By enacting the secondary laws to constitutional energy reforms back in August, Mexican President Enrique Peña Nieto detailed the opening of energy sector. However, while the press has been focusing on the reforms’ implications for the oil and natural gas sectors, the clean power market did not receive the attention it deserved, especially considering that Mexico has set the objective to generate 35% of electricity with clean power by 2025.
One of the reasons is that green infrastructure has been growing for a decade outside the political debate of oil and gas. Many plants in Mexico migrated to clean energy to replace natural gas generation. So, secondary laws for clean power were not amended per se, but were boosted with the opening of the sector to private companies. Unlike hydrocarbons infrastructure, clean infrastructure is ready to take off without big investments.
The new Power Industry Law will allow private actors to contribute to power generation with a legal framework that ensures fair competition. Regulations to that Law are in process of discussion among the industry and regulators. As private generators will be given access to the power transmission and distribution infrastructure, solar and wind energy projects are bound to increase where both sun and win are abundant. As for transmission and distribution, the Federal Electricity Commission (CFE) will be capable of performing power market planning as an independent system operator. As a result, it will be able to accommodate the growing numbers of clean energy generators and provide them with better cost-based access to the power market. Finally, private traders will contribute the green power they produce, allowing others to consume clean electricity.
Aside from these implications, the Power Industry Law creates a Clean Energy Certificate (CEC) system. The Ministry of Energy has been entrusted with setting a percent threshold for clean-to-conventional power production per annum. Power suppliers and consumers will have to uphold this threshold, allowing the government to enjoy a demand for its renewable power and the income it makes once the initial investment costs are paid off.
In addition to the Power Industry Law, other statutes are bound to fortify the production, distribution and trade of clean power. First off is the Coordinated Regulatory Bodies Law, which will support the power sector regulator Energy Regulatory Commission (CRE) and provide it with the technology, financing and operational autonomy it needs to tackle the more competitive power market in Mexico. Another law is the Geothermal Energy Law, which aims at prospecting, exploring and ultimately using geothermal resources for generating electricity and other uses.
With so many changes taking place in the Mexican power market, more global energy firms are focusing their attention towards the Latin American country. In June, Spanish utility Iberdrola announced that it would be investing $5 billion between 2014 and 2018. Following its footsteps was U.S. based power generator AES, which told Reuters in August that it plans to double its capacity in Mexico for $1 billion over three to five years.
The U.S. especially has shown interest in partnering with Mexico, even for its clean energy production efforts. After visiting the Mexican President in July and hosting him a month later, California’s Governor Jerry Brown has expressed his interest in Mexico’s energy industry. As many Californian companies are focusing on renewable energy goals, state energy officials have faith that they can help Mexico, especially when it comes to reducing its emissions and further promoting the use of renewable energy sources. However, other companies from Utah and Colorado have been scouting and developing solar projects even before the Reform.
Despite the challenges facing the Mexican power sector, especially its inability to access natural gas from the U.S. and the widespread theft of electricity, international firms are very optimistic and believe these problems to be some of the “vast and varied” opportunities they believe they can avail. Now, maybe it is time for PV companies to start evangelizing the home market as “everyday appliances”.
Photo credit: Wind turbines, eco energy by majeczka-majeczka – Bigstockphoto.com
China and Mexico have been at opposite ends for decades, especially since the latter accused the former of flooding the U.S. market with cheap goods that affected the sales of its own. However, now that the Mexican oil and natural gas industry is open to local and foreign investors after over seven decades, China has expressed its interest in investing in the country.
Economy Minister Ildefonso Guajardo told the press earlier in May that China among other countries has expressed its interest in the world’s 10th biggest crude oil producer. “Basically, Singaporean companies, Chinese companies, European companies, Norway, the Americas, the U.S. obviously. There is a lot of interest,” he said.
Earlier in March, a top company executive told Reuters that China’s largest company intends to compete for oil and gas development rights in Mexico. The vice president of the American division of the China National Petroleum Corporation , Gong Bencai, had pointed at Mexico when asked if his country had future plans to invest in Latin America. Gong only said, “Yes, we are ready to participate in the Mexico venture. This is a very big market in the international business.”
Gustavo Hernandez, an exploration and production executive at PEMEX, hinted that such an opportunity will be available for companies like CNPC quite soon. “I think (the first international public tender) is going to happen by the end of this year,” he said. However, government officials had said that they expected the first tenders by the mid of 2015.
Currently, the government is working on detailing secondary laws to ensure investors of the safety of their ventures. The government planned to pass these laws before the last session on April 30, but the opposition disputed these, delaying the process. President Enrique Pena Nieto’s Institutional Revolutionary Party (PRI) hopes to gain approval for the legislation by the end of June.
Meanwhile, the Mexican Ministry of Energy is in the process of evaluating the fields PEMEX intends to keep. The process, which is called Round Zero allocation will last until mid-September for the ministry or until the ministry decides which of the fields PEMEX will keep. Once Round Zero is complete, an annual international bidding session will start all the way until 2019, each offering investors access to about 20,000 square kilometers.
With China’s new ventures in Mexico, CNPC will have a stronger hold over Latin America as it is currently active in Peru, Colombia, Brazil, Costa Rica, Ecuador, Venezuela, Costa Rica and Cuba.
Photo credit: Ameresco Biomass Cogeneration Facility at SRS by Savannah River Site
Despite Mexico’s potential oil boom in the light of its latest energy reforms and the newly approved Hydrocarbons Transboundary Agreement with the U.S., the country remains invested in its alternative energy resources. Currently, only 7% of Mexico’s energy is from renewable sources. Biomass is in the lead with 3.8%, followed by Geothermal at 1.6% and Hydropower at 1.4%. Finally, solar and wind energy sources are 0.1%.
In 2012, the Mexico Ministry of Energy (SENER) published a report titled Prospects for Renewable Energy 2012-2016. In it, SENER highlights that Mexico had issued over 50 permits in 2012 for generating power from agricultural residue. The report also showed Mexico’s high potential for landfill gas production with approximately 28.2 million tons of solid waste dumped in landfills, of which 53% is organic. Taking into consideration that 10 permits offered a capacity of 44.76 MW, SENER estimates that Mexico’s 186 landfills can generate between 652 and 912 MW.
Power generated from livestock waste also shows great potential. The 327 anaerobic digesters the Mexican government approved between 2008 and 2012 have successfully processed a variety of waste materials, including pig manure collected from pig farms, dairies and feedlots. Pig manure alone has the potential of generating 246-492 MW.
Complementing the findings of the report is a study initiated by PricewaterhouseCoopers (PwC) to evaluate the sources of biomass in Mexico and determine their potential. According to the study, the capacity of biomass generation can reach 1.5 GW in 2020, which is a substantial rise from the 550 MW produced in 2012. The sources of the 1.5 GW are predicted to be agricultural residuals (950 MW), livestock waste (278 MW), urban landfills (200 MW), and forestry residuals (87 MW). By embracing its biomass potential alone and generating at least 1 GW by 2020, Mexico will be able to add USD 37.5 billion to its GDP, generate 31,000 jobs, and cut down its CO2 emissions by 5 Mt.
Biomass aside, geothermal energy in Mexico offers great energy potential. Ranking fourth worldwide, Mexico’s geothermal power generation is estimated at 7560 MW, of which three quarters is produced at the Cerro Prieto plant in Baja California. Mexico’s 72 operating hydropower stations also contribute highly at 11,603 MW while those under construction promise to add 136 MW. Experts haves identified over 100 possible sites which the government will explore when funds and labor are available.
Despite getting attention much later, solar energy in Mexico is expected to thrive, as the county is one of the top five countries to invest in. By 2013, 33 MW of solar energy was being produced while 39.1 MW was expected from facilities under construction. As for wind energy, the sector remains underdeveloped. Despite offering a potential of 71,000 MW, only 1.7% of it is in use. In 2013, in operation facilities produced 1214 MW while those under construction promised to add 2069 MW.
With the current world reserve/production ratio estimated at 54.2 years for oil, Mexico appears to be set to cover its energy needs in the future.
Photo credit: Rig repairs by Andrew Deacon
The Mexican energy reform drafted by President Enrique Peña Nieto was approved by the Congress in Dec 12 and most of the 31 states. As a result, the once PEMEX-controlled sector opened up to private and foreign partners after 75 years. Starting next year, new contracts will be issued to companies to allow them to enter Mexico and carry out their work without becoming PEMEX contractors. As well, PEMEX may partner or contract with companies, too.
Peña Nieto believes that foreign companies’ knowledge and technology are what Mexico needs to exploit its huge reserves. “We, Mexicans, have decided to set aside myths and taboos, to take a big step forward,” said the President to assure investors that Mexico is indeed changing its policies and attitudes towards foreign investors. Funds are also an important factor in the success of Mexico’s energy sector as PEMEX estimates that Mexican fields require $60 billion a year in investment, which is double what Pemex spends today.
By allowing private contracts for profit and production sharing with well-known companies such as Exxon Mobil, the government expects the country’s oil output to increase by one million barrels per day. Currently, the country produces 2.5 million barrels per day, which is about one million less than the numbers recorded in 2003. With the reforms implemented and part of the constitution, the new energy sector changes are bound to increase Mexico’s GDP by 1% until 2018 and by 2% by 2025. This means a stable economy for Mexico, which translates into a growing middle class and lower poverty rates.
Though the reforms give PEMEX the first round of entitlements, the state-oil producer will have three to five years to develop the resource on its own or by entering into a joint venture with private companies. US oil service companies and independents may be interested in partnering with PEMEX, but the latter is definitely aiming for this joint venture.
The reason behind this is that PEMEX has burdened the economy by not making the most of oil and gas resources due to insufficient labor and lack of technology. By entering into a joint venture with one of the independents, it will be able to learn the know-how it lacks and use sophisticated technology to develop half-exploited fields.
In addition to international oil companies, oil service companies will contribute to Mexico’s energy. This is because the contracts opening up and the licenses provided are better suited for their work. Foreign service companies may also join forces with Mexican companies to develop Mexican energy resources, further boosting the productivity of the oil and gas sectors.
However, Mexico is yet to decide how its hydrocarbon fields will be valued, what the bidding process entails, the nature of the contracts, and other important details. Given the speed and dedication exhibited in drafting and approving the reform bills, Mexico’s regulators are bound to resolve these issues before President Peña Nieto leaves office in 2018. Yet the reforms will be so advanced by then that the new government will deem them economically costly to turn back.
I made an early review of the Mexican Energy Reform. Now it is time to revisit in full. This is part 1 of 3 for a series of posts trying to construe the recently approved Mexican Energy Reform. Despite the political opinions, this Reform sets a new landmark on how Mexico sees the future of energy sector and the free market economy.
Mexico has liberalised the energy market, leaving behind the vision that PEMEX and CFE must have monopoly over hydrocarbons and electricity. Mexican Congress has already declared constitutional the Energy Reform, after having received approval from majority of State Congresses. President has already signed the publishing Decree, and is being published this afternoon. On Monday, the Reform will have effects.
The approval happened despite the opposition of the left-wing party PRD, who proposed an overhaul to PEMEX and not allowing private investment into the energy sector. As PRI/PAN majority on Senate and Representatives approved the Reform, it passed. Regardless of the political opinions, the majority decided. PRD is analysing legal recourses to challenge the Reform, and also suggesting a public consultation that could happen in 2015. Considering that this Reform was to the Constitution, it will be very hard to challenge it, as there are very limited cases where the Constitution can be challenged.
What is firm now?
The Reform has two sets of provisions: The constitutional articles and the transitory articles. The first are firm, and as indicated, it is very hard to challenge due to the circumstances of majority. The second are provisions that rule during vacant time until secondary legislation is enacted. Secondary legislation would be enacted during first quarter of 2014.
The Constitutional Articles that were amended are 25, 27 and 28, and provide for the following:
1. A common mistake is that PEMEX had the monopoly of oil and gas reserves, and CFE from electricity. However, the Mexican State has always been the owner, and decided, as public policy, granting monopolies to PEMEX/CFE, not by Constitution. According to the Reform, Mexican State will keep control of government-owned companies (GOC) in the oil, gas and electricity sector. From the Reform, PEMEX and CFE will remain 100% state-owned, but breaks the customary monopoly, i.e. the State itself can create other GOCs that compete or collaborate into those markets. Creation of diverse GOC is not so uncommon, as happened with CFE and Luz y Fuerza del Centro.
2. Nuclear power and radioactive materials are property of the State, and always will be used for pacific purposes.
3. In electricity sector, the State will keep control of the grid, transmission and distribution. In relation to the generation (and self-generation) of electric power, there will not be licenses, but contracts for private parties. For practical purposes, licenses equal contracts.
4. In oil and hydrocarbons, the State will be their owner and there will be no concessions. However, for the purpose of obtaining economic benefits, it can grant, for exploration and extraction: a) assignments to GOCs, or b) contracts with GOCs or private parties. GOCs can subcontract or partner private parties. Secondary activities like refining, transport, sub-products and retail are not provided for, which would be regulated on detail by secondary legislation.
5. Banco de México will manage a sovereign fund for receiving the rents, manage the investment and distribute the benefits and make payments in relation to oil rents.
6. Executive Branch will have regulatory bodies for hydrocarbons sector (Comisión Nacional de Hidrocarburos) and electricity (Comisión Reguladora de Energía).
For now, many details are to be defined by March 2014. However, the Reform draws four main conclusions: 1) There is not coming back to state-monopoly; 2) The Reform is good enough to start exploring opportunities, 3) PEMEX and CFE will require experience, resources and partners/contractors to compete, as well as private players, and 4) Mexican energy market is being fuelled by growth in the manufacturing industry and public infrastructure.