THE MEXICAN ENERGY REFORM

Transcription

1 THE MEXICAN ENERGY REFORM By: Héctor Arangua and Oscar Vázquez A. The Energy Reform On August 14, 2013 the President of Mexico, Mr. Enrique Peña Nieto, made the formal presentation to Mexican Congress of the long awaited Constitutional bill of amendments for the oil & gas and electricity industries in Mexico including constitutional amendments for both sectors. This bill comes at a time when Mexico s public oil & gas company, PEMEX, has decreasing results in the exploration and exploitation of these resources and very limited capacities to invest and transform such company into a 21 st century company due mainly to a stringent tax regime draining the company of its resources to finance government expense and a corrupt and extremely powerful workers union. Mexico s electricity supplier, CFE, has not been able to grow and become more efficient at the rhythm the country requires. Both public companies operate in many occasions with outdated infrastructure and with important losses, impacting consumer s pockets and the country s economic growth. B. Main Objectives of the Energy Reform In our view, the most important objectives of the Constitutional bill of amendments presented by Mr. Peña Nieto to Mexican Congress are: 1. Strengthening the role of the state as manager of the oil industry Mexico will continue as owner of the oil and gas resources located within its territory, implying that the Mexican government would continue to have the authority to set upstream, midstream and downstream industries policies. In connection with

2 2 the electricity industry, Mexico will continue as the only distributor of electric power in the country but with the possibility of entering into agreements and joint ventures, in better conditions for the country, with private entities. 2. Economic growth In case the President s bill is approved by the procedure settled in the Constitution, the Mexican economy is expected to grow due to: (i) A great inflow of national and foreign resources being invested in the sector; and, (ii) The creation of jobs in connection with such investments in the industry; (iii) A substantial increase in production and reserves of oil and gas is one of the main purposes of the reform. 3. Inclusive Development Mr. Peña s Bill states that approving the Constitutional amendment would open the oil & gas and electricity industries to the foreign and national private sector, having as consequence a substantial improvement in Mexican s standard of living. 4. Energy Security With the current regulation, Mexico s oil and gas production is insufficient and inefficient, some examples of this are the following: (i) Importation of natural gas has increased drastically in the last 15 years (from 3% up to 33% of the national consumption).

3 3 (ii) Pipeline infrastructure has just grown approximately 1% per year for the past 15 years. The National Pipeline System (Sistema Nacional de Gasoductos) is saturated, making the importation of gas difficult. (iii) In refined products, the facilities in charge of processing crude oil are insufficient and inefficient, which obligates Mexico to buy refined products from foreign producers. (iv) Transporting oil is very expensive and inefficient (e.g. tank cars and bobtails), impacting in a substantial increase of the sales cost. Additionally, in the electricity sector, currently managed only by CFE, government has the mission, declared by Mr. Peña, to supply the totality of the country with electricity at rates that compete with those of international suppliers. In that regard, Mexico s legal system reform is expected to increase the country s energy security by making the upstream, midstream and downstream oil & gas more efficient; as well as an improvement in electricity generation and distribution facilities which will reflect on the decrease of electricity s costs. 5. Transparency PEMEX and CFE are governmental companies that manage huge budgets. An estimate of US$40.5 billion a year would be destined to PEMEX for fiscal year 2014, and approximately US$25 billion a year would be allocated to CFE; however, the opaque way in which those resources are spent is an endless source of criticism and debate. In connection with the aforementioned, Peña Nieto has declared that secondary laws will have to grant effective governmental transparency mechanisms to allow the supervision of government spending, as well as how the administration of the National Energetic Estate (Patrimonio Energético Nacional) is carried out.

4 4 6. Sustainability and environmental protection One of the government s main concerns is to have sustainable oil & gas and electricity industries. In that regard, the entering into agreements with entities that have the technology to explore and exploit oil & gas fields, would have substantial benefits for the country (i.e. Mexico s proven reserves would grow), as well as generating electricity with efficiency making the industry have healthy finances impacting in decreased costs to consumers. In the other hand, an emphasis on environmental protection would make a huge difference from the current situation. Currently, PEMEX and CFE s industrial procedures are very pollutant (i.e.20.7% of Mexico s electricity is produced in highly pollutant facilities using conventional technology, burning fuel, oil and diesel, which in addition is four to six times more expensive than other production processes such as natural gas). President Peña and his administration have a lot of interest to transform the oil & gas and electricity industry to a low pollutant industry. C. Oil and Gas 1. Challenges ahead The main challenge to Mexico is to implement in secondary laws substantial modifications that will allow PEMEX to enter into Shared Production Agreements (payment in kind of crude oil) and/or Risk Agreements (payments in cash or similar arrangements), among others, with national and foreign entities to have an important improvement in upstream, midstream and downstream activities. (a) Exploration and extraction The main area for new business is precisely the exploration and extraction of oil & gas, area in which currently PEMEX has a Constitutional monopoly. With the

5 5 implementation of the reform, it is expected that secondary legislation would allow PEMEX to have the possibility to associate with private and public entities, national or foreign, to explore the Mexican territory for oil & gas fields. Additionally, it is foreseen that PEMEX would be allowed to enter into agreements for all midstream and upstream industries with other public or private entities. (b) Mexico s energy security In case the aforementioned reform is approved, the country s energetic security would be substantially increased because the oil and gas reserves are expected to significantly increase, and most advanced technology in the world would be available for this sector without struggling with the limited amount of resources and legal restrictions affecting this industry. 2. Constitutional Reform Oil & Gas The reform proposal presented by Mr. Peña Nieto eliminates the prohibition to PEMEX to enter into agreements with entities in connection with the oil & gas industry. In addition, exploration, exploitation and petrochemical industry would not be considered as strategic anymore (i.e. in which the government is exclusively authorized to develop such activity) but as a priority industry, (i.e. government could associate with other entities while regulating the sector s activities). D. Electricity 1. Electricity sector situation The current situation of the Mexican electricity sector, managed by CFE can be summarized as follows:

6 6 (i) electricity prices in Mexico have been consistently on the rise and are in aggregate (considering all applicable tariffs, including home, commercial, industrial, etc.) approximately 25% higher than those in the US; (ii) Mexico s state owned electricity producer and supplier (CFE) is operating at an annual loss of approximately US$6 billion; (iii) Mexico s electrical grid is old and insufficient; and, (vii) 20.7% of Mexico s electricity is produced in highly pollutant facilities using conventional technology which is four to six times more expensive than other production processes such as natural gas. The current situation of this industry negatively affects the competitiveness of the country. 2. Constitutional Reform - Electricity The Constitutional amendment would now allow CFE to associate with the private sector in order to generate electricity (excepting nuclear generation, which will continue to be solely managed by CFE), although the distribution and final sale would continue to be managed solely by CFE. E. Issues not addressed in the reform 1. What could have been done In our view, Mexican government could have made a bold move with the reform allowing concessions to be granted in this sectors, which would grant the direct upstream, midstream and downstream activities to the private sectors.

7 7 Regarding the electricity sector, another time, in an ideal world, it would have been interesting to see the granting of concessions on the distribution grids and the ability for the private sector to directly sell power to consumers. 2. What has not been mentioned but was expected The most important topic that has not been mentioned is the abusive interference that PEMEX s union has in its decisions; for example 5 out of 15 members of its Board of Directors are union affiliated workers. The referred union is very corrupt, has a huge bargaining power and impedes the efficiency of the company in many levels. F. Hot Areas in the Mexican Energy Sector 1. Current Currently, PEMEX legal framework only PEMEX to enter into agreements with contractors of the private sector to support PEMEX s activities, limiting its growth scope and forcing PEMEX to take all the exploration and drilling risks involved. Nevertheless, PEMEX s huge investment program requires a lot of services and assets such as those provided with specialized vessels such as jackups and drilling boats are in high demand lately. CFE is also expected to approve a huge investment program for the following years, mainly to increase its infrastructure, so a lot of projects are likely to be presented for public bidding within the next few months. 2. If the reforms are approved In addition to the existing investment programs of PEMEX and CFE, in case the bill of amendments is approved, a huge exploration and production expansion is expected. Companies involved in oil & gas exploration and drilling activities should

8 8 follow the Constitutional reform (and future amendment to the secondary legislation) very closely. With respect to the electricity sector, new electricity production facilities would be expected to be built in the next few years.