and production sharing contracts Service contracts Concessions Service contracts Service, profit or production sharing contacts and licenses Concessions Concessions and production sharing contracts Concessions and production sharing contracts Concessions, profit and production sharing contracts Concessions Concessions and production sharing contracts Production sharing contracts Concessions Concessions 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).
  8. 8. 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 8. Transitory Article 6 9. Transitory Article 20 10. Secondary Legislation
  9. 9. ROUND ZERO FOR PEMEX1 1 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. 2 (90 days) The Ministry of Energy, with technical assistance from the National Hydrocarbons Commission (CNH), shall review Pemex’s request, and issue the corresponding resolution. 3 Pemex will maintain exploration entitlements in those areas where it has made commercial discoveries or exploration investments. (3-5 year period) (180 days) 6 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. Transitory Article 6 5 Pemex may propose to the Ministry of Energy for its approval, the migration of the allocated entitlements into new contracts. 4 Pemex will maintain extraction entitlements in fields in production.
  10. 10. OIL AND GAS EXPLORATION AND PRODUCTION CONTRACTUAL FRAMEWORK2 2 • Technical guidelines of the bidding rounds. • Technical design of contracts. 1 • Block selection, with technical assistance of the CNH. 3 4 • Conducts the bidding rounds. • Decides on the winning bids. • Fiscal terms of contracts. 7 6 • Mexican Petroleum Fund for Stabilization and Development makes payments and manages government cash flows. • Technical management of contracts. 5 • Awards and signs the contracts on behalf of the Mexican State. 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).
  11. 11. TRANSPARENCY AND ANTI-CORRUPTION POLICIES IN OIL AND GAS CONTRACTS5 1 3 2 Bidding rounds and their guidelines will be public. Transparency clauses will be included in oil and gas contracts. 4 Full disclosure of all payments associated to oil and gas contracts. External audits to supervise cost recovery and accounting aspects. 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 5. Transitory Article 9 6. Transitory Article 21
  12. 12. MEXICAN PETROLEUM FUND FOR STABILIZATION AND DEVELOPMENT 1 Payments established in oil and gas exploration and production entitlements and contracts 2 At least 40% 3 Expenditure Federal Budget PEF (Constant at 4.7% of GDP) 4 Long-term savings (Up to 3% of GDP) Long-term savings (until savings reach 10% of GDP). Up to 10% Universal Pension System Up to 10% Science & technology and renewable energy projects Up to 30% Oil and gas project investment vehicle and infrastructure development Up to 10% Scholarships, connectivity enhancement projects and regional industrial development 9. Constitutional Article 28 and Transitory Article 14 When long-term savings surpass 3% of GDP, the excess balance will be allocated as follows:
  13. 13. Electricity
  14. 14. OVERVIEW OF THE ELECTRICITY REFORM  Private investment in Generation will be allowed.  An independent system operator (CENACE) implement a Competitive Electricity Market. will  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.
  15. 15. OVERVIEW OF THE ELECTRICITY REFORM Generation Marketing • Generators can sign long term contracts to reduce their market exposure. • • The spot market will be based on the short-term optimal dispatch. 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. • CFE will operate its generation independently from its other activities, and will compete on a level playing field. 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.
  16. 16. Further actions
  17. 17. FURTHER ACTIONS Resolution for round zero Secondary law March Pemex proposal Round zero April Aug Regulation exploration Kick off of the Electricity Market Sept 2014 Dec Creation of CENAGAS and CENACE 2015 June Kick off First Bidding Round CFE and PEMEX as State Productive Companies
  18. 18. Mexico’s Energy Reform Lourdes Melgar, Ph.D. Undersecretary of Hydrocarbons Ministry of Energy February 7, 2014
  19. 19. 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. Investment in exploration and extraction (Billions of dollars) 25 20.7 3.4 20 3.0 15 11.7 2.5 10 Oil Production (Million of barrels per day) 4.7 5 103 1.5 0 31 Price of Mexican Crude Export Mix (Dollars per barrel) 13 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 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. 2012 19
  20. 20. 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. 9,000 8,007 7,792 Million cubic feet per day 8,000 (100%) Natural Gas Consumption 7,000 6,534 6,000 5,651 (70%) 4,576 5,000 (100%) 4,000 4,467 (97%) Natural Gas Production 2,356 3,000 (30%) Natural Gas Imports 2,000 1,000 1,258 109 (3%) - 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* * January – July, 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. 20
  21. 21. GASOLINE IMPORTS REPRESENTED 25% OF TOTAL CONSUMPTION IN 1997; BY 2012, THAT PERCENTAGE HAD INCREASED TO 49%. 900 Gasoline Consumption Thousands of barrels per day 800 811 (100%) 752 700 600 503 Gasoline Production (100%) 500 455 416 (51%) 400 376 300 200 395 (75%) (49%) Gasoline Imports 127 (25%) 100 54 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Pemex, annual average 1997-2012. 21
  22. 22. IN 1997, MEXICO IMPORTED 41% OF THE PETROCHEMICALS IT CONSUMED; IN 2012, 66% OF DEMAND WAS MET WITH IMPORTED PETROCHEMICALS. 22.09 21 (100%) 19.36 18 Billions of dollars 14.47 Demand 15 (66%) 12.72 12 Net Imports 7.62 9 (34%) 6.09 6.64 (100%) 6 Production 3.62 (59%) 3 2.47 (41%) 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Mexican Energy Ministry, with data provided by Pemex-Petrochemicals and the Mexican Central Bank. 2012 22
  23. 23. THE AVERAGE CFE RATE IS 25% HIGHER THAN IN THE US. WITHOUT SUBSIDIES, THE AVERAGE DIFFERENCE IS 73% AVERAGE ELECTRICITY RATES AT FISRST QUARTER OF 2013 (MEX CENTS/ KWH) Subsidio México 400 +149% EE.UU. 350 +123% +135% 300 250 +69% +73% 200 +25% +84% 150 -24% 100 50 0 Domestic High Residencial Consumption Alto Consumo Comercial Commercial Servicios Public Service Industrial Industrial Source: Sener. SIE. DOE, EIA. Rates converted to Mexican pesos with an exchange rate of 12.64 pesos/dollar, 1Q2013. Residencial Domestic Agrícola Farming Promedio Average
  24. 24. Mexico’s Energy Reform Lourdes Melgar, Ph.D. Undersecretary of Hydrocarbons Ministry of Energy February 7, 2014