The Rise of North America: A Global

Energy Powerhouse

Energy Reform in Mexico

Jesus Serrano LanderosComisión Reguladora de Energía, México

2

INTRODUCTION

At the end of 2013, Mexican Constitution was amended allowing

private participation throughout the entire energy sector.

The motivation and objectives of the reform are economic. It

opens to the private sector investments estimated, for the next

three years, in:

• 34.3 billion USD for oil and gas (upstream and transport)

• 31.6 billion USD for electricity.

In July the first oil and gas production sharing contract will be

awarded.

In January 2016 wholesale electricity market will start.

3

THE REFORM WAS URGENT

No more cheap and easy oil for Mexico.

Natural gas self sufficiency lost after 2000.

Oil Production2002 - 2013

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Demand

Production

Imports (right)

*Without oil industry consumptionSource: SIE

*

Natural Gas Demand(million cubic feet per day)

2000- 2014

4

THE TREND WAS TO BECOME A NET

IMPORTER

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012 2014

Bill

ion

s U

SD

Mill

ion

s U

SD

Petroleum products balance2000 - 2014

Petroleum products monthly balance2012 - 2014

-50

.8

-46

3.2 -9

71

.1

-1,000

-500

0

500

1,000

1,500

2,000

ene.

abr.

jul.

oct

.

ene.

abr.

jul.

oct

.

ene.

abr.

jul.

oct

.

2012 2013 2014

ELECTRICITY PRICES WERE HAMPERING

COMPETITIVENESS AND PUBLIC FINANCES

5

USA Mexico Subsidy

Domestic

Real Tariff

+73%

Overall

+123%

Nominal

Tariff

-25%

Average Tariff, 2013 1st Quarter(MX$/KWh)

Domestic High

ConsumptionCommercial Services Industrial

Source: Sener. SIE. DOE, EIA. Rates converted to Mexican pesos with an exchange rate of 12.64 pesos/dollar, 1Q2013

Country Ranking Country RankingKorea, Rep. 1° United States 61°Guatemala 18° Argentina 104°Brazil * 19° Mexico 116°Turkey 34° China 124°Chile 49° Russian Federation 143°

Getting Electricity Ranking

Source: World Bank, http://www.doingbusiness.org/rankings

6

OBJECTIVES OF THE REFORM

Oil and Gas

• Materializing the maximum possible wealth from

natural resources

• Price reduction

• Improving supply

Electricity

• Price reduction

• Improving supply

ENERGY REFORM PRINCIPLES

7

Don not reinvent the wheel.

Legal certainty for new and

previous participants.

Reduce costs through

efficiency and competition.

8

Working along with

markets rather than

against them.

Potential competition Free entry

Natural monopoly Regulated tariffs

Investments promotion and not stopping ongoing

projects

ENERGY REFORM PRINCIPLES

9

PEMEX AND CFE WILL BE JUST TWO

PLAYERS MORE

9

Private investment across oil, gas and power sector.

Previous to the reform Mexico and North Korea were the

only countries in the world whose energy industries were

state monopolies.

PEMEX and CFE migrate from

public entities to State Productive

Enterprises, with

modern corporate government

mandate of value creation

It’s a matter of incentives.

10

OIL AND GAS:

NEW INSTITUTIONAL SET UP

The Mexican State,

through SENER,

manages the country’s

oil and gas reserves

(selection of bidding areas)

Entitlements granted by

SENER to Pemex (Round Zero)

Service,

profit/production

sharing and license

contracts, awarded by

the National

Hydrocarbons

Commission (CNH) to

Pemex and/or the private sector

Permits for refining and

natural gas processing

(including

petrochemicals),

granted by SENER to

Pemex and/or the private sector

Permits for all

transportation, storage,

distribution and

commercialization

activities through

pipelines, granted by

the Energy Regulatory

Commission (CRE) to

Pemex and/or the private sector

Oil and Gas Reserves

Exploration and Production

Refining and Natural Gas Processing

Transportation, Storage, Distribution

and Commercialization

11

NEW ELECTRICITY INDUSTRY STRUCTURE

GenerationSystem and Market

Operation

Qualified

Users

Basic

Users

ConsumptionRetail

Private

Cogeneración

Supply to

regulated tariffs

Long Run

contracts

Spot Market

Auctions

and contracts

Transmission Distribution

PIEs

12

NEW INSTITUTIONAL ELECTRICITY SETUP

• Independent Operator forthe system and the market

• Network open access

• Especializad bodies

• Clear rules

• Market surveillance

• Impartial planning

• Transparency

A level playing field

NATIONAL INFRASTRUCTURE PROGRAM

(NIP) 2014 - 2018

New

18 natural gas transportation projects

10,000 kilometers of new pipelines

13.1 billions USD investment

Now 2018

13

LNG re gasification terminals in 2014

Pipelines 2014 Pipelines 2018

proposal for natural gas liquefaction / compression plant

proposal for natural gas re gasification / decompression plant

Sea route for natural gas supply

14

MEXICO AND USA ECONOMIES

Improvements in Mexico’s productivity may mean improvements all

over the region because of their economic ties.

China, 18.02%

Canada, 16.88%

Mexico, 14.64%

Japan, 6.57%

Germany, 5.75%

Rest of the

World, 38.13%

US imports2013

Mexico’s imports2013

Source: United Nations Commodity

Trade Statistics Database

, 65.7%

China, 8.4%

Germany, 3.5%

Japan, 2.8%

Canada, 1.5%

Rest of the World, 16.8%

Korea, 2.8

Value of US content in US imports from

selected Economies

Mexico 40%

Canada 25%

Malaysia 8%

China 4%

European Union

2%

Japan 2%

Source: Working Together,

Christopher E. Wilson, U.S. 2011.

15

OIL AND GAS PROVED RESERVES

12.0 17.3 17.2 17.1

304.6334.1

308.0338.3

4.4%

4.5%

4.6%

4.7%

4.8%

4.9%

5.0%

5.1%

5.2%

0

50

100

150

200

250

300

350

400

2011 2012 2013 2014

Mexico United States % World Reserves

Crude Oil Proved Reserves (Billion Barrels)

Proved Reserves of Natural Gas (Trillion Cubic Feet)

10.4 10.4 10.3 10.125.2 29.0 33.4 36.5

175.2 173.6 173.1 173.2

12.4%

12.8%

13.2%

13.6%

14.0%

14.4%

0

20

40

60

80

100

120

140

160

180

200

2011 2012 2013 2014

Mexico United States

Canada % World Reserves

16

NORTH AMERICA OIL AND GAS FIELDS

Analysis shows that Mexican geological formations are highly

correlated with commercially productive U.S. equivalents. Adding

proximity the most valuable experience for Mexico is that of U.S.

17

INVESTMENT IN OIL AND GAS

Oil and GasRound 1

First invitation to bidNext 5 years

16.7 billions USD

Second invitation to bidNext 3 years

4.5 billions USD

Pipelines 13.1 billions USD

18

POWER INDUSTRY NORTH AMERICA

OPPORTUNITIES

Clean Energy Certificates could be marketable between

U.S. and Mexico.

Private investors are able to participate in generation,

transmission contracts, distribution contracts, and retail

activities.

There is no power import / export restrictions. It’s possible

to generate energy in U.S. and export it to Mexico.

Last month the first power import authorization from a

plant located in the U.S. and connected exclusively to

Mexican grid was given.

19

INVESTMENT IN ELECTRICITY MARKET

2014 - 2028

Electricity

Generation27.1 billions USD

Next 3 years92.8 billions USD

Transmission4.5 billions USD

Next 4 years19.9 billions USD

Distribution 10.4 billions USD 34.4 billions USD

Total 42 billions USD 147.1 billions USD

20

REFORM: PROGRESS AND NEXT STEPS IN

ELECTRICITY

2014

October

Guidelines for Clean Energy Certificates

November

Assets transfer from CFE to CENACE

December

Interconnection criteria

2015

February

Wholesale Electricity Market Rules

2015

March

Clean Energy requirements for

2018

July

Assets transfer from CFE to

CENACE

Wholesale Electricity Market Operating Rules

October

Electricity Market Software Test

2016

January

Wholesale Electricity Market

Starts

The Rise of North America: A Global

Energy Powerhouse

Energy Reform in Mexico

Jesus Serrano LanderosComisión Reguladora de Energía, México