The Final Step of the Mexican Energy Reform

The Final Step of the Mexican Energy Reform

Photo credit by: Three energy saving light bulbs by Anton Fomkin

Mexican Congress opened a new chapter in the country’s oil, gas and electricity sectors when it opened all three to foreign investors. Supported by two thirds of the congress and most of Mexico’s states, the reform also allowed private companies to invest after the country nationalized the sectors over 70 years ago. However, as tempting as the offer was, most investors had their doubts.

This is because the opposing PAN party intervened to create the last form of the legislation. In addition, the PRI and Mexican companies have reserved space for national providers and investors. A third concern was the lack of transparency by the managers of the section. Finally, the last concern was the government’s ability to provide regulatory bodies with autonomy to carry out their duties and create frameworks for the energy sector. Addressing these concerns gradually, the government has started taking many steps, starting with becoming involved in government-funded projects.

In addition to 21 laws related to oil and gas contracts, regulatory agencies, and taxes, the Mexican government is encouraging joint ventures between foreign and national firms and even financing the former. Among these 21 laws, 9 are new. The topics of the laws are divided in: hydrocarbons (includes foreign investment, mining and PPP), electricity, geothermal energy (includes water regulation), energy security (includes environmental), government companies (includes PEMEX, CFE, government procurements and works), regulators (includes coordination among regulators), taxes (includes taxes on hydrocarbons and duties), sovereign fund and federal budget.

Mexico has been reorienting its federal procurement system around principles of delivery for results and away from compliance and overarching procedures. The process has been taking place since 2009, allowing the country to save USD 1 billion over three years. Moreover, it helped the World Bank interact better with other sectors like Poverty Reduction while improving the Bank’s engagement in public procurement reform in Mexico

However, the biggest effect is of course the Bank’s interest in continuing to support Mexico, especially as the latter has set objectives to align its public procurement system with expenditure policy to ensure value for money, transparency, efficiency, and quality of procured goods and services. As a result, Mexico will have ample funds to establish government-funded projects and profit SMEs that can profit local and international investors.

The reform is expected to be approved by mid June by the Congress. Can Mexico grab energy momentum until then?

Oil Exploration Opportunities Open up in Mexico

Oil Exploration Opportunities Open up in Mexico

Rossville-Oil Tanks 2 by Joseph Kranak

By the end of 2013, Mexico had opened its state-run petroleum sector after over seven decades of being monopolized by Pemex. Now, the country is taking full advantage of this change in the constitution and preparing itself to become the next frontier to many of the world’s top oil companies.

Lourdes Melgar, deputy minister for hydrocarbons, said, “We are seeing in the first bid round, two areas in deep waters, some areas of shale gas, some areas of the non-conventional Chicontepec (basin), and some areas in shallow waters.” The industry is expecting private investors to be tendered some parts of the highly profitable Perdido Fold Belt and a few offshore heavy oilfields along with technically challenging areas.

In addition, the energy minister is going through the 68-page Round Zero wishlist detailing the fields Pemex wants to hold onto to tender some of those fields by June 2015. The government has until September 17 to determine which fields Pemex will lose, but the decision is expected much earlier to avoid hurdling the state-oil monopoly’s operations. Besides, Pemex is planning to discuss joint-ventures and partnerships for the fields it keeps, so it needs a decision to start its own plans.

While the first step Mexico is expected to open its deep water oilfields to tender starting 2015, Pemex believes that the first international round of bids could start by the end of this December. The bidding will cover 25,000 sq km, enabling international oil majors to get their share of Mexico’s 86.6 billion barrels of oil and gas. This is widely expected as Perdido, Mexico’s deepwater discovery, will be available for bidding despite Pemex controlling a large part of it. However, Melgar expects the Mexican state oil company to require partners since deep water isn’t its specialty.

Melgar also anticipates Chevron and Exxon to express interest in its extra heavy oilfields since both have the experience to do so after developing the Kearl project in Canada. However, it’s Chicontepec that’s causing the most concern. The onshore field has been a disappointment despite constant drilling operations. Regardless, Melgar is optimistic. “We have had a lot of interest in Chicontepec and not just from international companies, but also from firms that are perhaps working as contractors,” she said.

To complement these changes, Mexico is planning a flexible tax framework for the private oil and gas companies coming to the country. The government, along with the conservative opposition, is negotiating this necessary document to give the country a competitive edge in the North American energy sector, define how much the investors will receive, and specify the government’s share of its oil and gas resources.

The tax model is expected to include a sliding-scale royalties system that would differ depending on the type of field, the cost of oil and gas there, as well as the production. In addition, a royalty discount may be offered for shale gas producers to make it more tempting despite its narrow profit margins. However, both the government and the National Action Party are yet to finalize the details.

Mexico will hold at least ten bidding rounds and will be holding them annually unless the authorities plan more frequent shale tenders.

Yet, the complete package of bills to the energy sector is expected to be presented this week.

What is the Immediate Impact of Mexico’s Energy Policy Overhaul?

What is the Immediate Impact of Mexico’s Energy Policy Overhaul?

Photo credit: Drilling at Dusk by Shane Anderson

By the end of 2013, Mexico’s Congress approved a bill to change Mexico’s energy policy and end a state oil monopoly that lasted 75 years. Despite protests from opposition lawmakers, the bill secured the necessary votes and will be implemented before the end of 2014.

With many laws and regulations expected to improve the efficiency of the energy sector, major changes are predicted in Petroleos Mexicanos (PEMEX).  Allowing private contracts and partnerships between the state oil producer and other companies, the bill will also set parameters for PEMEX’s ability to compete and create partnerships. That way, PEMEX would have more autonomy, a competitive tax regime, and a board that promotes the best international practices.

Chief Executive of Pemex Emilio Lozoya commented, “[The energy reforms bill] will only strengthen Pemex because it would allow us to have much more flexibility in the way we exercise our portfolio and in the way we can partner with various players and various parts of our supply chain.” Despite the government investing $20 billion a year on the oil industry, PEMEX had failed to operate up to its potential, reducing the output from 3.4 million barrels a day to 2.5 million.

Two challenges stand in the face of restructuring PEMEX: the unions and the government. Both have their interests at stake and could resist the change and end up slowing down or fully blocking the reforms. However, if PEMEX decides to comply and adapt, it may reach the same success as its Brazilian counterpart Petrobras. After several reforms from the mid 1990s to the 2000s, the national oil company of Brazil has made a name for itself worldwide and now owns modern R&D labs that boast both efficiency and high technology.

PEMEX aside, the gasoline industry will react to Mexico’s latest energy reforms. Currently, gasoline is heavily subsidized in the country, which is why it is sold for far less than its cost of production. Once the reforms are implemented, these high subsidies will be eliminated. Gustavo Madera, president of Mexico’s National Action Party, deems them useless because they don’t serve their true purpose. “The rationale behind these subsidies has always been that they are helping the poor, but the truth is that they are supporting those who already have money — the middle class and upper class. Because of these kinds of subsidies, there isn’t the money to help the poor.”

Another industry that will feel the impact of the upcoming changes is the electricity market. Like the oil industry, it will be opened to the private sector for the first time. This is why Mexican officials are planning to separate the transmission of electricity from generation. Though the separation process will be difficult and time consuming, especially with the high number of private investors in these fields, Mexico is determined to carry out this process.

The economy of Mexico will also be affected by the reforms, but in a positive way. With the country attracting as much as $1.2 trillion in investments and its manufacturing and industrial sectors thriving, 2013 witnessed a 0.8% growth in the fourth quarter and an overall estimated growth of 1.3% for the whole year. Though it was lower than the 2012 prediction of 3.8%, the estimate indicates the country’s growth potential. With more jobs opening up, poverty rates will decrease while living standards will improve.

Wind Power Opportunities in Mexico

Wind Power Opportunities in Mexico

Photo Credit: Walmart de Mexico renewable wind energy by Walmart

With recent developments in the region, the wind is certainly blowing in favour of wind power projects in Mexico. The country’s wind power market has seen remarkable growth; expanding from virtually nothing in 1994, Mexico is poised to cross 1,560 MW next year, which is around 3% of grid capacity. An increasing number of wind power opportunities are coming up on the Mexican horizon, attracting an eclectic group of stakeholders from within and outside the country.

The Mexican city of Oaxaca is one of the three major areas of good wind. In addition to having around 90% of Mexico’s installed capacity, Oaxaca has class 6 and class 7 winds. It will not be outlandish to predict excellent growth opportunities in the country. In 2010 Mexico had an average annual installed capacity of 300 MW. By the end of 2012, the country had a development pipeline of 2,500 MW.

65% of Mexico’s wind turbine market is held by Spanish companies Gamesa and Acciona. The US electricity giant General Electric is also planning to expand its operations in Mexico. GE presently has approximately 1% of the Mexican wind power market.

Mexico’s state-owned utility Comisión Federal de Electricidad (CFE) coordinates wind power projects. Due to national security concerns, the government does not provide a lot of grid information to companies and developers. This makes the initial site selection is a somewhat complicated process, which makes it harder to identify favorable connection points in Mexico as compared to in the US. Nonetheless the CFE, which inherits the substation interconnection points, is very much committed to facilitating project developers.

An alternative funding model known as “self-supply” has also emerged that enables energy developers to enter lucrative agreements with non-state companies, generally via consortiums comprised of independent power producers. These agreements can run anywhere between 15 and 20 years, much like the agreements made in the US.

Interested parties can identify opportunities in Mexico’s wind power market through CFE’s high tariffs running between $97 and $245 per MWh. The self-supply model had also attracted large companies such as Wal-Mart and Cemex which have chosen this funding model for wind power projects.

A wind energy company connected to San Diego has also entered a deal for supplying electricity to two Volkswagen auto plants in Mexico. This deal indicates the encouraging opportunities for renewable energy prospectors in the area. Headquartered in Baja California, Mexico Power Group signed an agreement in September to provide wind-generated electricity to Volkswagen’s assembly and manufacturing facilities in Puebla and Guanajuato state respectively.

The electricity will be generated on a new wind farm located hundreds of miles away in Zacatecas state. Back in 2010, Mexico had introduced generous transmission rates for renewable energy projects. This will hugely help the new wind-energy agreements.

Volkswagen’s utilisation of wind energy is in line with its ongoing efforts to reduce its carbon footprint. Since this is something an increasing number of companies are interested in, Mexico’s wind power opportunities will continue to get more attractive. The global wind energy industry is beginning to recognise Mexico’s potential to become a powerhouse in wind energy development.

Energy reform will be discussed at the House of Representatives during next days. This Reform is mainly focused on oil and gas. However, the liberalisation of the electricity market under this Reform could allow to reach full potential of Mexico in the wind power generation.

Mexican Senate approves liberalisation of energy market

Mexican Senate approves liberalisation of energy market

Credit: Oil tanker in South Portland by Justin Russell

Yesterday, Mexican Senate approved the Energy Reform over oil and electricity. Originally, the Bill presented by President Peña Nieto provided for a conservative opening of the market, as he had not enough support to pass it. However, with back up from left-centre PAN, the Senate approved a liberalisation of the market under these terms: 1. Private companies can participate into the market. Previously, there were a limited number of activities where private companies could do energy business. 2. Refining, basic petrochemicals, as well are open to private companies. Nevertheless, the State remains owner of the hydrocarbons. State will remain manager of electric grid, but private can openly enter as contractors. Nuclear will remain state-controlled. 3. There are four models approved for extraction business: Services, Profit or Production Shared Agreements and Licenses. Combined models are allowed. 4. PEMEX will compete with other players in the market. PEMEX will have right of first refusal for choosing projects, as long as it demonstrates capability. PEMEX can have partners and/or convert to an approved business model. 5. Energy market will be ruled by Comisión Reguladora de Energía and Comisión Nacional de Hidrocarburos. 6. A sovereign fund is formed for Banco de Mexico to manage profits on oil rents. Now, the Bill is passing to the House of Representatives for discussion. It is expected not to change substantially, but it has some many legal consequences that it would require a deeper review, specially on electrict generation. Do you expect more surprises?

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