Energy Reform Under the New Administration
Alejandro SchtulmannEnergy Trade Mission
Mexico CitySeptember 2018
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Lopez Obrador’s Landslide Victory
In order to make amendments to the Constitution, Lopez Obrador needs 2/3 of each federal chamber and 1/2 of all state legislators to vote in favor. Lopez Obrador’s party now controls 18 state legislatures.
Lower House Senate
Coalitions % Seats
PRI-PVEM-Panal 13 63
PAN-PRD-MC 26 130
Morena-PT-PES 61 307
Coalitions % Seats
PRI-PVEM-Panal 16 21
PAN-PRD-MC 31 39
Morena-PT-PES 53 68
New Mexican Congress: Blank Check for Lopez Obrador?
Candidate Votes Percentage
Lopez Obrador (Morena-PT-PES) 29,985,934 53.19%
Anaya (PAN-PRD-MC) 12,552,325 22.26%
Meade (PRI-PVEM-Panal) 9,254,576 16.41%
Jaime Rodriguez “El Bronco” (Independent) 2,951,110 5.23%
Voter Turnout
71,801,425 63.44%
1,563,875 2.77%
Null Votes
61%26%
13%PRI-PVEM-Panal
PAN-PRD-MC
Morena-PT-PES
53%31%
16%
Morena-PT-PES
PRI-PVEM-Panal
PAN-PRD-MC
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Lopez Obrador: National Hydrocarbons Project (2018-2024)
• “Rescue” the sector• Increase production• Strengthen Pemex finances and
operations• Increase self-sufficiency (energy
security)
• Improve production capacity of Pemex and other private companies
• Improve refining capacity• Increase biodiesel production• Improve supply chain security • Revert the financial losses of Pemex• Strengthen the autonomy of regulators
Andres Manuel Lopez Obrador has historically opposed reforms to the energy sector. However, in his National Hydrocarbons Project, he does not propose an outright rollback of the reforms undertaken in 2013.
Central Objectives
Key Proposals
Action Plan (Selected Issues)
I. Downstream • Temporarily reverse the deregulation of fuel markets (until
conditions are optimal)• Construct one or two new refineries• Review tax rates on fuels
II. Upstream • Increase gas E&P efforts• Assess the performance of E&P contracts, review their
adjudication processes and their legality• Temporarily postpone farmouts until the conditions set out
in the contracts are revised
III.Increase efficiency and safety in the refined products and natural gas supply chains • Eradicate fuel theft• Expand gas pipelines
IV. Pemex • Eliminate regulatory asymmetries • Full autonomy
VI. Accountability • Guarantee transparency • Improve mechanisms for the appointment of regulators
VII. Social Issues • Include citizens in the design of energy policy (through
public hearings)• Require companies to invest in social development• Carry out free and informed consultations
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How Much Support does the Energy Reform Have?The energy reform has a negative connotation for a majority of Mexicans, most of whom heavily associate it with the high price of fuel and utilities.
Source: March 2018 poll conducted by The Brookings Institution, the University of California at San Diego, IHS Markit, El Financiero
Pragmatic Consumers
The reforms to the energy sector in Mexico were necessary
The reforms to the energy sector are rendering good results
The reforms to the energy sector must be continued
Private investment in oil E&P will harm the Mexican people
0 25 50 75 100
10%
9%
7%
8%
5%
6%
5%
4%
34%
37%
61%
47%
51%
48%
27%
41%
Agree Disagree Neither Did not answer
12%
34% 54%
AgreeDisagreeOther
Private competition in gasoline sales could lead to:
13%
36%51%
Higher quality fuels
Reduced prices
Do you agree or disagree with the following statements?
7
9
11
13
15
17
19
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18
Average Magna Gasoline Price per Liter (MX Peso)
Source: Amegas
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-4
-2
0
2
4
6
8
10
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2.7
4.7
-0.2 0
1.5
3.72.5
4.5
2.3
0.9
-5.1
5.1
3.7 3.4
1.62.8 3.3
2.7 2.3 2.5 2.8
Economic Reality and Decision Making AMLO will inherit a relatively healthy but vulnerable economy, with low growth prospects…
•Mexico’s growth and economy have been sustained by manufactured exports under NAFTA, remittances, and oil exports; thus, the renegotiation of NAFTA is a major risk to the economy.
•Lopez Obrador’s energy reform-reform averse party obtained a strong majority in Congress, and so the markets are wary of any changes to the sector.
Energy Ministry (Sener):
The 107 contracts signed between the state and private companies — from all nine oil tender rounds— are expected to result in investments of US$160 billion if all stages of exploration are successful.
With the projects to be carried out this year, the total investment committed to E&P of hydrocarbons, seismic exploration, new pipelines, and clean energy power plants will exceed US$200 billion.
In 2017, the Mexican government received US$339 million from hydrocarbons E&P contracts:• US$180 million in signing bonuses from tender rounds
• US$108 million from the sale of hydrocarbons belonging to the government
• US$36 million from royalties
• US$15 million from contract fees
Source: Sener
Real GDP, Total Annual Growth Rate (%)
Source: OECD
The Energy Reform is extremely important due to its potential contribution to economic growth and economies of scale via greater investment, job creation, oil and power production, and fiscal revenues for the Mexican government.
Vulnerabilities
Source: CNH
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Projected Oil Production and Implications
Source: International Energy Agency (IEA), Amexhi
“No reform” scenario (2015-2040)
US$650 billion: cumulative value of the lost oil output
US$260 billion: cumulative loss of upstream investment
US$130 billion: The Mexican Association of Hydrocarbons Companies (Amexhi) estimates that about 20% of the US$650 billion loss would be Mexican government revenue
Projected Oil Production in Mexico (2015-2040)
In 2015, oil production in a “New Policies” scenario and a “No Reform” scenario starts with 2.5 million barrels of oil per day (bpd). In a “No reform” scenario, oil production remains below 2018 levels until 2039.
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Scenarios: Energy Policy
•Refurbish existing refineries
• Increase thermoelectric capacity
•Review existing hydrocarbons and power contracts; temporarily halt auctions
•Conciliatory approach to technocracy
•Moderately tackle union corruption
•Modification of the constitution and/or changes to laws governing the energy sector
•Strengthen Pemex and CFE at the expense of competitors
•Cancellation of contracts based on the argument that they do not benefit the nation, inciting legal battle with private companies
•Politically-motivated appointments in key posts at CFE, Pemex, Sener, ASEA, CNH and CRE
•Strip the CNH of a great deal of the regulatory power it was granted in the 2013 energy reforms
•Build new refineries (attempt at substituting gasoline imports)
•Artificially manage fuel prices
• Indefinitely halt hydrocarbons and power auctions
•Deem existing contracts to be unfair to the Mexican people
•Develop hydropower projects which are not financially attractive
•An aggressive increase in local content requirements in upstream investments
•Reduce the autonomy and decision making power of the CNH
•Continue the hydrocarbons and power auctions without interruptions
•Strengthen interagency coordination
•Grant ASEA more independence and give greater budgetary autonomy to all regulators
•Eliminate barriers of entry (e.g. better access to information)
• Improve processes for public consultation and environmental impact studies
•Tackle corruption across the board
•Adherence to international best practices in setting fuel prices
•Develop a respectful, non-discriminatory relationship with private companies
Worst Case (Policies with Negative Consequences)
Negative (Promotion of Disruptive Policies)
Optimal (Policies Implemented with Industry Input)
Base (Selective Changes to the Energy Reform)
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Scenarios: Management of Pemex
Optimal Strategies Suboptimal Strategies
• Austerity measures, tax burden reduced, budget control
• Appointment of technocrats
• Greater focus on E&P
Short-term E&P in shallow waters and land projects
Long-term E&P of deepwater projects via farmouts
• Industrial Transformation
Maintain target markets and abandon unprofitable markets
• Work towards launching an initial public offering (IPO) on the stock exchange
• Accelerate the speed of farmouts
• Sell unproductive assets
• Soaring costs and fiscal burden
• Lopez Obrador follows through with the appointment of Octavio Romero Oropeza (a political appointee with no experience in the national energy sector) as Director of Pemex
• E&P: Pemex— sans partners in the private sector with capital, technology and knowhow— is given priority in deepwater projects (tampering with free market rules)
• Requiring capital spending to build one or two new refineries, while serving as the sole constructor and operator
These new refineries could easily bleed money if mismanaged
Construction of new refineries implies high levels of debt which would represent a credit and financial risk to Pemex
New refineries would divert spending that Pemex should be using to help increase oil and gas production
• Pemex tenders are postponed which could stifle production, profitability and harm its credit rating
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Constitutional AmendmentsIf Lopez Obrador wants to make serious changes to Mexico’s energy reform, he would need to amend Articles 25, 27 and 28 of the Constitution. The process for amending the Constitution is laid out below.
An amendment is introduced by the President or a legislator
The amendment is approved by 2/3 of both the Lower House and the Senate
Amendment is approved by 1/2 of state congresses
Congress passes ‘secondary laws’ to define the details and implementation of the new amendment.
Lopez Obrador’s party, MORENA, lacks 2/3 of either chamber of Congress, but it could easily get votes from the PRD, PRI or MC legislators to pass amendments in Congress
MORENA controls more than half of the state congresses
Secondary laws only require 1/2 of both federal chambers to pass, which MORENA has.
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Public Consultation (an Unlikely Route)Lopez Obrador has stated that he will conduct a public consultation on the energy reform.
All public consultations must be approved by the Supreme Court of the Nation (SCJN).
So far, the Court has struck down 4 out of 5 proposed national public consultations. These included consultations on the minimum wage, energy reform, and a reduction of the number of legislators via proportional representation.
Public votes against No changes are made
Public votes in favor
Supreme Court rules on the constitutionality of the proposed consultation
If constitutional, the consultation goes to a
national vote
1/3 of a Chamber of Congress proposes a public consultation
2% of registered voters petition for a public consultation
President Lopez Obrador proposes a public consultation
The result is legally binding for the Executive and Legislative powers and
the relevant authorities(if 40% of eligible voters participate)
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Recent Statements from Lopez Obrador and his Team
Jesus Seade says that the preliminary trade deal reached by the U.S. and Mexico on August 27 is consistent with the Mexican 2013 energy reforms. Lopez Obrador has also voiced his satisfaction with the agreement.
Lopez Obrador earmarks the following energy sector budgetary priorities for the 2019 fiscal year:
• MX$75,000 million for exploration and drilling• MX$25,000 million for the refurbishment of the existing refineries• MX$55,000 million for the first phase of the construction of the new refinery• MX$25,000 million for the retooling of the existing hydropower plants
Lopez Obrador announces that he will launch tenders for drilling oil wells beginning early December in an effort to quickly increase Mexico’s crude output.
Lopez Obrador announces that he aims to increase crude production to 2.6 million barrels per day (bpd) by the end of his administration—up from the current level of 1.8 million bpd.
Prospective Director of Pemex Octavio Romero Oropeza says that he is working to reintegrate Pemex into one company and to define this new structure by December (El Heraldo).
After meeting with the American Bechtel and the Mexican ICA Fluor, Rocio Nahle says that Lopez Obrador’s team will continue to meet with companies that are interested and that have the ability to undertake the refinery project.
Prospective Chief of Staff Alfonso Romo says that retail fuel prices will be determined by the market.
Energy adviser Fluvio Ruiz says that the President-elect has enough political support to change Mexico’s energy law.
Aug 27
Sept 2
Sept 6
Sept 8
Sept 8
Sept 12
Sept 11
Sept 19
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A higher capital expenditure from a company that is not generating that same amount in cash is seen as a risk. Company’s rating could change if there’s a change in the trajectory of spending.
-Moody’s
Overly ambitious because hydropower costs ($50/MWh) are much higher than solar and wind power generation costs ($20/MWh). -Director of renewable energy at Sener
Doubtful hydropower investments would come to fruition during Lopez Obrador’s administration because of “timing issues.”
-President of Mexican Energy Association (AME)
Represents a credit risk and would be the top financial risk for Pemex in the short- and medium-term. Investment would take resources, which Pemex lacks, away from key priorities like increasing oil and gas production. New refineries typically end up costing much more than originally planned.
-Moody’s
Proposed investment would be only enough for the maintenance of the refineries, not for the refurbishment of the refineries to improve overall efficiency. A modernization of the facilities is necessary, but costs would be much higher.
-KPMG
Four Strategic Priority InvestmentsOn July 27, Lopez Obrador announced four strategic projects for the energy sector that would require a MX$304,000 million investment in the next three years.
MX$304,000 million Total
MX$75,000 million Capital injection into
Pemex for the extraction of oil and gas
MX$20,000 million Modernize existing
hydroelectric plants to increase capacity
MX$160,000 million Construction of a new
refinery in Paraiso, Tabasco
MX$49,000 million Refurbish Pemex’s six
existing refineries
Expert Opinion
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Key Energy Sector Appointments
Position Background Views on Energy Reform
Rocio Nahle Minister of EnergyNahle holds a degree in chemical engineering with a specialization in petrochemicals. She began her professional career with Pemex.
Relentless critic of the reform. She has repeatedly said the reform was designed to weaken Pemex and has called it a “serious mistake.”
Alberto Montoya Deputy Minister of Hydrocarbons
Montoya is an academic who has written extensively on the Mexican economy. He is currently president of the National Center for Strategic Studies (CEEN).
Has said the energy reform would subordinate policy and the energy industry to foreign companies and cause Mexico to become a “colony dependent on foreign powers.”
Octavio Romero Oropeza Director of Pemex
Romero holds a degree in agricultural engineering, is a long-time collaborator of Lopez Obrador’s, and has held roles within the PRD. He has no experience in the national energy sector.
Staunch critic of the reform who has insisted that current officials are “handing over the country’s wealth to foreigners.”
Miguel Angel Lozada
Head of Pemex Exploration and Production (PEP)
Lozada holds a degree in petroleum engineering and a master’s in Exploration and Production. He is currently deputy director of Technical Assurance of PEP.
Has said the energy reform is a great instrument for incentivizing investment that is necessary to boost production and improve the recovery factor in mature fields.
Manuel Bartlett Director of CFEBartlett has served as the Governor of Puebla and in the cabinets of multiple admins., e.g. as Sec. of the Interior and Education. Lacks technical expertise in energy issues.
Published a book in 2016 deriding the energy reform and what he perceived as the destruction of Mexico’s energy sector. Bartlett recently reversed course and said the reform is “functioning.”
Carlos Morales Deputy Director of the CFE
Morales holds a degree in mechanical engineering and is the president of the State Council of the Morena party in Veracruz. He has previously represented energy companies in Veracruz.
Critic of the energy reforms when they were launched.
Luis Abelardo Gonzalez
Coordinator of Renewable Energy Policy
Gonzalez is the director of the company Ecoenergiza which aims to develop energy savings systems. He is a proponent of hydroelectric energy.
Previously criticized the energy reform. Has characterized the reforms as handing over oil and slowly destroying Pemex.
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Future Key Appointments
National Hydrocarbons Commission (CNH)Six commissioners will be confirmed for another term or replaced (Mexico’s President submits shortlist, Senate appoints):
•Three in 2019
•One in 2020
•One in 2022
•One in 2023
Energy Regulatory Commission (CRE)Six commissioners will be appointed, same process as the CNH:
•One in December 2018
•Two in 2019
•One in 2021
•One in 2023
•One in 2024
National Agency for Safety, Energy and Environment (ASEA)The Executive Director of ASEA will be appointed and removed freely by the President:
•The Executive Director has the power to name and remove the public servants of the Agency
National Center for Energy Control (CENACE)Energy Minister makes the appointment of the General Director on the recommendation of the President.
National Gas Control Center (Cenagas)Energy Minister makes the appointment of the General Director on the recommendation of the President.
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Ongoing and Upcoming Hydrocarbons Tenders
Tender In Charge Purpose Launch Date Bids Due Award Date
Exploration and Extraction CNH Lopez Obrador plans to launch tenders for oil exploration and
extraction. December 2018 TBD TBD
Pemex Farmout CNH Tender of rights for seven onshore farm-out opportunities with Pemex. The blocks are located in Veracruz, Tabasco and Chiapas. April 27, 2018 February 14, 2019 February 19, 2019
Round 3.3 CNH Tender of development rights for nine shale projects in Burgos, Tamaulipas. March 2, 2018 February 14, 2019 February 19, 2019
Round 3.2 CNHTender of 37 onshore blocks. Tender of E&P license contracts includes conventional areas in Tampico-Misantla, Veracruz, Burgos and the Sureste Basin.
February 25, 2018 February 14, 2019 February 19, 2019
The CNH has scheduled key hydrocarbons tenders, including an unconventionals round. However, Lopez Obrador has voiced his opposition to fracking and he may also suspend the upcoming oil and gas rounds.
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Final Considerations
• IOCs and electricity companies delay and postpone investments•Pemex has less success
with farmouts
orLopez Obrador can reap
the benefits of the Energy Reform
•Greater upstream investment•Expansion of the country’s gas
pipeline network•Private competition and
imported commodities that provide lower-priced and more reliable electricity• Income for the government• Increased oil production output
once key investments begin to bear fruit in the coming years•Help Pemex and CFE
strengthen their finances•Funds for regional development
for host communities where projects are developed
Less income from signing bonuses, sales, royalties, contract fees
Less E&P of hydrocarbons
Delayed and less investment in the
energy sector
Tamper with the reform and cause
uncertainty
•A less effective Mexican Oil Fund that struggles to insulate public spending from transitory fluctuations in oil revenues and that allocates less money to R&D, oil and gas projects, a universal pension fund etc.
•Undermine Mexico’s reputation as an attractive investment destination
•Oil production will likely plateau
Fewer tangible benefits for the
Mexican population
•Fewer jobs•Cost of fuels and power
can go up•The same or worse
utility services for the public
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Final Considerations
Things to Watch
• Lopez Obrador’s picks to head key agencies suggest that he does not understand the importance of the Energy Reform
• Nahle will have the authority to dictate policy that determines the future of tenders
• The final text of a NAFTA energy investment chapter could provide assurance to North American investors in Mexico
• The contract review process is welcome but the incoming administration should be more transparent about the procedures and criteria
• Lopez Obrador should place more weight on industry input when implementing policies
Key Risks Ahead
Ideology vs. Pragmatism
Political or inexperienced appointments vs. technocracy
Vested interests disguised as social protest
Inability of a Lopez Obrador administration to solve conflict
Attempt to strengthen Pemex or the CFE at the expense of the nascent markets
Halting hydrocarbons and power auctions and not making full use of other tools created by the energy reform
Placing excessive emphasis on transforming the hydrocarbons industry instead of promoting the renewables industry
Lopez Obrador continues to send mixed signals to the markets as a result of his contradictory policy rhetoric and politically-motivated appointments to key energy sector positions
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