IHS ENERGY Presentation Advance on energy reform: Setting the boundaries for expectations 7 August 2014 ihs.com Alejandra León, Director, Latin America Upstream, +152 55 3067 6453, alejandra.leon@ihs.com
Key questions IHS Mexican Economic Outlook Conference / August 2014 What is the status of the energy reform? How long it could take for seeing impact? What is a realistic expectation of energy reform impact? Why? 2
What does the reform means? IHS Mexican Economic Outlook Conference / August 2014 Legal Monopoly Ends Stronger Institutions and Agents Contract Flexibility Upstream Downstream Power Generation Petrochemicals Regulatory Agencies (CNH, CRE) Mexican Oil Trust Natural Gas National Control Centre Independent Transmission System Operator Transformation of Pemex and CFE into a productive state companies Service Contracts Profit-Sharing Production-Sharing Licenses 3
IHS Mexican Economic Outlook Conference / August 2014 Following Constitutional amendments (Dec 2013), secondary legislation was approved (Aug 2014) Hydrocarbons Law NEW LAWS Hydrocarbon Income Law PEMEX Law Law of the Mexican Oil Stabilization and Development Fund Power Industry Law Federal Electricity Commission Law 13 EXISTING LAWS AMENDMENTED Law of the Coordinated Energy Regulatory Agencies Geothermal Energy Law Law of the National Industrial Safety and Environmental Protection Agency for the Hydrocarbons Sector 4
IHS Mexican Economic Outlook Conference / August 2014 Government is committed to accomplish deadlines but that doesn t mean changes to happen immediately 2014 2014 Complete Approval Secondary regulation 120 Days 90 Days delay Round Zero for Pemex 90 Days CNH Resolution 180 Days 5
IHS Mexican Economic Outlook Conference / August 2014 The laws already set some implementation deadlines 2014 2014 2015 2016 Pemex and CFE Transition Pemex and CFE to become State Owned Productive Companies 730 Days NG Control Center 120 Days 90 Days delay 365 Days Hydrocarbons Law regulation 180 Days Transfer data and information to the National hydrocarbons data center Pemex only importer of gasoline and diesel 2 years Up to 31 December 2016 Pemex supply contracts to service stations Up to 31 December 2016 6
IHS Mexican Economic Outlook Conference / August 2014 What can we expect in the upstream? 7
The main promises of energy reform IHS Mexican Economic Outlook Conference / August 2014 Increasing oil and gas production Increase oil production from current 2.5 million barrels per day (mbd) to 3 mbd in 2018 and 3.5 mbd in 2025. Increase gas production from current 5.7 billion cubic feet (Bcf) per day to 8 Bcf per day in 2018 and 10.4 Bcf per day in 2025. A lot of investors coming Lower energy cost Lower fuel prices Lower power tariffs. Competition 8
IHS Mexican Economic Outlook Conference / August 2014 Investors come when opportunities are attractive Security Capital Costs Environment Fiscal Terms and Regulation Technology Geology Oil/gas prices (global market) 9
IHS Mexican Economic Outlook Conference / August 2014 Round Zero: first step to define areas of opportunities, but some issues still need to be resolved Which will be the final resolution about Pemex s request? What kind of contracts? Which are the fiscal terms? Which are the contractual terms? When CNH will be ready for calling for bids? Sabinas Burro Picachos (gas) Tampico Misantla (oil) Burgos (gas) Basins Deep Waters Shale resources potential Oil fields Gas fields Veracruz (gas) Exclusive areas for Pemex Areas under partial control by Pemex (open to association with third parties) Sureste (Southeast) (oil/gas)) Open areas (available for bid rounds) 10
IHS Mexican Economic Outlook Conference / August 2014 E&P opportunities: how to balance different interests? 11
Billion Mexican pesos Pemex tax relief? IHS Mexican Economic Outlook Conference / August 2014 Hydrocarbons contribution to government budget 1,400 Tax structure for Pemex assignments will be similar to contracts: 1,200 1,000 Exploratory phase quota (monthly $1,150 per km 2 during first 5 years and $2,750 per km 2 afterwards) 800 600 400 200 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 Taxes and duties on hydrocarbons 4.7% of GDP Source: IHS, SHCP E&P tax (monthly $1,500 per km 2 during exploration and $6,000 per km 2 during production) Royalty (varies with price; non associated gas doesn t pay royalty if price is below US$5 per MMBtu, oil pays 14% at US$100 per barrel price) Profit share (from 70% in 2015 to 68% in 2019) But underline premise: maintain the same contribution to government budget than previously. 12
IHS Mexican Economic Outlook Conference / August 2014 The geology: good potential but when you look closer The Mexican onshore and shallow water basins are highly mature, with 75% of oil and 60% of discovered gas already produced. Mature field revitalization and near-field exploration could potentially add millions more barrels of oil in known basins where infrastructure is already in place, but is this area going to be available to investors or Pemex will keep it? Deepwater (> 1,000 ft water depth) exploration activity to date has been very limited, creating substantial uncertainty regarding yet-to-find resource estimates. Play extension of the US Eagle Ford shale into Mexico has yielded some positive results, mostly dry gas in nature, but also with limited activity. Unconventional oil potential may be greater in the deeper Pimienta formation further south. But, with so few wells drilled to date, the uncertainty around unconventional resource potential remains high. 13
million US$ IHS Mexican Economic Outlook Conference / August 2014 Unconventional gas in Mexico facing economics challenge Mexico Piedras Negras Texas Oil Fairway The top performing wells in the Eagle Ford rely on a high liquids content (oil or wet gas) to make them profitable in a low gas price environment. Monclova Sabinas Basin Nuevo Laredo Most of the Eagle Ford in Mexico is believed to reside in the dry gas portion of the play. Single-well breakeven price in Eagle Ford East dry gas: US$8-13 per MMBtu Wells Oil Dry Gas Wet Gas Drilling Dry Monterrey Wet Gas Eagle Ford & La Pimienta Burgos Basin Unconventional well cost 10 9 8 7 6 5 4 3 2 1 0 Eagle Ford East Dry gas Eagle Ford East Wet gas Eagle Ford East Black Oil Pemex unconventional wells Drilling cost Completion completion Source: Pemex. Source: IHS 14
IHS Mexican Economic Outlook Conference / August 2014 Substantial Uncertainty on deepwater Gulf of Mexico Pemex deepwater drilling program United States Mexico Pemex new-field wildcat exploratory deepwater wells Source: IHS Edin Mexico Ridges Province Perdido Foldbelt Area Shell s Perdido development Sigsbee Abyssal Plain Campeche Deep Sea Campeche Escarpment Cantarell Deep & ultra-deep water exploratory wells since 2005=36, compared to 801 in US GOM. Mexico Perdido Fold belt trend are similar in size to those found in the U.S. Lower Tertiary and Jurassic trends (150-180 million barrels). But, development challenges include absence of infrastructure, water depth in excess of 9,000 ft, high temperature/high pressure reservoirs, and lower well productivity compared to other deepwater GOM plays. The four discoveries to date in the deepwater Mexico Campeche Deep Sea Basin suggest a mean field size comparable to the US GOM Miocene and Miocene sub-salt plays (20-45 million barrels). 15
million barrels per day Results could be disappointed IHS Mexican Economic Outlook Conference / August 2014 Mexico oil production outlook 4 4 3 3 2 2 Deepwater Oil 1 Shallow Water Oil 1 Onshore Conventional Oil 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 Onshore Unconventional Oil Source: IHS Energy 16
Billion cubic feet per day IHS Mexican Economic Outlook Conference / August 2014 Unconventionals and deepwater have the potential to stem the Mexican production decline Mexico gas production outlook 8 7 6 Deepwater Gas 5 4 3 Shallow Water Gas 2 Onshore Unconventional Gas 1 Onshore Conventional Gas 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 Source: IHS Energy 17
The main promises of energy reform IHS Mexican Economic Outlook Conference / August 2014 Increasing oil and gas production Increase oil production from current 2.5 million barrels per day (mbd) to 3 mbd in 2018 and 3.5 mbd in 2025. Increase gas production from current 5.7 billion cubic feet (Bcf) per day to 8 Bcf per day in 2018 and 10.4 Bcf per day in 2025. -Current projects are insufficient -New projects will arrive later -Implementing reform will take long -Contractual and fiscal terms needs to be sufficiently attractive Lower energy cost Lower fuel prices Lower power tariffs. -Market prices are not necessarily lower -Availability of gas will set the path for a more competitive power generation market 18
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