MEXICO: An Introduction to Energy & Natural Resources

THE ENERGY SECTOR TOWARDS A NEW FEDERAL ADMINISTRATION 

As of the date of this introduction, a new federal administration has been elected; and while Andrés Manuel López Obrador – the elected President – is preparing to take office, it is relevant to analyse the achievements and merits of the 2013 Energy Reform.

As acknowledged by various global organisations, including the International Energy Agency (IEA): the reform has brought (i) a robust institutional design and a set of specialised laws and regulations that provide legal certainty for all participants in the energy sector; and (ii) nearly US$200B of already committed investment in the country.

It is no secret that at the beginning of President Peña’s administration the development of the energy sector in Mexico and the then current energy policy was fully dependent and inclined towards the role that Pemex and CFE could undertake in the forthcoming years. The lack of capital, the limited investment and the lack of access to new technologies were the main concerns that would represent a meltdown of the energy industry in Mexico, with the results that that would have meant in Mexico’s economy.

HYDROCARBONS SECTOR 

The success of the energy reform has been particularly notable in Mexico’s E&P sector. Since 2015 over 332,000 km of new 2D seismic data has been obtained, which represents over three times of all the 2D seismic data that Pemex had accumulated to that year. Similarly, almost 90,000 km2 of 3D seismic data have been obtained, which means a fourfold increase in the same 3 year period. Currently nearly 40 companies continue to work in the analysis and processing of data.

CNH’s bidding rounds have awarded 107 contracts to 73 companies, which to this date has represented earnings for the country of US$304.9M, with US$4B of committed investment in the short term (as per the bidding rules) and an overall approved investment of US$12B.

Pursuant to the awarded contracts, 138 exploration and development oil wells have been committed; estimations indicate that during the 2018–2021 period, 24 new wells will be drilled each year – which represents a record volume for the last 30 years.

Since the reform was enacted, 49 new oil field have been discovered with total reserves of 917 mmb and 2,041 mmmpc.

The transformation has also reached the distribution and commercialisation in service stations, where out of the 11,000 stations currently operating in the country 2,100 (nearly 20% of the total) are operating through new brands, and four companies are actively importing oil from the USA through Tijuana Reynosa, Nuevo Laredo and Nogales.

ELECTRICITY AND RENEWABLES 

After three successful long term auctions, a committed investment of US$8.6B will result in the creation of 65 new power plants, mainly photovoltaic and wind power. With this pace, the estimated generation of energy from clean sources for 2020 is expected to reach 7,000 MW –which represents 10% of the current national electric system.

By the end of 2017, 21.08% of the electric power was generated through clean sources. Fossil generation grew by 2.07% while clean power grew 6.89% in the same period. Installed capacity of clean sources reached 22,327.30 MW, which represents 29.5% of the total national capacity. Hydroelectric plants represent 16.70% of the total national capacity, followed by wind power plants which represent 5.55%.

It is expected that, as a result of the awarded projects in the first three long term auctions, the installed capacity will increase by 7,000 MW during 2018 and 2019.

In this respect, it has to be noted that according to the new federal government Nation’s Plan, proposals with respect to the electricity and renewables sectors are centred on the principle of accelerating the transition towards the use of renewable energy sources. Geothermic, wind power, hydroelectric and solar energy sources are planned to be encouraged. The Nation’s Plan also acknowledges that Mexico has been seriously affected by the climate change effects. Full commitment towards Mexico’s Paris Agreement undertakings seems to be guaranteed.

However, a real transformation of the energy sector demands a major challenge in attracting investment to the national electricity transmission network to interconnect areas of the country’s geography with high potential for development of clean energy infrastructure.

The 2013 reform aimed towards allowing private investment into the sector. Currently, the participation of private entities and investors in the generation and commercialisation of electricity is allowed, while the policy planning and control of the National Electric System as well as the transmission and distribution services remain strategic areas reserved for the State.

FINAL THOUGHTS 

The 2013 Energy Reform was the acknowledgement that neither Pemex nor CFE are superheroes and that a healthy and competitive ecosystem of companies, regulators and policy makers is a successful manner to have efficient and sustainable markets in the long term.

The Energy Reform was clearly a double approach to revolutionise Mexico’s Energy sector in an integral manner: on the one hand, mechanisms were set to foster the generation of clean energy, a Wholesale Electricity Market was created to be opened to free participation and the auctions triggered large investments for long term projects; on the other hand, the upstream rounds attracted unprecedented levels of private investment in the E&P sector, while midstream and downstream activities have begun to reflect the interest of private participants.

Most of the expected investment figures and scale growth can only be the result of the strict continuity of a bold system of regulators and policy makers, together with an ever-increasing ecosystem of operators of numerous calibres and nationalities; thus, the new federal administration under the lead of the elected president López Obrador – who has openly questioned the Energy Reform – have a challenging task to give continuity to the growth plans and expectations, while respecting the acquired rights of the current investors and contractors, through their own approach to the future of the sector in Mexico.