A more advanced oil and gas industry

Mexico

Mexican Secretary of Energy Pedro Joaquín Coldwell talks to TOGY about how the country’s 2014 energy reform has led to advances in the upstream sector, the subsequent opportunities that have opened up for Pemex, how the fuel transportation and retail market is being liberalised and the progress achieved in the opening of the power generation sector. The Secretariat of Energy (SENER) is responsible for developing Mexico’s energy policy.

• On Pemex’s farm-outs: “The farm-outs for production fields and exploration areas that were granted to Pemex in Round 0 are mechanisms that give the company more flexibility in its investment portfolio. By diversifying funding sources, it is easier to encourage the development of projects that were not feasible before.”

• On retail and distribution: “With the oil product market opening, we intend on going from a one-supplier model to a more open, competitive and robust model, in which multiple players can share the responsibility of supplying fuels throughout the national territory, and offer Mexicans a wide range of options to choose from, with regards to modern brands and service stations.”

Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Pedro Joaquín Coldwell below.

What has SENER achieved with the energy reform in Mexico’s upstream sector?
Throughout 2016, there were important breakthroughs regarding the implementation of the energy reform in the hydrocarbons, electricity and renewable energy sectors.
Regarding hydrocarbons exploration and extraction, Round 1.4 took place, drawing the attention of big international oil companies, which have proven capacities to make incursions into the deep waters and ultra-deep waters of the Gulf of Mexico. The four tenders of Round 1 were successful, as they led to the participation of 48 new companies from 14 different countries in the upstream sector. These companies have started to make up part of the Mexican industrial hydrocarbons system that we set out to form.
We hope to spark USD 49 billion in investments throughout the duration of the contracts that were awarded in Round 1. This amount will increase with Round 2, which is currently underway. That round includes two onshore tenders and one in shallow waters [that have already occurred]. Round 2.4 for deep waters is expected to occur in January 31, 2018.

What tools are at SENER’s disposal to increase hydrocarbons reserves and accelerate the development of Mexico’s oil and gas resources?
The energy reform gave the productive state-owned companies, Pemex and the CFE [Federal Electricity Commission], the tools they were missing in the past. In the upstream business of the hydrocarbons sector, Pemex can now diversify risks, acquire cutting-edge technology and complement financial and execution capacities for project development. It can also venture into new exploratory activities in high-risk border areas, such as deepwater and unconventional fields.
In this new scenario, one of the main tools Pemex will be able to make use of to increase hydrocarbons reserves is strategic alliances. Through these, Pemex will be able to create partnerships and participate in the tenders carried out by the National Hydrocarbons Commission.
Furthermore, the farm-outs for production fields and exploration areas that were granted to Pemex in Round 0 are mechanisms that give the company more flexibility in its investment portfolio. By diversifying funding sources, it is easier to encourage the development of projects that were not feasible before.
In parallel, the new strategy of the Five-Year Exploration and Production Plan 2015-2019 seeks to encourage participation of oil companies when choosing the areas that will be tendered. By including the industry’s expectations and the perceived feasibility of the nominated areas, we hope the quality of the offered blocks will increase and, in this way, keep the interest of the industry high.
Thanks to this new approach, we will continue to strengthen the conformation of a competitive industrial system, which will be added to Pemex’s current capacities.

What kind of partnerships has Pemex already become involved in?
Pemex was able to confirm two partnerships in Round 1. The first one was a farm-out in the Trion block, located in the Perdido Fold Belt and requiring an investment of around USD 8 billion. The second partnership was the first contract in which Pemex participated and won jointly with a large-scale oil company, Chevron.
The aforementioned achievement was one of the objectives set by the energy reform: Pemex should be able to create partnerships with other oil companies to split the geological risks, as well as attract capital, human resources and cutting-edge technology to establish itself in the international market.
Regarding the transformation of hydrocarbons, Pemex recently settled its first partnership for hydrogen supply to the Miguel Hidalgo refinery in Tula for 20 years. As a result, unscheduled downtime will decrease and oil refining capacity will increase.

What policies is SENER considering to further incentivise the development of an independent logistics infrastructure for crude oil and refined fuels?
The energy reform has opened the hydrocarbons sector to private investment, allowing private companies, together with Pemex, to participate in the industry’s value chain activities.
In relation to oil products, the increasing needs of consumers requires us to modernise existing structures and build new ones for fuel storage and transportation.
Regarding the logistics facilities, the opening of the sector is sending positive signs to the market that are encouraging private companies to start projects aimed at extending the pipeline network for transportation of fuel and diesel. In this way, the new private system will complement the existing one that is operated by Pemex.
With this change, we will be able to gradually reduce the use of tank cars and other transportation methods that are more expensive and less efficient than oil pipelines, which will result in more competitive prices for oil products for the final consumer.

What are the near-term market implications of the government’s decision to liberalise fuel prices?
The lack of modernisation and extension of the infrastructure system for storage and logistics of oil products have made them obsolete, limited our capacity and led to expensive distribution logistics, which are also insufficient in meeting the increasing fuel needs of the country.
SENER has been working on these issues to guarantee a continuous and reliable fuel supply. To achieve this, we issued a new storage policy, with a progressive objective of reaching a minimum 15-day inventory in 2025. With this measure, we want to encourage the modernisation of storage and transportation infrastructure, and try to bring in more investors for the development of a private sector that is regulated by the government and that can coexist with Pemex and allow us to strengthen the country’s energy security.
With the oil product market opening, we intend on going from a one-supplier model to a more open, competitive and robust model, in which multiple players can share the responsibility of supplying fuels throughout the national territory, and offer Mexicans a wide range of options to choose from, with regards to modern brands and service stations.

How has the energy reform manifested in the power generation sector?
The CFE is allowed to transform electrical plants so that they can run on natural gas instead of fuel oil or diesel.
The short-term wholesale electricity market started operating on January 1, 2016, and we already have several private companies participating. Those companies complement the CFE subsidiaries and its affiliate. As of mid-2017, a total of 21 companies are operating as generators and suppliers, while 16 others are in the process of becoming operational.
In the long-term market, we have concluded two electrical tenders, which we considered to be essential for Mexico to start moving towards clean energies. Through these two tenders, we have assured that the 34 winning companies will put into operation 52 new plants in the next three years, investing around USD 6.6 billion. In this way, there will be a 170% increase in infrastructure for the generation of solar and wind energy, which has been developing in the country for the past two decades. At the beginning of this year, we made the third tender public, in which different companies besides the CFE will be able to acquire clean energy.
To electrify the poorest areas of the country where 1.8 million people live, the Universal Electrical Service Fund was founded, through which we will finance the installation of solar panels and small local networks for electricity distribution.

What specific measures will SENER employ to lower overall electricity costs and incentivise more private participation in the power market?
We have two main measures. The first is to convert the most obsolete and polluting plants to be able to use clean technologies and natural gas, which is a highly efficient and cleaner fuel, when compared with other fossil energy resources. The second measure is to eliminate barriers to market entry for private companies interested in power generation and supply, including those that use renewable energies.
Regarding the first measure, the CFE is turning seven electrical plants into dual plants. Until now, those plants ran on fuel oil. From now on, they will be able to run on natural gas as well. Furthermore, the company will build nine additional combined-cycle plants, working towards the same objective.
To be able to transport the natural gas to these electrical plants and the industry as a whole, we are encouraging the expansion of the national gas pipeline network, which will allow us to supply fuel around the country with more competitive prices. To date, an investment of USD 12 billion has already been confirmed for a total of 7,372 kilometres of pipelines, of which 2,386 kilometres are already operating.
Regarding the second measure, in 2016, the wholesale electrical market started operating. In the short-term market, which is related to daily transactions, we have the CFE working alongside private companies in the generation and supply of basic, qualified services. To date, we are working with 28 companies, 18 of which are private. We are waiting for another 17 to start working.
Regarding the long-term market, we are carrying out tenders focused on electricity and whose main objective is to encourage the generation of clean energy across the country. To date, we have successfully concluded two tenders for this, in which we have achieved highly competitive prices for renewable energies.

What is your assessment of the current institutional capacity and interagency collaboration to be able to effectively develop and fine-tune public policies?
The energy reform created new institutions and made the already existing ones stronger. The National Centre for Energy Control, or Cenace, and the National Centre for Natural Gas Control, known as Cenagas, work as technical bodies for the creation of energy markets. The Mexican oil fund administers oil income, ASEA [National Agency for Safety, Energy and Environment] controls regulations on environmental security, and the National Hydrocarbons Commission and Energy Regulatory Commission have acquired new regulatory power. All these players define the rules and processes to encourage competition and the entrance of new players.
There are still pending challenges to perfect the design and daily operation of the regulatory bodies. Recently, the Organization for Economic Co-operation and Development published specialised research in which it suggested an improvement of interinstitutional co-ordination, minimising duplicities and consolidating the legal framework, especially the one that governs ASEA, which is currently constituted by 11 laws and 12 regulations.

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