1. The Mexican Energy Reform Oil and Gas
Alejandra Elizondo
Center for Research and Teaching in Economics (CIDE), Mexico
2016 USAEE Annual Meeting
October 2016
The Mexican Energy Reform Oil and Gas

2. Oil production and investment
Oil production (MBOED)
Investment in exploration and exploitation (billions USD)
Increasing investments and decreasing production (from 3.4 millions of barrels of oil equivalent per day to 2.5 million, affecting public finances when oil prices dropped
Source: Base de Datos Institucional de Pemex, Anuario Estadístico de Pemex

3. The 2013 Energy Reform completely modified the institutional framework
Before
After
Investments only from Pemex
Lack of: reliable energy supply and economic competitiveness
Increasing investments – decreasing production
76% of prospective resources in unconventional and deepwater reservoirs
Set the policy and regulate business activity
Comprehensive in electricity and oil and gas
Private system + Pemex
Investment + technology for deep/ ultradeep waters and mature fields
Before
Investments exclusively from two state companies
Energy security risk and lack of economic competitiveness
76% of prospective resources in unconventional and deepwater reservoirs
In need of the latest technologies and financial resources. Mature field’s remaining oil is 3 times the prospective resources
The easily accesible oil was gone. The country needed to change the strategy or the oil industry was going to collapse
After
Leave behind the monopoly model and change the role of the state: set the policy and regulate business activity
There were attempts in the past to reform parts of the system. But this is a comprehensive reform in electricity and oil and gas
The reform looks for a private system that coexists and complements the actions of Pemex
Objective: attract investment and technology to access oil in Deep and ultradeep waters and oil in mature fields

4. A new energy model for Mexico
Former energy model
New energy system
Pemex
Environ. Reg
CRE
---
CNH
Private companies + PEMEX
ASEA
CRE
CENAGAS
CNH
Agency for Industrial Safety and Environmental Protection
National Commission for Hydrocarbons
Energy Regulatory Commission
In the past, Pemex dominated the scene. The Regulatory Commission was in place, but its functions were limited to midstream and downstream activities. With a little more than 100 people it could not actively regulate the monopoly.
The Commission for Hydrocarbons was just recently created (2008).
The environmental regulations were limited to the delivery of an environmental impact assessment, and transportation was part of the vertical integration
The new institutional structure has 2 new agencies (ASEA and CENAGAS), 2 stronger regulators, and a financial tool: The Mexican Oil Fund
The new model broke that vertical integration with the National Center for the Control of Natural Gas, but also strengthened both regulatory agencies, CRE and CNH, with more people and more technical resources. It also created a new environmental agency, the Agency for Industrial Safety and Environmental Protection.
I would like to focus now on the role of these new institutions and the objectives to have a more competitive environment.
National Center for the control of Natural Gas

5. Mexico changed the Constitution and created new laws
3 articles of the Constitution 21 secondary laws 25 new regulations Administrative actions
Private companies + PEMEX
ASEA
CRE
CENAGAS
CNH
But first I must point out that
To launch the Reform the government had to make changes in 3 articles of the Constitution, enact 21 secondary laws and create 25 new regulations and numerous administrative actions.
The Mexican Oil Fund

6. Petróleos Mexicanos: PEMEX
Accumulated labor debt (more than 1 thousand billion MXN)
Fewer employees, increase productivity
Refineries
Increase operational efficiency
Invest to revamp refineries
Farmouts to get new partners
Low oil prices
Low efficiency
PEMEX
Pemex was being squeezed by two sides. Upstream, there were low oil prices. And even before that, investments were not sufficient to get the technical and financial resources that it needed. Downstream, Pemex’s refineries are inefficient.
At this time, it is undergoing a process with the unión to renegotiate contracts and lower costs. For this process it is getting financial help from the government
In addition, the Company is having farmouts to get new partners to be able to increase its efficiency

7. CNH: National Commission for Hydrocarbons
Regulates exploration and production
Tender processes
Round Zero: 83% 2P reserves + 21% prospective resources
Round One:
4 Tenders, 3 concluded
30 contracts for exploration and production
Onshore and shallow waters, 7 billion USD investment
4th Tender in process (Deep waters): Dec 5th
Round Two:
15 contracts (shared production) shallow waters in the Gulf of Mexico,
Areas nominated by the industry, begin production in 2020
2nd Tender: 12 contractual areas with proven potential near facilities
10 with infrastructure (dry and wet gas)
Regulates exploration and extraction. According to the law, it can choose from a variety of contracts or a combination to maximize government revenue
en efectivo, para los contratos de servicios; II) con un porcentaje de la utilidad, para los contratos de utilidad compartida; III) con un porcentaje de la producción obtenida, para los contratos de producción compartida; IV) con la transmisión onerosa de los hidrocarburos una vez que hayan sido extraídos del subsuelo, para los contratos de licencia, o V) cualquier combinación de las anteriores.
maximizar los ingresos para lograr el mayor beneficio
The Finance Ministry defines the fiscal terms of the contracts and the tenders and the Ministry of Energy must design the type of contracts and the technical guidelines for the process Steps:
Round Cero: The State guaranteed fields to Pemex according to financial and technical capabilities = 83% of 2P reserves and 21% of prospective resources
Round One: 4 Tenders, 3 already concluded with relative success
Transparency, broadcasted in real time, 30 contracts for exploration and exploitation in land and shallow waters, 7 billion USD investment
4 Tender in process (most complex, Deep and ultradeep waters)Dec 5th
Round Two: March 2017, 15 contracts of shared production for exploration and exploitation of oil in shallow waters in the Gulf of Mexico, areas nominated by the industry, expected to begin production in 2020
Second tender: April 2017, 12 contractual areas with proved potential near Pemex facilities, 10 with infrastructure (dry and wet gas)

8. Energy Regulatory Comission: CRE
Regulates midstream and downstream activities (29 markets) Tariffs and regulation: structure (monopoly or competitive), maturity, and behavior (contestable) of the market
Under CRE’s control
Wholesale
Processes
Regulates midstream and downstream activities (29 markets, including 8 from the electricity sector), and including wholesale, retail, transport, storage, and distribution
It regulates oil and gas activities, oil products, biomass products, throughout the value chain
CRE regulates based on the structure of the market (competitive markets or natural monopolies) but also on its maturity (setting its tariffs accordingly). In addition, it observes the current behavior of activities. If it finds for instance a constestable market, then it lowers its regulation
Exploration and exploitation
Refining/ Processing
Storage
Retailers
Transportation
Distribution
Consumption

9. ASEA: Agency for Industrial Safety and Environmental Protection
Exclusively for oil and gas
Regulates industrial safety of all facilites
Issues regulations for the protection of the environment
Mandatory for Pemex, CENAGAS and private companies
Recently created, ASEA regulates industrial safety and environmental protection for all hydrocarbon activities (upstream, midstream, downstream)

10. CENAGAS: National Center for the Control of Natural Gas
Breaks vertical integration
Technical System Operator
Owns and manages 9,000 km
Regulated by CRE and ASEA
Ensures a leveled playing field
in capacity (first open season)
CENAGAS
A government utility created to break the vertical integration of Pemex,
In the past Pemex had to produce, process, transport, and commercialize natural gas in the country.
Now CENAGAS owns and operates 9,000 km gas pipelines of the system, acquired from Pemex and 9 compressor stations. This is a centralized planning model
CENAGAS is subject to CRE and ASEA’s regulations, including the approval of tariffs
Its operation ensures a leveled field for the companies. Actually this week it is having its first open season
It also set a 5 year plan for the expansion of the network that has to be updated anually. Currently it has 7 awarded projects and 2 tender projects

11. Increased energy security
Short term benefits
Geological knowledge: licenses to invest (over 2 billion USD)
Expansion of the national network of gas pipelines
11,000 km + additional 10,000 km by 2018
Expansion of transportation and storage of oil and liquid fuels
Investments: 7 billion USD (exploration and extraction) billion USD (gas pipelines)
Increased energy security
Geological knowledge: permits to companies investing over 2 billion USD in the Gulf of Mexico
Expansion of the national network of gas pipelines
11,000 km + additional 10,000 km by 2018
Expansion of transportation and storage of oil and liquid fuels (private sector), which will allow more competition in service stations
Investments: 7 billion USD (exploration and extraction) + 13 billion USD (gas pipelines) and more than 26 billion USD with elect. gen.

12. Pending issues: CO2 emissions
Energy demand by sector (2050)

13. Pending issues: CO2 emissions
Primary energy supply by source (2050)

14. Other pending issues Subsidies and carbon taxes Regionalization
2013 Carbon tax: Correcting externalities or distorting the market?
Regionalization
Price liberalization (interregional subsidies)
Social + environmental issues
Social license: consultation + environmental impact assessment + social impact assessment + territorial occupation analysis
North American Regulatory Harmonization

15. Thank you for listening
Alejandra Elizondo
Research fellow
Center for Research and Teaching in Economics (CIDE)