Consolidating Energy Reform in Mexico

Consolidating Energy Reform in Mexico

Mexico ended 2016 with an optimistic trajectory as expectations were exceeded in December’s deepwater oil & gas bidding round and the concurrent auction for the Trion project in partnership with Pemex. However, the changing calendar did not alter the important questions surrounding the consolidation of the country’s energy reform measures, as well as the institutional and regulatory environment as 2017 unfolds.

Indeed, Mexico’s energy reform is, now more than ever, a subject of great importance thanks to its rapid evolution and progress. The progress to date has also meant that on several levels it has entered a critical consolidation period, particularly as Mexico heads into a presidential election cycle in 2018.

These issues spurred spirited debate and discussion at the Institute of the Americas’ annual Mexico Energy Roundtable, held on February 28 in Mexico City.

The latest phase of the unfolding energy reform in Mexico presents its own unique challenges and could be one of the most complex stages given the focus on strengthening institutions, ensuring transparency, boosting investment and continuity in the oil and gas sector in Mexico.

One of the essential issues discussed was the excessive bureaucracy that companies and operators in the energy sector must now manage. The existence of multiple regulators and regulatory overlap often means having to obtain a variety of permits and approvals, in some cases almost identical requirements are required from different agencies.
Beyond the need to strike the right balance between regulation and investment, the discussions also pointed to the critical importance and attention of dialogue among the full range of relevant actors in the country. There was consensus across the panels with speakers from government, industry and academia all noting the acute need in the country for adequate dissemination and communication strategies for reaching society as a whole and reporting on the results. Indeed, communication efforts underscoring greater transparency regarding the reform measures, decisions and actions being taken by the regulators, government and Pemex are of utmost importance.

In addition, a report released in February by the Organization for Cooperation and Economic Development (OECD) set forth a series of recommendations for regulatory agencies in Mexico. The report was frequently cited during the roundtable and particularly the key recommendations:
• The importance of consolidating the work of regulatory bodies, which should promote the operation of the Energy Sector Coordination Council (CCSE) in order to minimize duplication of work.
• The essential need to create a one-stop shop for licensing and permits.
• The need to modify the legal framework of the Agency for Security, Energy and Environment, ASEA.
• The imperative for the three regulatory agencies to develop multi-year budgets to maintain fiscal autonomy, enjoy stability and facilitate long-term planning while avoiding unnecessary political pressure or influence.
• Maintain a structured dialogue between the regulators and the congress.

Finally, industry representatives underscored that to achieve the overarching goals of energy reform and its consolidation, regulation must be clear, sensible, responsible and practical. These characteristics are the key to success and also indispensable for having the best science and technology, consultative processes, innovation and openness to change.

Mexico has moved ambitiously and expeditiously on energy reform and while there are many opportunities, there will be many additional demands and requirements placed upon all stakeholders. Clearly, the tireless efforts committed to date in Mexico to reach this point will certainly need to continue.

Mexico Celebrates Oil Auction Bidding Bonanza

Mexico Celebrates Oil Auction Bidding Bonanza

Jeremy Martin
Vice President Energy & Sustainability

As the deepwater oil and gas auction came to a close today, momentous, significant, and historical were but a smattering of the adjectives flying around Mexico City and indeed the global energy world.

With the final block adjudicated just before Mexican lunch hour, the success in terms of winning bids, competition and diversity of bidders was clear for all at Mexico City’s Centro Banamex and watching the livestream to see.

Eight of the ten blocks on auction and the farm-out and partnership with Pemex were successfully tendered exceeding the government’s expectations and estimates of many across the industry. The pensive expressions and slightly stooped shoulders of Mexico’s energy authorities that began the day had turned into wide smiles, upright posture and a spring in their step. Winning bidders could also be seen exchanging hugs and handshakes.

The story lines are plentiful as the ink dries on nine long-term multi-billion dollar bids and opportunities to develop projects in Mexico’s deepwater side of the Gulf. But here are seven immediate takeaways that will be worth watching as the new industry dynamics in Mexico unfold, euphoria ebbs, and the daunting work ahead begins on the massive and challenging projects.

  1. The Mexican government is thrilled. Secretary of Energy Pedro Joaquin Coldwell had indicated they would be happy if four of the ten blocks were awarded. Instead, the authorities awarded eight of the ten to a diverse group of bidders from across the globe. Additionally, the first ever Pemex farm-out and source of much innuendo, Trion, was awarded to BHP Billiton based upon their winning payment to Pemex of $624 Million after the Australian firm’s bid and BP’s had tied in terms of additional royalty commitments – each had bid 4%.
  2. Oil price headwinds and capital constraints remain an important part of the context for today’s auction, but given the diversity and size of the bids tendered, it will not be needed as a scapegoat for the Mexican government. Indeed, today offered a strong argument that in a capital constrained global energy market, large projects can still be successfully tendered when the materiality and fiscal terms line up sufficiently to draw investment.
  3. Mark Twain famously remarked his death had been greatly exaggerated. On the heels of a $624 Million commitment from its new partner, BHP Billiton, plus their contribution to cover Pemex’s roughly $570 Million investment in Trion, the imminent demise of Mexico’s national oil company may have been similarly exaggerated. Yes, the company is struggling financially and with oil production but it proved today that it is still relevant as projects with BHP Billiton and Chevron & Inpex underscore, the latter as part of consortium led by Chevron. For years, many have underscored the imperative for Pemex to work side by side and as part of a major international consortium to learn firsthand the best practices and operational excellence of the oil and gas industry. That appears poised to become reality.
  4. In line with the three preceding auctions and bidding, the National Hydrocarbons Commission (CNH) and Mexican government achieved transparency in how the deepwater auction was conducted. A highly rigorous qualification and adjudication process left few doubts as to the validity of bids and their objectivity. The terms and process also produced an important level of competition, particularly for the Salina Basin opportunities.
  5. China is in the house – CNOOC was the early story with two aggressive bids to win two of the four Perdido Fold blocks. And, in what is a bit of break from its posture in Latin America’s upstream of late, the Chinese NOC was a sole bidder as operator and did not participate in consortium. By itself, it will develop two deepwater projects in the Perdido Fold.
  6. Sierra Oil & Gas has carved out an important role in Mexico’s post-reform upstream landscape with participation in two more blocks bringing their total to four in the Round One auction when added to their success in the first ever auction in July 2015. Indeed, they proved the most aggressive and committed bidder with bids that far exceeded the minimum additional royalty terms established by the government.
  7. The deepwater auction was always supposed to attract the globe’s largest upstream oil and gas firms – the so-called majors — and it delivered on that score with the likes of BP, ExxonMobil, Chevron, Total, Statoil, CNOOC, and Petronas all emerging as winners.

Mexico Biders Winners Graphic

Today was a success but the real metrics and analysis to determine success will not be possible for several years. Indeed, the congratulations and victory laps are well-deserved across the Mexican government and industry, but a dose of realism as to the long-term horizon for these projects and when investments will translate into oil and gas production bears noting.

But there will be plenty of time for our customary Mexico and Pemex navel gazing and hand wringing. Today we celebrate Mexico. Let’s all raise a glass and mark December 5 as a historic day for the future of the country’s oil and gas industry.

Panama Canal as Disruptor

Panama Canal as Disruptor

La Jolla – Disruptors are not just for the tech industry anymore. Speaking at the Institute of the Americas on July 22, United States ambassador to Panama, John D. Feeley, called the $5 billion dollar expansion of the Panama Canal a “disruptor of international commerce.”  Ambassador Feeley’s remarks centered on what he called the three reasons to be interested in Panama: history, prosperity and US foreign policy.

Amb. Feeley was quick to note that the US and Panama have a long history and the two nations are inextricably linked; he added that the historical connection goes back to long before the Panama Canal. Indeed, he underscored the role Panama played, and the Trans-isthmian railroad, as a primary route for Americans to get from the East Coast to California for the gold rush in the middle part of the 19th Century. More recently, the epic construction and operation of the Panama Canal was a major piece of interconnection between the US and Panama, eventually culminating in the Carter-Torrijos agreement that saw the US hand over the Panama Canal and its operations to full Panamanian control at the end of 1999.

Opened on June 26, the expansion of the Panama Canal was a 10 year plus infrastructure project that cost over $5 billion and is the aforementioned disruptor. The expanded Canal will shave between 12-14 days off shipping times from the US East Coast. Additionally, it will considerably reduce shipping time for liquefied natural gas (LNG) exporters from the US Gulf Coast to Asian buyers. But it is also the center piece of Panama’s prosperity.

Panama has for several years been a leading economy in the region with GDP growth averaging around 8% per year and GDP per capita steadily climbing each year. Much of the country’s prosperity is linked to the Canal, its expansion, but also a broader services industry. Counting no significant natural resources, Panama has developed an economy focused on services and, as Amb. Feeley put it, “being useful” to global commerce.

When it comes to US foreign policy, Panama has long played an outsized role for the nation of just under 4 million at the intersection of Central America and South America.  Indeed, as Amb Feeley noted in discussing the historical connection, even prior to independence from Colombia, the Isthmus was instrumental for US citizens heading to the West Coast, but with the development of the Canal came a critical juncture.

Panama was home to not only the Canal and the Canal Zone, a 10 mile wide swath of US territory cutting through the middle of the country, but also found in Panama were several vital US military assets including the headquarters of the US military’s Southern Command. The 1989 invasion and removal of Manuel Noriega on drug trafficking charges to stand trial in the US also is a key moment in the country’s connection to US foreign policy.

More recently, the Panama Papers, the leak of thousands of pages of law firm information regarding offshore accounts and tax evasion has brought international attention to Panama. The name, which unfortunately invokes Panama due to the location of the Mossack Fonseca law firm, is really a conversation on global tax policy and international banking underscored Amb. Feeley. He added that it is not an issue directly related to Panama per se.

Amb. Feeley exuded a tremendous amount of optimism for Panama’s outlook and implored everyone in attendance to consider the country and what it has to offer, not just in terms of business and commercial opportunities, but also tourism and historical attractions.

Mexico Celebrates Oil Auction Bidding Bonanza

Mexico Celebrates Oil Auction Bidding Bonanza

Jeremy Martin
Vice President Energy & Sustainability

As the deepwater oil and gas auction came to a close today, momentous, significant, and historical were but a smattering of the adjectives flying around Mexico City and indeed the global energy world.

With the final block adjudicated just before Mexican lunch hour, the success in terms of winning bids, competition and diversity of bidders was clear for all at Mexico City’s Centro Banamex and watching the livestream to see.

Eight of the ten blocks on auction and the farm-out and partnership with Pemex were successfully tendered exceeding the government’s expectations and estimates of many across the industry. The pensive expressions and slightly stooped shoulders of Mexico’s energy authorities that began the day had turned into wide smiles, upright posture and a spring in their step. Winning bidders could also be seen exchanging hugs and handshakes.

The story lines are plentiful as the ink dries on nine long-term multi-billion dollar bids and opportunities to develop projects in Mexico’s deepwater side of the Gulf. But here are seven immediate takeaways that will be worth watching as the new industry dynamics in Mexico unfold, euphoria ebbs, and the daunting work ahead begins on the massive and challenging projects.

  1. The Mexican government is thrilled. Secretary of Energy Pedro Joaquin Coldwell had indicated they would be happy if four of the ten blocks were awarded. Instead, the authorities awarded eight of the ten to a diverse group of bidders from across the globe. Additionally, the first ever Pemex farm-out and source of much innuendo, Trion, was awarded to BHP Billiton based upon their winning payment to Pemex of $624 Million after the Australian firm’s bid and BP’s had tied in terms of additional royalty commitments – each had bid 4%.
  2. Oil price headwinds and capital constraints remain an important part of the context for today’s auction, but given the diversity and size of the bids tendered, it will not be needed as a scapegoat for the Mexican government. Indeed, today offered a strong argument that in a capital constrained global energy market, large projects can still be successfully tendered when the materiality and fiscal terms line up sufficiently to draw investment.
  3. Mark Twain famously remarked his death had been greatly exaggerated. On the heels of a $624 Million commitment from its new partner, BHP Billiton, plus their contribution to cover Pemex’s roughly $570 Million investment in Trion, the imminent demise of Mexico’s national oil company may have been similarly exaggerated. Yes, the company is struggling financially and with oil production but it proved today that it is still relevant as projects with BHP Billiton and Chevron & Inpex underscore, the latter as part of consortium led by Chevron. For years, many have underscored the imperative for Pemex to work side by side and as part of a major international consortium to learn firsthand the best practices and operational excellence of the oil and gas industry. That appears poised to become reality.
  4. In line with the three preceding auctions and bidding, the National Hydrocarbons Commission (CNH) and Mexican government achieved transparency in how the deepwater auction was conducted. A highly rigorous qualification and adjudication process left few doubts as to the validity of bids and their objectivity. The terms and process also produced an important level of competition, particularly for the Salina Basin opportunities.
  5. China is in the house – CNOOC was the early story with two aggressive bids to win two of the four Perdido Fold blocks. And, in what is a bit of break from its posture in Latin America’s upstream of late, the Chinese NOC was a sole bidder as operator and did not participate in consortium. By itself, it will develop two deepwater projects in the Perdido Fold.
  6. Sierra Oil & Gas has carved out an important role in Mexico’s post-reform upstream landscape with participation in two more blocks bringing their total to four in the Round One auction when added to their success in the first ever auction in July 2015. Indeed, they proved the most aggressive and committed bidder with bids that far exceeded the minimum additional royalty terms established by the government.
  7. The deepwater auction was always supposed to attract the globe’s largest upstream oil and gas firms – the so-called majors — and it delivered on that score with the likes of BP, ExxonMobil, Chevron, Total, Statoil, CNOOC, and Petronas all emerging as winners.

Mexic Energy Winners Bid List

Today was a success but the real metrics and analysis to determine success will not be possible for several years. Indeed, the congratulations and victory laps are well-deserved across the Mexican government and industry, but a dose of realism as to the long-term horizon for these projects and when investments will translate into oil and gas production bears noting.

But there will be plenty of time for our customary Mexico and Pemex navel gazing and hand wringing. Today we celebrate Mexico. Let’s all raise a glass and mark December 5 as a historic day for the future of the country’s oil and gas industry.

Managing Expectations – XXV La Jolla Conference

Managing Expectations – XXV La Jolla Conference

As the 25th annual La Jolla Energy Conference approached, the landmark climate agreement reached in Paris dominated headlines and pervaded the energy world. The focus on decarbonization and emissions reduction, and particularly the role of technology in the global energy transition cut across the Conference’s panels and discussions on May 25-26, and clearly was on the minds of attendees.

But the need to manage expectations also emerged as a central theme, whether in terms of the Paris Accord, renewable energy, oil prices, Latin America’s upstream, Argentina, or the future of transportation. Thinking about energy, as State Department Deputy Assistant Secretary for Energy Diplomacy Robin Dunnigan noted, is critical and particularly so for managing expectations surrounding the intersection of national security and energy.

The Paris Agreement and nationally determined contributions, or NDC’s, have been roundly applauded for the bottom-up approach. The discussions at La Jolla concurred with the critical nature and great value in this element of the agreement.  But as Professor Tim Duane aptly noted, the Paris Agreement is like a plane where all the passengers have agreed it’s time to land, but the destination and at what pace demand determination. Managing expectations will be required.

State Department Deputy Assistant Secretary for Energy Diplomacy Robin Dunnigan and Roger Tissot, Research Fellow at the King Abdullah Petroleum Studies and Research Center (KAPSARC) discuss energy security and cooperation with Energy Program Director Jeremy Martin.State Department Deputy Assistant Secretary for Energy Diplomacy Robin Dunnigan and Roger Tissot, Research Fellow at the King Abdullah Petroleum Studies and Research Center (KAPSARC) discuss energy security and cooperation with Energy Program Director Jeremy Martin.The State Department’s Robin Dunnigan spoke in bold terms about the energy transformation occurring in the United States and its impact on foreign policy and diplomacy. As the US has reasserted itself as an energy super power, so has energy security grown in terms of impact and importance for foreign policy. The State Department, along with several other US government agencies, are working on myriad programs across the globe to boost energy security, access to energy, regional energy integration and the deployment of renewables and emissions reduction initiatives.

Volatility in commodity markets, and particularly oil prices, continues to cast a long shadow over the hemisphere and globe. But despite the continued commodity price downturn, Gil Amengualof Solar Turbines noted that mining economies in Latin America such as Chile, Peru and Colombia have demonstrated greater diversification than their oil exporting brethren, and thus a more positive economic growth outlook.

In their assessment of oil prices and markets, panelists asserted that OPEC still matters and, according to Pedro Haas of Hartree Partners, the cartel has proved itself extremely resilient. More broadly, oil markets are facing a question of peak demand now instead of peak production.

The need to manage expectations when it comes to the price of oil, and what it means for National Oil Companies and economies in Latin America is of utmost importance. Nowhere is this more evident than at Pemex. Gustavo Hernandez’s call for partners as Pemex develops opportunities in the new upstream environment in Mexico was emphatic and consistent throughout his remarks.

Gustavo Hernandez of Pemex highlights the importance of partnerships for the company during the question and answer session with Energy Program Director Jeremy MartinGustavo Hernandez of Pemex highlights the importance of partnerships for the company during the question and answer session with Energy Program Director Jeremy MartinBeyond the role of NOC’s, Latin America’s upstream continues to face challenges. Panelists agreed that given the price environment, and particularly when it comes to deepwater, the industry will become more selective. Expectations must be managed by companies and governments seeking to attract investment, such as Mexico’s Round One and efforts in Colombia, Peru and Argentina, given the constraints on capital to invest in exploration.

Argentina has emerged from more than a decade of a statist and interventionist energy model. Secretary of Strategic Energy Planning, Daniel Redondo, admitted that there may still be perceived risks when it comes to investing in Argentina but he emphasized that the new government was committed to a model of competitive markets, effective regulation, and with a focus on ramping up renewable energy. He asserted that waiting to invest might not guarantee opportunity and reminded attendees that investing early has significant upside.

At the same time, major advances in deployment of renewable energy and electric vehicles, and increasingly competitive costs for these technologies added to the narrative. Renewable energy has seen huge increases in investment despite the persistent downturn in the price of oil. Many speakers pointed to this as a paradigm shift. Similarly, while low oil prices may slow electric vehicle sales, it will not kill them.

Orlando Ribeiro of Petrobras responds to a question about Brazil’s upstream as BP’s Felipe Arbelaez, Berkeley Research Group’s Walter Pesenti and Energy Program Director Jeremy Martin look on. Orlando Ribeiro of Petrobras responds to a question about Brazil’s upstream as BP’s Felipe Arbelaez, Berkeley Research Group’s Walter Pesenti and Energy Program Director Jeremy Martin look on.Channeling the theme of managing expectations, Adrian Katzew of Zuma Energia, while touting the April power auction in Mexico and huge gains in cost reduction for renewables, underscored that to be competitive, prices must be at $40 per megawatt hour. He added that storage and intermittency, as well as a focus on enhancing electric grid infrastructure must be taken into account.

The Conference’s final session brought together a series of themes that had echoed throughout the panels and sidebar discussions: the role of technology, decarbonization and the future of energy. In particular, when it came to the element of managing expectations, Tom Doughty from California’s Independent System Operator (CAISO) spoke of CAISO’s efforts to balance peak demand and the so-called Duck Curve, that is the increased load from renewable energy and distributed generation being fed into the California system.

Panelists agreed that technology and data could also provide much of the solution to meeting these issues across the hemisphere. Indeed, energy storage remains one of the key pieces to managing expectations for renewable energy, but also the future of energy markets in the Americas and across the globe.

But CAISO’s Doughty emphasized that the most important expectation power systems and the energy sector across the Americas must manage is that of reliability. Consumers expect the lights to come on when they flip the switch. And all panelists agreed that consumers are more informed, discerning, and better able to manage their energy needs than any time in history.

Argentina’s Evolving Energy Outlook

Argentina’s Evolving Energy Outlook

BUENOS AIRES – Mauricio Macri’s election in late 2015 sent shockwaves across the hemisphere and unleashed a torrent of optimism. Indeed, there was a period of euphoria as he announced his cabinet, economic team and desire to pursue unity and reset Argentina’s regional and global standing. President Macri embraced the expectations for his administration when, during remarks to open this year’s legislative session in Argentina, he said that his government will change the country’s history.

Quickly focusing on the nation’s nearly bankrupt energy sector makes good sense for the Macri administration. Not quite 100 days into his term optimism abounded, as did the necessity to focus on the enormity of the needs for the nation’s energy sector that has ushered in an increasingly workmanlike atmosphere. That was the clear consensus across two days of intense discussions at the Argentina Energy Roundtable convened by the Institute of the Americas on March 9 and 10 in Buenos Aires.

Throughout the election, the Macri campaign made clear their intentions with regards to revitalizing the country’s economic outlook, investment climate and particularly the energy sector. Since assuming power in December, the government has moved swiftly on a variety of fronts from navigating a path to a solution for the long-standing impasse between Argentina and international creditors and confronting onerous capital controls, the country’s currency, export duties and jury-rigged inflation statistics.

The Macri government also brought a technical seriousness to the nation’s energy bureaucracy, as well as a strong push to move beyond the “disorder” and “poor management” they inherited. There have been clear marching orders from the top as the administration works to “normalize” the many government institutions that had languished for years.  In addition, little time was wasted to confront strongly entrenched market distortions and massively costly inefficiencies in the country’s energy system.

Over the last few years, energy contributed around 5 percent of the nation’s GDP, 6 percent of its export revenue and 17 percent of imports. Indeed, the interconnection between the nation’s fiscal imbalance and the cost of energy subsidies and imports was clear and demanded immediate attention. Energy subsidies cost on the order of 12% of all government spending in 2014 while energy imports that same year totaled $6 billion.

President Macri assumed power with a clear understanding that these statistics must be met head on if the country is to revitalize the energy sector and use it as a motor to jumpstart economic growth and be a significant driver of reform.

Only days after taking office in December a state of emergency was declared for the nation’s electric system to avoid what the energy minister called the possible collapse of the system. The presidential decree granted powers through the end of 2017 in an effort to stave off outages, deal with the challenges of the market distortions, and begin medium and long term planning for the system.

As part of the emergency decree, the government also moved swiftly to complete a campaign promise to liberalize prices in the electric sector and deal with the long-standing problem of distortive subsidies.  New prices for the national wholesale power market were introduced in January covering the three months between February and March. Further cuts to electric subsidies are likely later this year in an effort to move electric prices toward more market based rates. The goal in confronting these distortions and fiscal issues is to foster a more attractive investment climate and one that overturns years of confrontation between the government and private investors.

Another early move that was applauded by markets and the investment community, was the government’s creation of a ministry of energy and mining. The new ministry brought into government a wide range of experienced practitioners and energy sector veterans. The ministry replaced a Secretariat of Energy that had ceased to provide policy direction or vision.

As part of the new ministry, several new secretariats and undersecretariats were created including a renewable energy undersecrariat that will work to comply with the national goal of 8% renewables by 2017, a secretariat of energy scenarios to manage energy planning in the medium and long term (15-40 years) and an undersecretariat for energy savings and energy efficiency, which seeks to reduce consumption by 5% by 2020.

Though still early days, the Macri government has clearly been busy in an earnest effort to construct a vision for the energy sector. The first draft, along with several first steps, is in place with the formal energy outlook for the government set to be finalized and published later this year in September.

A key tenet was set forth in opening remarks at the Roundtable by Secretary of Strategic Energy Planning Daniel Redondo: Energy planning and projects must balance supply and demand in Argentina at the same time as reducing imports and supporting modest GDP growth.

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