In December 2013, Mexico’s Congress approved landmark constitutional reforms to initiate a sweeping overhaul of the nation’s energy sector. In August 2014, a further package of legislation was passed to formally implement the constitutional energy reform and establish a new legal framework for the industry. A cornerstone of President Enrique Peña Nieto’s plan to boost economic growth and domestic energy production, the energy reform has opened the Mexican energy market to material foreign investment and participation for the first time in over 75 years.
Key Objectives of the Energy Reform
- Generate more hydrocarbons at a lower cost by allowing private companies to complement PEMEX’s investment through contracts or licenses for the exploration and extraction of oil and gas.
- Modernize the country’s refining, transportation and storage infrastructure by allowing private companies to invest, but only under the fair and transparent regulation of Mexico’s government.
- Double Mexico’s installed gas generation capacity by 2028, to 110,000 MW, largely fueled by the addition of over 50,000 MW of natural gas-fired capacity.
- Create 2 million jobs by 2025 and lower the cost of gas and electric bills. Less expensive fuel will also have a significant economic impact on the broader economy: adding 1 percent to economic growth by 2018 and 2 percent by 2025.
- Ensure international standards of efficiency, transparency and accountability, while effectively combating corruption in the energy sector.
- Reduce financial, geological and environmental risks in the exploration and extraction of oil and gas. Foreign companies possess the experience and knowledge to help Mexico unlock deepwater and onshore shale reserves.
Key Elements of Hydrocarbon Reforms
PEMEX becomes State Productive Enterprise
PEMEX will change from a monopoly into a “state productive enterprise” (SPE), with special legal status and required internal reforms.
Enactment of a Round Zero process wherein PEMEX can request to maintain its existing acreage; PEMEX was granted its full request to keep all 1P (proven) reserves and 2P (proven and probable) reserves. It will also retain 67 percent of its 3P (proven, probable and possible) reserves, and will retain ownership of its midstream strategic assets.
Enactment of Round One, in which PEMEX will migrate to new forms of contracts and may take on new commercial partners approved by CNH. New acreage and acreage not retained by PEMEX in the Round Zero process will be subsequently auctioned in Round One and subsequent bids. Round One contracts will be awarded on a rolling basis between May 2015 and November 2015, with 169 blocs expected to be awarded.
Retail Gasoline & Diesel Sales
By January 2016, PEMEX will lose its monopoly on retail sales of gasoline and diesel, and by January 2017 private firms will be able to participate in the import and export of crude oil, gasoline and diesel.
Customized Contracts & National Content Requirements
Allowing individual contracts to contain customized terms, including requirements for national content in the procurement of goods and services for the sector.
Opening of Midstream & Downstream Sectors
Near complete opening of midstream and downstream oil and gas to private investment.
Strengthening of Regulators
Strengthening of independent self-funded regulators (CNH and CRE), with strict rules for transparent regulation of the sector, along with new regulators to manage the gas pipeline system.
The laws limit vertical integration of natural gas companies and install the Energy Regulatory Commission (CRE) to provide oversight of all retail gas marketing. CRE will enforce open access provisions for both state-owned and private infrastructure.
Key Elements of Electricity Sector Reforms
Private Investment in Generation
Private investment in generation is permitted. Electricity may be imported and bid into the wholesale market; current barriers to entry, including requirements to negotiate offtake contracts with CFE or seek approval for bilateral contracts are eliminated. CFE’s existing and new generation assets will compete on a level playing field with new entrants.
CFE Existing Assets
CFE retains all of its existing generation assets. Existing contracts and projects in advanced development for Independent Power Producers (IPPs) will be respected and continued. CFE may now contract with private sector providers to introduce technology and expertise.
Changes to CFE Structure
CFE will be subjected to strict vertical separation for its activities of generation, transmission, distribution and commercialization; generation will be separated horizontally to foster free competition; and distribution will be separated regionally.
Emphasis on Cost Savings
Price alone will determine the priority of dispatch—the source of power used first by the ISO to sell to customers: the generator that produces power most inexpensively gets to sell first.
The National Energy Control Center (CENACE), currently a part of CFE, will become a decentralized public agency with a constitutional mandate for the planning, control, and operation of the national electricity system.
Wholesale Electricity Market
A wholesale electricity market will be created to allow trading among market participants that will include generators, qualified users and electricity suppliers. Qualified users and providers (including CFE) can contract directly or buy and sell electricity through the market.
CFE is required to guarantee continuity of electricity supply to basic service users in the event that their supplier goes out of business, until their contract is transferred to another supplier.
Load centers will be required to ensure that a minimum percentage of their energy consumption is generated by sources with clean energy certificates.
Sources: Secretaría de Energía (SENER), Comisión Reguladora de Energía (CRE), Comisión Federal de Electricidad (CFE), Petróleos Mexicanos (PEMEX)