Speed and Consistency: Taking Stocking of Oil & Gas Reform in Mexico

Speed and Consistency: Taking Stocking of Oil & Gas Reform in Mexico

It is often difficult to stop and take stock of a major initiative while it is underway. But that is what is occurring in Mexico as the year draws to a close and the nation charges forward with its historic energy reform efforts. Lessons learned from the public bidding process of Round One, as well as measures to rewrite the regulatory and investment framework continue to be organic, that is living and evolving. And the government has displayed an earnest desire to adapt and rethink its vision as milestones are reached and challenges emerge. Particularly with regard to upstream tenders, global insights from industry and stakeholders have been well-received.

On November 18, over 75 representatives from the Mexican government, industry, academia, and civil society convened in Mexico City for the Institute of the Americas’ Mexico Oil & Gas Roundtable. The Roundtable offered a robust half-day discussion of key issues and focused on the question of: What is the vision?

 

As the country moves along the process of tendering oil and gas blocks, as well as throwing open its midstream and downstream sectors of the hydrocarbons chain, there have been immediate lessons learned. Of the myriad practices being absorbed in Mexico, government officials noted that three stand out: 1) Oil and gas is first and foremost a geology business; 2) Striking the right balance between risk and return for oil and gas investment demands never-ending consideration and evaluation; 3) The oil and gas business is a global one and thus competition for investment and capital occurs not on a regional but rather a global scale and stage.

Throughout the Roundtable, plaudits from industry participants were underscored by the government for the speed that energy reform is being implemented. But at the same time, there were voices that noted caution is required in order to insure that the current pace provides for a consistent and sustainable path.

Panelist at the Mexico Oil and Gas Institute of the Americas RoundtablePanelists urged the government to take care and be careful not to overreach and create an environment where it is more of a running-in-place mentality as opposed to forward progress as the increasingly complicated layers of energy reform unfold. Clearly, there are concerns of overburdening the government bureaucracy and overextending nascent agencies. How much additional bandwidth exists and can legitimately be tapped in the coming weeks and months must be considered.

In the opinion of several participants, the next 12 months will determine not just the success of energy reform, but also go a long way to defining the next 12 years for Mexico’s oil and gas sector. Indeed, when it comes to the most appropriate contract model for the upcoming tender of deepwater blocks the focus should be on creating the environment for a “good contract.” This means less concern over the contract model itself and more focus on the elements that will make bidding attractive, competitive and balanced with returns for the nation. Clearly, the government has a greater appreciation for the nature of global competition than it did earlier this year. The development and publication of the Plan Quinquenal or Five Year Oil and Gas Exploration and Production Plan marked an important step as to the vision for industry and the nation alike.

Beyond the issue of competition and drawing up balanced investment opportunities, the issue of social impact and role of local communities has also been thrust to the fore as a key challenge for the implementation of energy reform.

The reform legislation created important legal instruments and regulations to manage social and environmental impacts, but government officials admitted that staff levels, attention to and understanding of the topic may not be commensurate with the sheer magnitude of the challenge. The opening of the energy sector has created a new horizon for investment, and increased the number of sector participants, projects and infrastructure in communities with little to no understanding of or exposure to the basics of interaction with private firms or even federal energy authorities. It is a concern that government and industry alike share and agree requires increased attention.

Collaboration across all facets of industry, government and civil society is necessary, with all parties sharing responsibility. The concept of a social license to operate and what that entails merits further awareness. Indeed, as with the bidding and investment elements, there are a host of international examples to draw from with regards to best practices for community relations and avoiding costly and undesired unrest across the country.

Managing Energy in Boom Times in Panama

Managing Energy in Boom Times in Panama

Panama’s economy has been booming. High rise buildings and green entryways to Panama City’s new state-of-the art metro have been seemingly sprouting overnight. Foreign Direct Investment grew 32 percent in the first quarter of 2015 and over the last five years, Panama has been one of the region’s fastest growing economies, averaging annual growth on the order of 8 percent. The country’s economic growth has, not surprisingly, also led to spiking demand for energy. Some estimates project power demand growth of around 150 MW per year over the next several years.

Almost 100 representatives from Panama, the United States and across Latin America gathered in Panama City on Sep. 22 to debate how Panama can strike the appropriate balance between continued economic growth and corresponding energy supplies.

In acknowledging the boom, Secretary of Energy Victor Carlos Urrutia underscored that rapid growth has its impacts. Critical for Panama is how the government balances a market approach with continuing to provide secure, reliable access for all citizens of Panama. With the recent adjudication of a major 350 MW tender and contract for the country’s first ever natural gas fired power station, by way of LNG imports, the country is on the cusp of an energy revolution. How the government manages the next 350MW tender, set for later this year, on the heels of the first award is being keenly watched.

 

Secretary Urrutia emphasized the Panamanian government’s efforts to develop a Strategic Energy Plan and to take into account all issues and options; what many call an “all-of-the-above” energy approach. The strategic vision, supported by Roberto Meana, the head of Panama’s regulatory body, ASEP, includes the thorny issue of reducing and targeting subsidies, market competitiveness, but also a dedicated effort to diversify the country’s energy matrix.

At the heart of the discussion were four overarching themes: the role for natural gas, the role for renewable energy, how to manage energy demand, and regional integration.

But it was the role of natural gas that provoked the most debate during the course of the discussions at the Roundtable. The award of a 350 MW project to Gas Natural Atlántico, a subsidiary of AES Corporation, will bring on-line within 30 months Panama’s first natural gas-fired power plant at an estimated cost of $800 – 900 million.

Moreover, the future for natural gas in Panama’s energy matrix beyond just power generation, and more specifically the issue of open access and how the entire country will benefit from the fuel’s arrival in 2018 is a matter of debate between the government policymakers, regulators and private sector.

Adding to the discussion is the Panama Canal.

Deputy Administrator Manuel Benitez discussed the Panama Canal’s efforts underway to study the possibility of building an LNG receiving terminal for power generation and also with the aim of bunkering and providing LNG for ship borne propulsion, particularly as more stringent ship emissions come into effect in the coming years.  As a related element, the expansion of the Panama Canal is slated for inauguration in April 2016. Once the new locks enter into operation, the Canal will be able to accommodate 92% of the world’s ships according to Deputy Administrator Benitez.

It also bears noting that in the discussion of regional integration, there was much applause for the advances of Central America’s Regional Interconnection System or SIEPAC and the Regional Electric Market. Indeed, panelists underscored how critical regional integration and the regional market were for Panama as the system provided much needed relief during the 2013 drought, which hindered the country’s hydropower generation capacity.

The next step for Panama is moving forward with electric interconnection with Colombia, or the Colombia-Panama Interconnection Project. The project has been complicated by numerous environmental and indigenous concerns and broader geopolitical issues. Yet, panelists at the Roundtable concurred that the ICP would be completed by 2020.

Panama has important energy hurdles ahead, but the level of debate and seriousness of focus set forth by policymakers and market participants alike at the Roundtable points to awareness and competency to confront and manage the coming challenges.

To wit, CNH has granted 22 permits for 11 private companies to conduct assessments and in-depth studies of various subsoil basins across Mexico. In order to synthesize the information contained in the permit applications, CNH will integrate all the appropriate data into a single map. In short, this effort is aimed at creating a national map and profile to show the best expectation for the industry on areas with the highest prospectivity in Mexico.

All of these pieces are part of CNH’s ongoing mission to facilitate investment at the same time as regulating and rendering the utmost transparency for the nation’s hydrocarbons.

A broader, more in-depth understanding of Mexico’s oil and gas potential will not only enable the government to continue to move forward on oil and gas bidding but also deepen the understanding across all of Mexico vis-à-vis the oil and gas sector. Information is increasingly available to anyone interested. In the oil and gas business, like many other technology driven enterprises, data is king.

Moving Mexico’s oil sector forward requires indefatigable efforts and an understanding that today’s failure often greatly informs tomorrow’s success. The turbulence of today’s oil market is not for the fainthearted and demands constant reappraisal of all facets of the bidding process. But Mexico is committed.

Today’s efforts from bidding to historic data and information gathering are intended to provide a window and boost to the future of the Mexican oil industry.

How Much Time do We Have? Climate Change, Energy Efficiency and Renewables in California and Mexico

How Much Time do We Have? Climate Change, Energy Efficiency and Renewables in California and Mexico

How much time do we have? This question posed by lunch keynote speaker, Dr. Veerabhadran Ramanathan of the Scripps Institution of Oceanography was a clever way to get everyone’s attention as to his presentation length and seriousness of the topic. In wide-ranging remarks delivered at a California-Mexico energy workshop, Dr. Ramanathan shared his groundbreaking research on climate change, solutions and the importance of broad, global engagement on the topic. On this latter issue, he was particularly enthusiastic about his work with Pope Francis and the Pope’s history-making encyclical that confronted the issue of climate change head on from a health and social welfare vantage.

On August 19-21, a delegation of Mexican and California energy officials and industry representatives convened in San Diego to share lessons learned on energy efficiency and renewables, as well as the overarching urgency of climate change. Together with the California Energy Commission, UC San Diego and Mexico’s Energy Secretariat (SENER), the Institute of the Americas was one of several partner organizations that organized the technical workshop and site visits across San Diego.

The workshop, a direct output of the Memorandum of Understanding (MOU) signed in July 2014 between the California Energy Commission and SENER, featured presentations by officials and practitioners from both sides of the border. The MOU was signed during California governor Jerry Brown’s trade mission and visit to Mexico City and set forth a series of goals focused on encouraging cross-border renewable energy investments and research and development.

The workshop highlighted best practices in grid management, and the success of microgrids at UC San Diego and in the small desert community of Borrego Springs, as well as the broader policy prescriptions for enhanced efficiency measures and renewable deployment. The policy elements were particularly relevant for the Mexican delegation as the country rewrites its energy laws and launches a new electric sector, wholesale market and regulatory tableau this year.

Given the nature of the very public drought facing California, the water energy nexus also figured prominently in discussions and presentations during the workshop.

But the show-stealer in many ways was transportation. More specifically, the increasingly important role that the transport sector will play in both Mexico and the United States’ efforts to decarbonize their energy matrices, as well as the implications for the electric sector and grid management.

By one estimate, if California’s approximately 30 million automobiles all transitioned to electric vehicles it would require an additional 180,000 MW of electricity supply, or approximately 3 times the state’s peak load today. Meanwhile, Mexico will also see a significant boost in the number of automobiles across the nation which demands a policy debate over the intersection of emissions, fuel supply and vehicle type.

Interestingly, Dr. Ramanathan never precisely answered his question as to how much time we have. But for the crowd gathered in San Diego in mid-August, furthering effective and sustainable energy policies are a key way to confront the ticking clock.

Chile’s Energy Agenda One Year On

Chile’s Energy Agenda One Year On

Under smoggy skies and against the backdrop of a persistent drought, the Institute of the Americas convened its Chile Energy Roundtable on June 23 in Santiago.

Almost one hundred attendees from across the Americas and Europe gathered in Chile to take stock of President Bachelet’s “Energy Agenda” one year after its launch. The principal themes of energy efficiency, interconnection of Chile’s two power systems, as well as with its Andean neighbors, and the need for improved dialogue and policies for community and energy project development made for robust discussions.

A panel focused exclusively on the issue of energy efficiency underscored the long path to finding common ground among the many disparate players. Panelists also drew attention to areas beyond the electric sector, with transportation and heating inefficiencies cited as the most urgent cases. Moreover, the need for an interdisciplinary approach across the entire value chain and policy making infrastructure was abundantly clear. The role for advancing an appropriate efficiency strategy and law should include all segments of the economy and government.

During his keynote address, Energy Minister Maximo Pacheco lauded the progress the government and his ministry has made over the last 12 months on the goals of the Energy Agenda. Specifically, 11 new projects totaling 2000 MW have been approved and added. A major imperative of the Energy Agenda, reducing energy prices had been achieved according to Minister Pacheco. Indeed, the latest power auction saw a 17 percent reduction in bid prices. Additionally, the long-awaited interconnection of Chile’s SIC and SING electric grids has been contracted and should be completed before the end of President Bachelet’s term.

But during the discussion, the minister too was quick to emphasize that the electric sector is not the sole target of the aims to reduce energy consumption and increase conservation. Indeed, he emphasized that energy efficiency is not synonymous with electric efficiency. He highlighted the role of biomass and transport in the government’s efforts. Minister Pacheco indicated that the government’s energy efficiency law would be finalized and submitted to Congress before the end of the year.

The minister further underscored the need to improve the government’s efforts when it comes to the national discussion of energy issues, not just on the topic of conservation but also vis-à-vis community concerns and the so-called issue of “asociatividad” in Chile. Communicating on energy matters, insuring equitability and making them clear and understandable for all stakeholders is a challenge that the government will continue to confront, he said.

ENAP General Manager, Marcelo Tokman, closed the event with a detailed update on the strategic outlook and role for the national oil company. Tokman discussed the efforts to recover the financial viability of the company, as well as progress on unconventional resource drilling and development in the Magallanes region and its significance for the company’s reserve replacement and that region’s energy supply.

But it was the affirmation of the strategic role for ENAP in terms of Chile’s natural gas and liquefied natural gas market, as well as its effort in power generation that underscored the progress made in line with the role for ENAP as set forth in the Bachelet government’s Energy Agenda.

Oil Price Volatility and Energy Security Questions Dominate La Jolla Conference

Oil Price Volatility and Energy Security Questions Dominate La Jolla Conference

In the lead up to this year’s La Jolla Conference, the energy world was rocked by the return of volatility in international oil markets. Promising to course through all of the agenda topics at the conference, the price of oil was indeed on the minds of attendees.

But the specter of lower oil prices that seemingly threatened to overshadow all other energy trends in 2015 has not entirely played out. The US shale revolution bubble has not burst nor does it appear that price issues alone will seriously undermine Mexico’s Round One oil and gas auction. And renewable energy projects are not being mothballed.

Dropping rig counts in the United States has not led directly to corresponding declines in production, and exports of liquefied natural gas are set to plug the US into the global gas market beyond North America. The debate over US crude oil exports rumbles on, more a victim of the political calendar than oil prices.

Experts and panelists at the Institute of the Americas’ XXIV La Jolla Energy Conference on May 20-21 underscored Latin America’s relative competitiveness in spite of the current downturn. Several speakers were quick to emphasize that this is not your father’s oil price collapse.

On the other hand, there is surely near-term uncertainty facing the region’s outlook, but also several fundamentals that point to significant potential in the medium and long-term. Indeed, many panelists cautioned that in Mexico and other parts of the region, patience remains a virtue. In addition, how the region embraces and adapts the lessons from the US unconventional revolution, particularly in terms of cost and efficiency figure importantly into the mosaic of opportunities for the region’s investment and production outlook.

Whether due to the oil price downturn or not, the discussions that surrounded the understanding of the regional energy context and what could perhaps be called the aura of competition across several key energy markets were intriguing. The newly installed head of Colombia’s regulator, ANH, minced no words when he noted that Colombia had to do a better job competing for and retaining investors, particularly as Mexico moves forward with its Round One auction.

Representatives from Mexico, which was a bit maligned at the conference for its increasingly bureaucratic implementation of the nation’s energy reform, also made great efforts to highlight the interest and attractiveness of the three calls offered to date. A representative of the country’s hydrocarbon commission, CNH, also spoke to efforts to redress pervasive complaints over contract stipulations and terms, revisions due out only days after the La Jolla Conference.
But beyond oil prices and competition, it bears noting that energy security has become more important than ever in the region. Countries are focused on efforts to refine domestic energy markets through offshore exploration, unconventional resources, efficiencies in power generation, and revitalized and improved energy integration.

Additionally, confronting above ground or non-technical risks that stem from environmental and community concerns and institutional weaknesses have quickly ascended the list of priorities for policy makers and industry.
Beyond the uncontrollable element of international oil prices, if countries in Latin America are able to address many of the aforementioned issues and other concerns, there will be no shortage of opportunities for energy players and the region’s outlook should command attention. To keep a glass-half-full outlook, it is useful to recall how a panelist from US-based equity fund Carlyle Group described the potential for Mexico’s energy investment future: mind blowing.

 

Building a Sustainable Electric Market in Mexico

Building a Sustainable Electric Market in Mexico

The need for flexibility, sustainability, certainty, patience and international best practices were oft-repeated refrains by panelists at the Institute of the Americas’ Mexico Electricity Roundtable.

Almost one hundred attendees from Mexico, the United States and Central America convened on April 9 in Mexico City to discuss the outlook for the electric sector and where Mexico’s energy reform measures stood. Discussions of the draft wholesale electric market rules, the evolving regulatory framework and the role for renewables and natural gas featured prominently.

Sounding much like a management class syllabus, a deeper dive reveals that flexibility, sustainability, certainty, patience and international best practices are a useful summation of the challenges and opportunities in Mexico as it rewrites its electric rules.

The need for flexibility will become ever more apparent as the government refines the market rules over the coming months. And as one former California regulator suggested, “flexible compliance” is a concept that should inform the rules’ implementation once they are set in place on January 1, 2016.

Further, insuring that not only the first several months and year under the new rules are successful will require that the market fosters competition and thus provides sustainability.

Investors’ desire for certainty was perhaps one of the most oft-repeated intonations over the course of discussions, and with good reason. When making significant long-term investments, companies and firms desire predictability and certitude.

On the other side of the coin is the need for patience, particularly in the Mexican context of overhauling 75 years of a statist approach.

But while patience is a virtue for all involved, it should also provide the opportunity for Mexico to redouble its analysis of international best practices. What has worked and what pratfalls to avoid from across the globe should continue to inform the development of the electric market in Mexico. That is to say, continuing to move Mexico up the electric sector learning curve is crucial.

Mexico continues to make international headlines as it strives to overturn years of state control of its energy sector for a market-oriented structure. Many arguments in favor of the reform focused on the role it will play in enhancing Mexico’s competitivity and, perhaps most relevant for the general public, reducing energy costs, specifically power bills across the country.

Without a doubt, the draft market rules announced in late February have unleashed much debate and analysis. The Mexican government has provided assurances that the process is open to feedback and will represent a transparent evolution to find the most balanced and appropriate approach. The next version will be unveiled later this year and the market goes into effect on December 31.

Stay connected with The Institute!

Join our mailing list to receive the latest news and updates from the IOA team.

You have Successfully Subscribed!

Pin It on Pinterest