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