1. Developing Natural Gas Infrastructure in the Americas: the Mexican case NARUC Committee on Gas Francisco Salazar Diez de Sollano Chairman, CRE July 17, 2007

2. Introduction: CRE CRE (Comisión Reguladora de Energía) was created in 1992 as a consulting body to the Secretary of Energy. Its objective was to prepare the rules that would regulate the relationship between the State’s utilities and the private investors in the power sector. In 1995, the Congress passed a reform opening the downstream activities in the natural gas sector. Then, CRE was also constituted as the formal regulator of the energy sector and was given operational and technical autonomy. CRE’s mandate is to promote the efficient development of the activities it regulates. In doing so, CRE looks for a balance between the interest of the consumers and that of the investors.

3. CRE’s regulation powers Reserved to the State Open to private investment Regulated by CRE Generation CFE & LFC National Transmission Grid Third PartiesOthers Imports Imports / Exports Power Natural Gas Exploration Marketing Production Processing. PMX Sales Transport Storage Distribution LPG Marketing Production Processing PMX Sales Transmission Generation Transmission Distribution Pipeline Distribution Surface transport. Bottle Distribution Storage

4. Natural gas demand According to the Ministry of Energy (1), natural gas demand was 6.549 bcfd in 2006. 48% corresponded to the oil sector; 35.7% to the power sector; 14.6% to the industry (including Pemex Petrochemicals), and 1.6% to residential and other services. Natural gas demand is expected to increase at an overall annual rate of 3.9% over the next 10 years. (1) Prospectiva del mercado de gas natural 2006-2015

5. Natural gas forecast 2005-2015 3.9 % 2.8 % Source: SENER 2006 – 2015 Prospectiva del Mercado de Gas Natural

6. Gross NG Balance 2005-2015 5.72 6.11 6.656.61 7.05 7.58 7.90 8.28 8.69 9.11 9.49

7. Natural gas for power plants Power forecasts 2005-2015 – 4.8% annual demand growth rate from 191 TWh in 2005 to 305 TWh in 2015 – 24 GW of new capacity required to meet demand (approx. 49% of current capacity) – CFE will install 23,545 MW during the next decade – Combined cycle power plants will grow from 33% to 51% of the total capacity by 2015 7.3% average annual natural gas growth over the next decade (for power)

8. Natural gas imports 2005-2015 Imports will peak by 2015 at 2.2 BCFD Source: SENER 2006 – 2015 Prospectiva del Mercado de Gas Natural

9. How to face increasing demand? Continue promoting private investment in – Development of LNG terminals along both the Pacific and the Gulf coasts – Pipeline infrastructure both to strengthen cross- interconnections and access to new LNG plants Start exploiting coal bed methane reserves Focus Pemex’s investment in areas of paramount interest such as exploration and production of oil and gas

10. CRE’s regulation objective CRE’s regulation must: Ensure technical engineering excellence through modern standards and third-party auditing procedures Approve general terms of service that satisfy user’s needs and reflect current practice in industry Approve rates that are competitive and allow fair rates of return to investors Lead to predictable and stable regulatory conditions with adequate flexibility

11. Permits granted by CRE TypeLicenses Length (km) Capital Investment (MM USD) Transport 155 12,354 1,979 Open Access 20 11,501 1,744 Non-Open Access 135 853235 Distribution2235,494 1,669 LNG terminals 5n.a.* 2,000 TOTAL 182 47,8485,648 * LNG total storage capacity of 1,250,000 cubic metres

13. Developing LNG terminals LNG project solutions are varied – Having a predictable and transparent regulation gives investors and developers the flexibility to structure their projects in a variety of ways – Terminal Developers (TD) can participate in acquisition of LNG through different schemes – TD can sign long-term contracts with utilities and shippers and/or assign all or a fraction of the terminal capacity to a marketing function – Shippers can arrange for their LNG deliveries or have the terminal/marketer do it. – CRE has resolved all LNG applications in approximately 12 – 18 months

14. Developing LNG Terminals Leading times are currently very long for LNG projects Construction time is typically 3 years There is an increasing demand of LNG terminals, especially in North America Costs of steel and concrete have increased significantly Additionally, liquefaction plants have been delayed in several countries

15. LNG regasification plants Cd. Pemex Cd Juarez Chihuahua Monterrey Reyno sa Cd Madero Toluca D.F. PR Mexicali Tijuana Naco Six applications submitted, 5 permits granted Commercial operation: Sep 30th, 2006 (Altamira) ECA (Sempra): operation in March 2008 Baja California 1. ECA (Sempra) 160,000 m 3 x 2 1.0 – 1.3 BCFD 2. Shell Baja 170,000 m 3 x 2 1.0 – 1.3 BCFD Manzanillo Altamira Shell-Total CFE bid 140,000 m3 x 2 0.5 - 1.1 BCFD Topolobampo Libertad

16. Problems… Private projects associated to private industry and LDC’s have had limited success – Large consumers are reluctant to sign long term contracts – Pemex’ supply and services are preferred – Competing fuels are priced with non-market criteria As a result, most transport and LNG infrastructure is tied to CFE’s need for CC generators and Pemex’ requirements Most of the new combined cycle power plants are located near Pemex’ transmission system or LNG terminals Both companies dominate the gas market

17. Towards a new transport model CRE is currently reviewing PEMEX SNG (national pipeline system) rates, the methodology to calculate them and the corresponding tariffs. The idea is prepare SNG to be the main part of a National Integrated Transport System (SNI) Issues being discussed include using a postage stamp instead of a mcf mile methodology, desired levels of central planning and expansion of the system, roll-in criteria, desired degree of competition, etc. Although SENER is responsible for energy policy and planning, CRE’s opinion is central in this issue.

18. Conclusions Natural gas foreseen demand’s growth in Mexico will require infrastructure to secure supply. So far, CRE has developed a predictable, transparent regulation that can accommodate flexibility to investors. Current infrastructure in Mexico has been mainly linked to CFE and PEMEX through long term contracts. New infrastructure to allow regional growth and active private participation in new projects poses regulatory challenges to the CRE.