Conditions to attract Investment and create Value in the Hydrocarbon Sector. Carlos A. Morales Gil

Transcription

1 Conditions to attract Investment and create Value in the Hydrocarbon Sector Carlos A. Morales Gil Houston November, 2015

2 Content Elements of a State A State s Role Exploiting resources Companies What do companies seek? State

3 Constitutive Elements of a State People Territory Laws Form of Government Natural Resources: Land Water Forests Minerals Hydrocarbons Renewable Energy Forms of Property Common Collective Private 3

4 State s Role Establish laws Implement regulatory mechanisms Capture rent generated by the exploitation of natural resources Collect income taxes and taxes associated to productive activities Execute laws Balanced social, education and health development Plan and develop infrastructure Provide safety Guarantee the preservation of the environment 4

5 Exploiting Resources Requirements Financial resources Knowledge Technology Technical Capacities Administrative Capacities Means State owned companies Private owned companies Regulation Mechanisms 5

6 What do companies seek? Legal Certainty Constitution Laws Institutions Materialization Business Dimension Investment Capacity Attractiveness Investment return Sustainability Planning tools 6

7 Legal Certainty 1. Congruent Regulation Constitution 2. Strong Institutions 3. Clear Processes Laws 4. Effective Implementation Regulation Authorities Processes Decrees Implementation and execution

8 Mexican Case On December 21, 2013, Mexico s Energy Constitutional reform bill formally became effective. The reform includes amendments to articles 25, 27 and 28 of the Mexican Constitution and 21 transitional articles that detail how the Mexican Congress and the Executive branch are to implement and put into place the constitutional reform. Thereafter, on August 12, 2014, a package of energy legislation became law in Mexico, which included 9 new laws as well as amendments to existing laws, and materialized the December 2013 constitutional energy reform, which established a new legal framework for Mexico s energy sector. 8

9 Mexican Case Constitutional Article 25 PEMEX and CFE are strengthened by transforming them into State Productive Enterprises (SPE) Article 27 The State maintains property of the hydrocarbons in the subsoil Assignments for SPEs Diversity of contractual schemes for SPEs and private companies Article 28 The Mexican Oil Trust is created The CNH and the CRE are established as Coordinated Regulators in energy matters 9

10 Mexican Case Legislation The Hydrocarbons Law and the Hydrocarbons Revenues Law establish a new legal framework for all hydrocarbon-related activities in Mexico, including the following: Surface and geophysical surveying, and exploration for, and extraction of, hydrocarbons; The treatment, refining, transportation, storage, marketing and sale of petroleum and petroleum products; The processing, compression, liquefaction, decompression and regasification, as well as the transportation, storage, distribution, marketing and retail sales, of natural gas; and Pipeline transportation and storage of petrochemicals. For exploration and extraction activities, the Hydrocarbons Law establishes two different regimes: i) entitlements granted to State Productive Enterprises and ii) Exploration and Extraction contracts entered into with private parties or State Productive Enterprises. For midstream and downstream activities, the law establishes a permit regime to be generally regulated by the Ministry of Energy (SENER) and the Energy Regulatory Commission (CRE) 10

11 Mexican Case Proprietor, regulator and operator Ministry of Energy determines energy policy and coordinates the regulators through the Coordinating Council for the Energy Sector Ministry of Finance determines the fiscal and economic aspects of the Government Contracts The Mexican Oil Trust receives and administers the State s oil income Regulators Coordinated Regulatory Entities CNH CRE Administrative Entity of the Ministry of Environment and Natural Resources Operators State Productive Enterprises PEMEX CFE Management Centers Public State Entities CENAGAS CENACE ANSEA Private Companies 11

12 Sustainability Main Aspects Applicable Public Policy Long term vision Political and Legal certainty Investment tools Participation of different sectors Realistic and efficient implementation

13 Mexican Case Five-Year Plan On June 30, 2015, the Ministry of Energy published the Five-Year Plan for Exploration and Extraction Bids for Hydrocarbons which was elaborated on the basis of a proposal by the CNH and considered different legal and public policy elements needed for the viability of the bidding processes. Since that date, an evaluation and modification process begun which involved the participation of local governments and the industry. 13

14 Mexican Case The process of interaction between the actors promoted an integral design in the development policy of the oil sector. In particular, the Five-Year Plan considered four fundamental processes: o The nomination of bidding areas; o Specific comments of the industry participants; o The analysis of questionnaires of the industry and local governments with oil potential, and o The updating of geological and geophysical information. The Five-Year Plan contains strategic information regarding the areas for bidding. Furthermore, it promotes la coordination of the national and international industrial sector and aligns the objectives with public policy in the hydrocarbon sector. In particular, the Five-Year Plan seeks to promote investment in the national oil sector by increasing the knowledge about the subsoil, restitution rates, levels of production and increasing the State s capacity in oil matters. 14

15 Transparency Essential aspects The participation in the private sector in the national oil sector should not be granted in a discretional manner by a single authority. Competitive processes for the granting of contracts Intervention of a plurality of authorities Clear and straight forward rules for the competitors Accountability on behalf of the authorities Publicity for the different procedures for the granting of the contracts 15

16 Mexican Case Constitution, Hydrocarbon Law and Hydrocarbon Revenue Law The new contract models for E&P activities are: (i) Licenses, (ii) Production-sharing contracts, (iii) Profit-sharing contracts and (iv) Service contracts. The Hydrocarbons Revenues Law provides for the economic aspects relating to each of the contract models. 16

17 E & P Contracts Licenses.- Payments to the State: o Execution Bonus o Contractual Fee for the Exploration phase o Royalties o Payment determined by a rate which considers the contractual value of the hydrocarbons. Payment to the Contractor: o Sale of hydrocarbons once they are exacted from the subsoil. 17

18 E & P Contracts Production Sharing Contracts.- Payments to the State: o Contractual Fee for the Exploration phase o Royalties o Payment determined by a percentage of the Operating Profit Payment to the Contractor: o Cost recovery o Remainder of the Operating Profit after payment to the State 18

19 E & P Contracts Profit Sharing Contracts.- Payments to the State: o Contractual Fee for the Exploration phase o Royalties o Payment determined by a percentage of the Operating Profit Payment to the Contractor: o Cost recovery o Remainder of the Operating Profit after payment to the State In Profit Sharing Contracts, Contractors shall deliver the total amount of the production to the State Trading Company, who will deliver the profit of the sale to the Mexican Oil Trust. 19

20 E & P Contracts Service Contracts.- In Exploration and Extraction Service Contracts, the Contractors deliver the total amount of production to the State. The Contractors receive payment exclusively in cash. The payment in favor of the Contractors shall be paid by the Mexican Oil Trust with the resources generated by the sale of the oil delivered by the Contractor established in the Contract. 20

21 Industrial Safety and Environmental Protection Environmental Protection: Main Aspects Control and regulate the emission of contaminants Conserve and restore ecosystems and natural resources Establish technical elements for environmental and energy policy Industrial Safety: Adopt national and international standards Avoid and contain oil spills Maintain the physical and operative integrity of the facilities Analyze risk and contingency plans and verify their compliance

22 Mexican Case The National Industrial Safety and Environmental Hydrocarbon Agency (ASEA), is created as an administrative entity linked to the Ministry of Environment and Natural Resources, with technical and management autonomy. The Agency s objective is to protect people, the environment and facilities of the hydrocarbon sector through regulation and supervision of: I. Industrial and Operative Safety; II. Activities that include dismantle and abandonment of wells, and III. The integral control of residues and contaminant emissions 22

23 Mexican Case The ASEA supports all the activities of the hydrocarbon sector: The processing, compression, liquefaction, decompression and regasification, as well as the transportation, storage, distribution, marketing and retail sales, of natural gas; and Pipeline transportation and storage of petrochemicals. Oil and gas: Surface and geophysical surveying, and exploration for, and extraction of, hydrocarbons, the treatment, refining, transportation, storage, marketing and sale of petroleum and petroleum products. Natural Gas: The processing, compression, liquefaction, decompression and regasification, as well as the transportation, storage, distribution, marketing and retail sales, of natural gas. LP Gas : The transportation, storage, distribution, marketing and retail sales of LP Gas. Petrochemicals: The transportation, storage, distribution, marketing and retail sales of petrochemicals. 23

24 Mexican Case Functions of the ASEA in Environmental Matters Protection, conservation and restoration of ecosystems and natural resources. Management of residues Control of contaminant emissions Technical elements for environmental and energy policy Authorizations of risk impact and environmental risk in the hydrocarbon sector 24

25 Mexican Case Functions of the ASEA in Industrial Safety Matters Adoption of national and international standards Prevention and containment of oil spills s Financial coverages for damages Maintain physical and operative integrity of the facilities Analyze risk and contingency plans as well as verifying its compliance. 25

26 Social Responsibility Main Aspects Collective protection Defense of minorities and marginalized communities Support to land owners and proprietors Fair compensation to the community Social Projects

27 Competitivity Skills Knowledge Personnel Multidisciplinary Experience Synergies Technology Database Investigation Innovation Access to Assets Clear distinction between roles Application of technology and skills 27

28 Operator Return Attractiveness 30% The Companies seek ATRACTIVE RETURNS 25% 20% 15% 10% 5 Different Blocks 5% 0% 35% 45% 55% 65% 75% Government Take Block 1 Block 2 Block 3 Block 4 Block 5 28

29 Operator Return Attractiveness 30% 25% 20% 15% 10% Companies assume IMPORTANT RISKS Risks Base Case Rise in Cost Geological Low Prices Other Risks: Political Legal Social 5% 0% Block 1 Block 2 29

30 Attractiveness 100% States must have COMPETITIVE TAX REGIMES 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Peru Ecuador Mexico (Royalty 10%) Argentina Mexico (Royalty 15%) US Permian Colombia Mexico (Royalty 20%) Royalties Other Taxes Taxes Operator Return Source: Wood Mackenzie & Global oil and gas tax guide 2015 EY 30

31 Conclusions The natural resources found in the subsoil, almost in every country, are property of the State. The development of natural resources is a source of revenue that contributes to economic development. In order to generate economic value it is necessary to invest an important amount of money, possess knowledge and administrative methodologies and have access to technology. The States possess reserves and decide the forms of exploitation of the resources: i) exclusive State investment, ii) exclusive private investment, and a combination of both. The NOCs and IOCs have the capacities needed to carry out oil activities. In order to maintain an optimal development of resources, States must generate a balanced legal framework, which provides certainty to investors and that recognizes the risks related to the industry and at the same time optimizes the capture of revenues.