Mexico’s Fuels Market and Infrastructure – A Complex Transition

Mexico’s Fuels Market and Infrastructure – A Complex Transition

Mexico’s energy reforms have brought a major overhaul of the nation’s entire energy sector. Among the myriad changes being implemented, major opportunities have emerged with regards to Mexico’s fuels and liquids market, as well as infrastructure development associated with fuel sales, supply, storage and distribution. Mexico’s fuels market is the fourth largest in the world and has experienced considerable growth in the last several years making it attractive to a wide-range of companies and investors. Growth is driven by transportation, power demand and underpinned by strong population growth.

Last year saw several deregulation milestones met on the path toward a liberalized fuel market, as well as important advances in open seasons aimed at ultimately boosting related infrastructure, both in liquid fuels and natural gas.  In what has become a rapidly changing market, a growing list of international companies, traders and Mexican firms have begun to develop projects with an eye to establishing themselves in Mexico’s fuel and liquids business.

This “complex transition” was at the center of three high-level discussion panels hosted by the Institute of the Americas on February 27 in Mexico City and attended by over 90 representatives from industry, government, and academia.

Panelists generally agreed that development of the fuel market was on the right track and that the reform measures had boosted investment in energy infrastructure. The proliferation of new market players (40 brands as of this week) in the fuel retail market and the choices being created for consumers is important.

But, there was less consensus on whether Mexico would soon see a truly competitive fuels market that could fully serve the growing demand in Mexico and its citizens, not to mention what the key next steps should be before the July elections. In an interesting development, several speakers put on the table the need for further energy reform in Mexico. Panelists also argued that government and industry alike must continue to aim for efficiency, continuity, stability and long-term regulatory certainty.

Event Summary: The Trump Administration, Latin America and Energy: Mexico, Natural Gas and LNG Exports

Event Summary: The Trump Administration, Latin America and Energy: Mexico, Natural Gas and LNG Exports

Energy continues to be a bright spot in the US-Latin America relationship and new developments, like an uptick in US LNG exports, offer opportunities to increase energy security and cooperation across the Western Hemisphere, said panelists at an event co-hosted by the Inter-American Dialogue and Institute of the Americas on December 15th.

Energy plays a central role in bilateral and trilateral cooperation with Mexico and Canada. The United States is working to expand this cooperation through increased data sharing for cross-border transmission, generation, and renewable energy mapping, as well as through technology sharing for carbon capture and storage, noted Department of Energy Deputy Assistant Secretary Beth Urbanas.

The three countries work on energy issues both trilaterally and through larger multilateral efforts like APEC and the G20. Mexico also recently joined the International Energy Agency and the North American Electric Reliability Corporation (NERC), providing two additional avenues for cooperation. Mexico joining NERC benefits both Mexico and the United States, noted Mark Nelson, regional vice president and director of issues management at Sempra, as Mexico can help provide system reliability and voltage support to the United States in times of energy distress.

Investment by US companies in Mexico following its energy reformhas also strengthened bilateral energy ties. Oil majors are entering the downstream space in Mexico, even though they are largely divesting from those assets in other countries, said Carlos Sole, partner and Latin America practice co-chair at Baker Botts.

A recent uptick in US natural gas exports represents another significant opportunity for US-Latin America energy trade and investment, said John McCarrick, deputy assistant secretary at the Department of State’s Bureau of Energy Resources. LNG exports – which began in earnest just last year – reached 465 billion cubic feet in the first 9 months of 2017, already 2.5 times greater than total 2016 LNG export volumes. LNG exports are projected to reach 4.4 trillion cubic feet by 2035.

At the same time, Latin America is increasing its capacity to receive LNG. Regasification capacity in the Americas, excluding the United States and Canada, will reach 50 million tons in the next few years, said Leslie Palti-Guzman, director of global gas at Rapidan Energy Group. Central America and the Caribbean alone will account for 8 million tons of this regasification capacity, and will be a significant growth opportunity for US LNG exporters.

These terminals may see low utilization rates, however, as LNG is used more as a backup fuel in Latin America. But the flexible contract terms offered by US LNG exporters and the United States’ geographic proximity make the fuel particularly attractive as a backup to baseload power and intermittent renewable energy. In Brazil, for example, US LNG is imported when hydropower supply is lower during the dry season, said Edmar Luiz de Almeida, professor at the Federal University of Rio de Janeiro’s Institute of Economy. In Central America and the Caribbean, US LNG can also help fill the vacuum left by Venezuela’s Petrocaribe shipments, which have fallen sharply in recent years, and a decline in shipments from Trinidad.

Going forward, the US government may try to create a more favorable regulatory environment for gas exports, but the success of US LNG exports also depends tremendously on global gas demand.

By Rebecca O’Connor, Inter-American Dialogue

Women in Energy in Mexico

Women in Energy in Mexico

On September 27, Jacqueline Sanchez, Energy Policy Associate at the Institute of the Americas participated in a Women in Energy breakfast in Mexico City featuring U.S. Ambassador to Mexico Roberta Jacobson. Amb. Jacobson offered remarks on the importance of the energy sector and its myriad opportunities as a key element for the broader US-Mexico bilateral relationship. At the breakfast, Sanchez joined a distinguished group of female executives, government officials, and representatives from academia and civil society. The event was hosted by Chevron, an Institute of the Americas Energy Steering Committee member and featured a wide ranging discussion of key issues facing Mexico’s energy sector.

Disruption, Uncertainty and Full Speed Ahead: The XXVI La Jolla Conference

Disruption, Uncertainty and Full Speed Ahead: The XXVI La Jolla Conference

Each May, the Institute of the Americas convenes the La Jolla Conference to foster debate and dialogue on our hemisphere’s most critical energy policy and investment themes. And each year 2-3 topics dominate the conference’s formal presentations, panel discussions, off-the-record roundtables, and cocktail banter. That the uncertainty gripping the globe has not spared Latin America was crystal clear as participants gathered for the XXVI annual La Jolla Conference on May 24-25.

The arrival of the Trump administration has seen an endless catalogue of contretemps, and many that directly and indirectly affect energy policy and the broader relationship between the US and Latin America. But the winds of change and uncertainty are not only blowing through the marble and wood paneled corridors of Washington, DC.

Countries across the region have been faced with economic pressures from depressed commodity prices, and political and social unrest has served to somewhat counter efforts to attract investment or push forward major energy policy overhauls, most notably in Mexico and Brazil.

Successive panels and speakers underscored that it is not time for the fainthearted, or risk-averse investor but also pointed to opportunities. The proverbial show goes on and progress is being made.

And all of this is occurring at the same time as a major disruption of how the world generates and consumes energy, and from what sources. Nowhere was this point more evident than the spirited debate that coursed through the conference as to the most appropriate role for renewable energy.

Panelists agreed that chaos appears to be the norm for the new administration in Washington, DC and as UCSD Professor David Victor aptly noted predicting what the Trump administration will do is akin to predicting the path a box of feathers will take after being dumped off a cliff.

Fortunately, the hugely divisive rhetoric aimed at Mexico in the early days of the administration has become more tempered, including a more measured approach to NAFTA and possible renegotiations. When it comes to the burgeoning energy trade between the US and Mexico, particularly in terms of natural gas and refined products, it is an important leverage point and one that can and should continue to positively inform the binational relationship in this new era.

As the panels and discussions continued on the conference’s second day, the dominant topic shifted. Indeed, the conference went from being all about Trump to an all-out debate on how far and fast renewable energy can be incorporated across the region. Regardless of the panel, the topic of where renewables fit into the region’s energy mix, and at what percentage, what price, and at what pace percolated through the discussions.

Those advocating a very forward-leaning 100% renewable energy posture – call them the California contingent – went head to head with the more moderated energy transition view, one that in most cases includes a critical role for natural gas. But make no mistake that no one argued against renewable energy, rather it was a debate over how much renewables should we rely upon and when.

Panelists argued that the renewable wave sweeping the region, and the reason for the daylong debate over the efficacy of a 100% renewables target, are the fact that governments are seeking renewables not just for climate and emissions reductions goals, but rather for cost reasons.

Representatives from Pemex, CNH and ASEA at The 2017 La Jolla Energy ConferenceRepresentatives from Pemex, CNH and ASEA at The 2017 La Jolla Energy ConferenceDespite social unrest, a sluggish economy and the long shadow cast by the US election and unfortunate spotlight placed upon the country by the new administration, Mexico has made considerable progress with its energy reform.

Representatives from Pemex, CNH and ASEA all touted the massive regulatory reform that has in many cases been enacted from scratch, along with the continued advance and attraction of upstream oil and gas investment. By the time of the conference, more than two billion dollars had been invested by way of 34 projects tendered since the reform became law. Panelists from Mexico concurred that much work remained in order to consolidate the reform, but none shied from the demands ahead nor were they overly concerned with the impending election cycle and its populist shadows.

The Temer administration in Brazil has set in motion an aggressive reset and reform agenda for the nation’s energy sector and particularly investment in the upstream. Over the last several months, major regulations have been rewritten pertaining to oil and gas investment, and a moribund effort to draw investment via auctions at the National Petroleum Agency (ANP) has been jumpstarted.

The Director General of ANP, Decio Oddone offered a keynote addressThe Director General of ANP, Decio Oddone offered a keynote addressThe Director General of ANP, Decio Oddone offered a keynote address focused on the plans the regulatory agency is taking in order to attract greater investments and described this moment as historical for Brazil. Oddone outlined four variables that could serve to revitalize the sector: 1) The agenda of tenders for new exploration areas; 2) The improvement of policies in the area of energy and regulation; 3) The modernization of the supply chain; and 4) Petrobras’ divestment plan.

Guyana also figured prominently with its recent deepwater oil discoveries in the Liza and Payara fields operated by ExxonMobil. The country surely stands on the cusp of a historical and transformational opportunity. Government and society face a steep learning curve as heretofore nonexistent institutions are stood up, regulatory practices are implemented, and energy governance is developed.
A robust panel and conversation centered on regulation, the role of stakeholder engagement and balancing regulation and investment. The discussion ranged across the oil and gas sector, but also examined the electric sector and particularly large scale projects and transmission lines. Panelists agreed that companies have a social responsibility to the communities, the so-called social license to operate.

When queried as to the keys to effective regulation, one that balances investment with risks and manages stakeholder engagement, the panelists responded with a variety of thoughts: “Be consistent in the long term,” one noted. “Above all else strive for transparency, that is tell people what you are doing,” suggested another. “Be brave when you make a mistake; say how you are addressing it,” cautioned another. “Collaboration,” one responded succinctly.

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.

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