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