SHIFTING INTO 2018: A SNAPSHOT OF MEXICO S ENERGY SECTOR More than four years have passed since the much-awaited approval and consequent implementation of the constitutional energy reform. During this period, the ground rules have totally changed, allowing for the entrance of new players and stakeholders, in a formerly closed electric and hydrocarbon sector. In retrospective, 2017 was a progressive year regarding the implementation of the energy reform, as groundbreaking developments in all branches of the sector were achieved. Petróleos Mexicanos (Pemex) through its subsidiaries (due to its organizational restructure) and governmental authorities, including newly created regulators, had a proactive role at adapting to the new framework and launching offerings through tailored schemes that would result of interest to attract technological, financial and operational capacity from national and foreign investors. Despite of the outcome of the 2018 elections, our country has acquired commitments, both internationally and nationally as explained hereunder, which need to be fulfilled. In the past year, commitments in among others, exploration and production, pipeline construction and clean energy summed an approximate amount of USD$80,327 million, and it is expected that in line with the government s agenda, relevant number will rise to USD$100,000 million by the end of the year. Please find below the energy sector s snapshot, which outlines the highlights of what happened in 2017 and what is expected in 2018, across all branches of the sector, including: 2. Downstream 3. Midstream 4. Upstream 5. Power Generation
1. Factors Impacting the Energy Sector Mexico became the first Latin-American and the 30 th country to become member of the International Energy Agency (IEA), which means it will be actively involved in foreign political energy forums and will have access to information and technical expertise of other members. In terms of foreign policy-making, the member countries of NAFTA within the frame of the renegotiation thereof, have sought to create an energy chapter that protects investments and, with regards to this jurisdiction, does not modify the spirit of the Mexican energy reform. The CRE and the Ministry of Communications and Transport (SCT) executed a collaboration agreement to strengthen the ports energy infrastructure. This allows the regulators to exchange information to identify the needs of port energy infrastructure for its development. The Federal Government, alongside with Banobras, launched Mexico Project Hub, an initiative which principle goals are to promote and stimulate opportunities to invest on infrastructure and energy projects by national and foreign parties, sponsors, lenders and banks. Despite the effort of the energy regulators at implementing the reform, the latter were unexperienced with the regulatory, corporate and other transactional aspects involved in the execution of license agreements with the authorities, as well as other transactions involving M&A and joint ventures involving energy assets and exploitation of energy reserves. Through this experience it is evident that the regulatory work shall be previously outlined to avoid legal contingencies or contractual breach, affecting business. Among the regulatory aspects, the environmental and social impact public consultations and assessment shall be observed and duly performed when applying and obtaining administrative authorizations for the development and operation of energy related projects and activities, otherwise, from a comprehensive interpretation of Mexican law not carrying out such may result in the nullity thereof. As member of the IEA, it is expected that Mexico will boost oil production, increase the share of renewable energy sources, increase energy efficiency and slow the growth in carbon dioxide emissions. Mexico s international and national commitments (with agencies as well as private entities), shall be observed despite of the political changes. It is expected that the Supreme Court resolves the contradicting precedents on the constitutionality of an article in the Law of the CRE and CNH, that prohibits the granting of the suspension (kind of injunction) in amparo proceedings against actions by CRE and CNH. This relevant precedent would shield actions of CRE and CNH. An agreement to have Mexico join the NAFTA in the energy chapter, and a clause governing oil exports may be one of the first significant products of the renegotiation talks of the Treaty. The reshaped Energy chapter in NAFTA could secure exports-imports of refined products and natural gas between United States and Mexico, at the time it buttresses a continuance of transnational pipeline projects and transmission lines. Mexico eyes infra PPPs for economic zones, as part of the 2025 planned initiatives. A great amount of the 127 billion Mexican Pesos (USD$ 6.6 billion) proposed investment for the Mexican Special Economic Zones (ZEE) is expected to come from private sector sources. Currently, the country has designated five ZEE projects and the Federal Development Authority for Special Economic Zones (AFDZEE) has identified 95 infrastructure improvements for private sector investment including 4 airports, 21 highways, 6 railways, 40 port projects, 1 logistics center, 11 energy-related projects and 12 water projects.
2. Downstream The liberalization of fuel prices in the entire country was concluded in November. As a consequence thereof, by the end of such month there were 243 licenses to import gasoline, 379 to import diesel, 110 to import Liquified Petroleum Gas (LPG) and 78 to import jet fuels. However, only a few gas stations operate with fuels delivered directly by the foreign supplier (e.g., Arco, who opened its first gas stations in Baja California and Sonora), thus not all permit holders have exercised imported volumes. Around 30 new gas station brands opened stations in Mexico, which represent the 18.5% of total gas stations in the market. Mexican firms Oxxogas, Hidrosina and Lagas lead the volume with 395, 198 and 90 gas stations, respectively. Foreign brands that opened stations are: BP 87 stations; Shell 18; Arco 8; Chevron 6; Gulf and Costco 2 and ExxonMobil 1. In such regard, Pemex renewed the image of its gas stations to keep its market-share, opening the first station with the new image in December. In the same marketing sector, the CRE approved improvements to the regulation of quality specifications of fuels to make it more flexible and facilitate the imports of new products to introduce more options to the Mexican market and simplify the regulation thereof. For instance, Ethanol is now allowed in 6 to 10%, with certain geographical restrictions. The storage and air fuels sale within airports was opened to the participation of other companies; previously State-owned Aeropuertos y Servicios Auxiliares (ASA) had the exclusivity, it now allows the participation of other companies. The Energy Regulatory Commission (CRE) approved the Mexican territory as a special zone to distribute natural gas and help the entrance of new competitors, by determining the space in which natural gas distributors can install and extend their networks to provide the service to users without exclusivity. Following stages of the Open Season Procedures of Pemex Logística have already been approved by CRE and capacity will be allocated in the remaining states of Mexico. The first process for the Northeast terminals began this month and allocation of capacity runs through March. It is expected that access to logistics infrastructure will translate into an increase in the direct importation by suppliers, although demand increase shall maintain.
3. Midstream The National Center of Natural Gas Control (CENAGAS) 1 achieved to allocate 97% of the total capacity offered as a result of the first Open Season. Big winners were Pemex Transformación Industrial, Engie México, ArcelorMittal, Shell, Grupo Alfa and Macquarie Energy. For the first time in history, entrance into the use of Pemex s existing logistics assets was allowed to private companies. In such regards, Pemex Logística (Pemex subsidiary) announced Tesoro México Supply & Marketing, a subsidiary of Andeavor, as the sole winner of the First Open Season Procedure; enabling it to be first company to use logistics and capacity from Pemex, which was formerly reserved to the latter. The Ministry of Energy (SENER) increased the obligations for suppliers of refined products that requires them to establish emergency storage capacity within the Mexican territory starting in year 2020, and gradually increase the days of coverage. The objective is to reach 12 to 15 days as a quarterly average by year 2025. 1 CENAGAS controls the National Natural Gas Transportation and Storage Integrated System (SISTRANGAS) which is the main pipeline network in Mexico. Due to SENER s Public Policy, demand for future storage facilities will reach a high peak, as it is expected to increase demand for storage capacity and gradually boom the establishment of new terminals. In such regards, heavy regulatory work is anticipated to obtain all necessary governmental authorizations and licenses. Logistics companies and suppliers are expected to partner. CFEnergia (CFEn), a subsidiary private company of the Mexican Comisión Federal de Electricidad (CFE), will partner with a private party to refurbish three storage terminals in Northern Mexico originally destined for fuel oil and offer more capacity to the market. First auction is undergoing. If results are positive, we may see CFEn replicating this model in other parts of Mexico.
4. Upstream Since the energy reform was enacted, a total of 9 oil & gas International Public Bids in 3 Rounds have been developed. In 2017, 38 Exploration and Production (E&P) Contracts, from the government with both national and international companies were signed. On early 2017 the National Hydrocarbons Commission (CNH) signed the first contracts for deep-water exploration and production (E&P) activities in Mexican history. The CNH launched three sets of tenders as part of Round 2, in which shallow water and onshore conventional blocks were offered. These did not only increase the participation of foreign oil companies in Mexico but also encouraged ventures undertaken by Mexican companies. Notably, the Mexican company Jaguar Exploración y Producción de Hidrocarburos became the private company with the most E&P contracts, after signing 11 of them in late 2017. The CNH approved the migration of an onshore block in Tabasco, awarding a contract to Pemex and the British company Petrofac for E&P activities. Such block is expected to produce 31,000 bpd of crude oil equivalent by 2027, requiring an approximate total investment of USD$1.590 billion. As part of the energy reform, a portion of the payments that upstream contractors will make to the government will be in kind (hydrocarbons). As such, the government requires an entity to sell said hydrocarbons. That entity is called marketer. In 2017, the CNH launched a bid to look for a suitable marketer for the State s hydrocarbon (oil and gas). After a first unsuccessful attempt, on the second round Trafigura was awarded with oil trading and the private company owned by the Federal Electricity Commission s (CFE), CFEnergía, with gas trading. Other anticipated joint ventures include the partnership between Pemex and a private partner, for 10 to 15 shallow waters and onshore projects. These farm-outs will continue to develop areas with private capital and expertise; Pemex would retain a percentage on this projects, but will cede operational control. In late January, CNH will develop the fourth bid of Round 2 to allocate up to 29 deep-waters blocks in the Gulf of Mexico. A total of 29 companies have prequalified for participating in the bid, that is considered the most significant Mexican bid due to the number of blocks offered and the presence of the big IOC s. The tender for the farm-out in Nobilis-Maximino block will add to the deep-water allocations during this term. Active CNH, after concluding the Ronda 2.4 is expecting to launch the International Public Bid Round 3 (Round 3.2) consisting of license contracts for on-shore E&P in Nuevo León and Tamaulipas, in northern Mexico, Veracruz, with coasts in the Gulf of Mexico, and Tabasco, in southern Mexico. The International Public Bid for shallow waters, Ronda 3.1 will continue and the award of the License Contracts regarding the E&P of 35 blocks located in North and Southeast Mexico is expected for March 27 th.
5. Power Generation Regarding energy sources, one key asset-purchase of 2017 is the Norte III combined-cycle power plant project, which was successfully acquired by Macquarie Capital and Techint. The development and construction of the 906MW power generation plant is now assured and power supply infrastructure of the Chihuahua region will be considerably upgraded. In 2018, all power supply users shall acquire clean energy certificates (CEL s) representing at least the 5% of its total power consumption. With this new clean energy threshold, it is foreseen that the CEL s market will grow rapidly, incentivizing clean energy power generation investments in Mexico. Given the proven success of the past long term and midterm power generation auctions held by the National Center for Energy Control (CENACE), and the constantly growing power generation demand in Mexico, it is expected that in 2018, CENACE will conduct new power auctions to satisfy domestic CFE s supply requirements. With these new upcoming auctions, more and more investments in clean power generation are expected to take place. Mexican Ministry of Energy will tender a private transmission line, with an approximate investment of USD$1.1 billion, to connect the isolated system of Baja California with the National Grid (SIN). This cuttingedge tender, will certainly allow the Mexican government to reinforce and extend the current power transmission infrastructure, and secure the development of all the new project investments which will be needing this kind of additional infrastructure to succeed. With the maturity of the Power Wholesale Market in Mexico (mercado eléctrico mayorista), it is expected that highly competitive international companies will be interested, as shown in recent years, in actively participating into such wholesale market. This potential entrance is expected to bring an important reconfiguration of the current power generation facilities (mostly operated under the grandfathered regime in force before the issuance of the energy reform) though several mergers and acquisitions between the companies holding those power generation facilities, and the new potential players.