The Mexican Energy Reform of 2013 Adrian Lajous Center on Global Energy Policy Columbia University April 17, 2014
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
Constitutional Amendment The begining of the end of a 75/53 year State energy monopoly 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 Oil and natural gas Electricity Upstream Midstream Downstream Genera-on Transmission Distribu-on
Cons4tutu4onal Amendments Art. 25 Art. 27 Art. 28 Establishes exclusive ownership and control of State companies that perform produc-ve ac-vi-es. 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 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 Transi4onal ar4cles Recognizes at a Cons-tu-onal level: Regulatory Commissions (CRE + CNH) Mexican Petroleum Fund Give specific instruc-ons with respect to the content of secondary legisla-on
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
Graph 1 Mexico s annual GDP growth from 1950-1980 was more than twice as fast as in the past three decades GDP growth rates, based on 2012 US$ Compound annual growth rate, % 6.1 6.5 6.6 6.4 3.5 1.8 1.8 2.4 1950-1960 1960-1970 1970-1980 1980-1990 1990-2000 2000-2010 Rapid and stable growth Recurrent economic and financial crisis Low growth, stable prices Source: McKinsey Global Ins-tute 6
Graph 2 Mexico: investment flows Direct foreign investment (current US billion dollars) Gross fixed capital formation (percent of GDP) 110 100 90 Direct foreign investment 98.6 85.6 25 20 20 21 22 21 80 15 70 60 60.4 63.6 10 50 40 2010 2011 2012 2013 5 0 6 5 5 5 2010 2011 2012 2013 Source: Banco de México Source: INEGI
Graph 3 Mexico: crude oil production, 2003-2013 (million barrels per day) 4 25% reduc-on from 2004 peak 3.5 3 2.5 2 1.5 1 Heavy Light Total 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 0.5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Low decline rate since 2010, but underes-mated due to measurement issues
Graph 4 Mexico: exports of crude oil to the US, 2003-2013 (Thousand barrels per day) 2000 1800 1600 1400 1200 1000 800 600 400 200 Total US Heavy Light 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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
48 Graph 5 Mexico: oil imports, 2003-2012 % domestic requirements 27 28 Th b/d 80 107 375 Diesel LPG Gasoline 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 33 2.3 (Bcfd) natural gas Domes-c product supply may increase due to beier yields, change in crude slate and refinery reconfigura-ons
Graph 6 Mexico: natural gas production and consumption (Billion cubic feet per day) Net production Domestic dry gas sales 5.5 5.4 5.4 5.4 7 6 5 5.3 5.3 6.5 5.6 5.7 5.7 5.3 5.2 5.1 5.2 5.2 5.1 5.1 4 3 2 1 5 2008 2009 2010 2011 2012 2013 0 2008 2009 2010 2011 2012 2013 P 2.5 2 1.5 1 1.2 1.2 Net imports 1.7 1.4 2.1 2.3 3.25 3.2 3.15 3.1 3.05 3 2.95 2.9 Gas for power generation 3.2 3.1 3.1 2.9 2.9 0.5 2.85 2.8 2.8 0 2008 2009 2010 2011 2012 2013 2.75 2008 2009 2010 2011 2012 2013 P
Graph 7 Mexico: natural gas consumption, by sector, 2003-2012 (billion cubic feet per day) 8 7 6 5 4 3 2 1 0 Industry Oil Electricity 2004 2006 2008 2010 2012 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 8 Mexico: power generation, 2003-2012 (twh) 350 300 250 200 150 Self- supply Other Total Extensive subsidies and cross- subsidiza-on High losses mainly due to thel High cost for industry affects manufacturing industry compe--vness 100 50 Industry Fundamental tariff redesign is impera-ve 0 2004 2006 2008 2010 2012
Graph 9 Cost of power in Mexico is rela4vely high Commercial electricity cost, 2011 12 Cents per kwh Brazil 17 Spain Switzerland 13 13 Mexico India 11 12 New Zealand 9 United States Bolivia Peru 6 7 7 +73% Ecuador Norway 6 6 Argen-na 4 Iceland 3 Qatar 2 Source: McKinsey Global Ins-tute 14
Graph 10 Mexico: oil revenues and taxes, 2013 Pemex taxes Pemex E+P taxes 37 67 Share of federal revenues 15.8 Share of total revenues 9.9 5.9 Other Pemex 91 Share of GDP Share in income before taxes 15
Reform process 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.
Graph 11 New Mexican energy sector structure State Produc-ve Companies Pemex CFE Department of Energy Department of Treasury Bank of Mexico 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 Mexican Oil Stability and Development Fund Descentralized State En--es Coordinated Regulatory Bodies Public Trust
Graph 12 Round zero: initial oil and gas asset allocation to Pemex 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 request Producing fields Commercial discoveries, including undeveloped deepwater assets Retains small share of es-mated shale resources Relinquishes major areas in Chicontepec Pemex must compete for additional acreage in subsequent bidding rounds
Graph 13 Pemex: request of hydrocarbon assets in round zero (percent) Prospective resources Reserves 82 Onshore 63 Shallow water 97 1P 29 15 83 75 Deepwater Shale 2P 3P
Upstream Midstream Downstream Some key industry issues Concessions vs license contracts Pemex joint venture par-cipa-on in round zero assets and in other bidding rounds Contractual variability and adequacy 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 Retail prices that reflect transport costs Free third party imports and qualifica-on of importers Transi-on to compe--ve pricing
Implementa4on strategies, 4ming and sequencing 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
State sphere Electricity Sector Reform 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 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 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
Graph 14 Mexico: merchandise exports, 2013 (percent) Oil 15 81 Other 4 Manufacturing Explosive growth of exports since 1995 Growing share of manufacturing Predominance of automobile and auto- parts High share of exports to US (82%) Total: 380 billion dollars
Table 1 Mexican manufacturing exports to U.S., 2013 (percent) Significant overall market share NAICS Classification Share of manufacturing exports Market share of US imports Total 81.9 12.3 increase in 2009-13 (2.2%) China`s share increased by 2.4 but its level is almost twice thatof Mexico 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 Source: UBS 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