Mexico energy reform

Mexico Energy Reform:
Paths Forward
Ricardo Falcón
IHS CERA Sr. Research Analyst II
1
Key messages: Looking four steps ahead
1
• Where we stand
now
2
• Chances for
further change
in energy
sector: main
issues and
proposals
3
• Challenges and
opportunities
under Peña
Nieto’s
Administration
4
• Reality check,
conclusions
Source: IHS CERA.
© 2012 IHS
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2
Where we stand now: Checklist
UPSIDE
DOWNSIDE
▲ Continuity of key
macroeconomic policies
▲ Relatively smooth electoral
process (less polarization)
▲ Interbranch cooperation
▲ Strengthening role of
Congress
▲ Proven potential to unlock
major reforms
▼ Still-adverse external
conditions
▼ Overloaded policy agenda
▼ Limited time frame to embark
on politically costly changes
▼ Potential legislative padlocks
and political tradeoffs
▼ Still critical security situation
Source: IHS CERA.
© 2012 IHS
No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
3
Gearing up for deeper policy change? The Pact for
Mexico and the PRI’s recent political move
5 headings
1. Social rights and
freedom
2. Economic growth,
employment and
competitiveness
3. Security and justice
4. Transparency,
accountability and fight
against corruption
5. Democratic
•
governance
•
3 key changes
Pact
for
Mexico
PRI’s
internal
statutes
Realignment of party agendas
More focused lobbying efforts
• Coherent policymaking
1. Stronger role of the
president in ruling
party’s decisionmaking process
2. PRI legislators may
now vote on
extended VAT to
food and medicines
3. Allow greater
private
investment in the
oil sector
Legislative consensus?
Source: IHS CERA.
© 2012 IHS
No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
4
The complexities of Mexico’s legislative process
Stage 3
Stage 4
Chamber of
Origin (CO)
First house to
review the bill
Revising
Chamber (RC)
Receives CO’s
report for review
President of
the Republic
Receives RC’s
report for review
CO sends bill to
committees
RC sends report
to committees
Stage 1
Stage 2
!
A bill is sent by:
• President of the
Republic
• Federal deputies
or senators
• State legislatures
V
Agrees?
Key:
!
V
Committees
submit a report
to the CO
Committees
submit revised
report to the RC
CO discusses
report in a
plenary session*
RC discusses
report in a
plenary session
Back to Stage 2
Presidential veto
NO
Approved?
YES
NO
Source: IHS CERA.
*This report is also known as dictamen, and when sent to the revising chamber, it is called minuta.
© 2012 IHS
Approved?
NO
YES
V
Back to
Stage 2
(presidential
veto)
President
enforces new
law or
amendment by
issuing it in the
official gazette
(or DOF)
YES
YES, BUT with observations to the CO report
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!
Back to
Stage 2
5
Labor, education and telecomm reforms: A good startup?
Stage 1
Stage 2
Stage 4
Stage 3
•
•
•
•
New labor contract flexibility,
Payment by the hour,
Outsourcing,
Salary pay-outs (industrial
action),
• Gender equality
Labor reform
• Greater administrative
autonomy
• Merit-based prof. service
• Institutionalized evaluation
of education system
• Census and database
• Full-time schools
Education reform
Telecomm reform
Freezer
Source: IHS CERA.
© 2012 IHS
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6
Peña Nieto’s first 100 days in office: Early results
UPSIDE
DOWNSIDE
▲ Higher approval ratings
▲ Reasserted authority over PRI
legislation process
▲ Stronger sovereign debt
position
▲ National agenda has been
effectively reset
▲ More balanced foreign policy
agenda
▼ Higher public scrutiny
▼ Verticality of internal decisionmaking process
▼ Financial and banking system
growth challenges
▼ Policy setbacks
▼ Continued exposure to
crossborder issues (especially
with the US)
Source: IHS CERA.
© 2012 IHS
No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
7
Now what? PRI-led administration still faces numerous
challenges
Economic growth
National security
• Drugs trafficking
• Organized crime violence
• Judicial system
•
•
•
•
Social development
Structural reforms
Business environment
Energy and environment
Drug-related fatalities
500 in 2006
24,000 in 2011
71,000 from 2006 to 2012
1,200,000 forced to migrate
Political agenda
• Political stability
• Governance
• Corruption
Real GDP Growth Rate:
Mexico and USA
6
4
2
Percent change (2)
(4)
(6)
(8)
2008
USA
2010
2012*
Mexico
2014*
Foreign policy
• Mexico-US
crossborder issues
• Mexico’s role in Latin
America
• Free trade agreements
Source: IHS CERA, IHS Global Insight.
© 2012 IHS
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8
2016*
Energy issues: Still a long way to go…
Integrity of the
• Conceptual
Refined Products
Balance
Distribution Network
Cantarell
Decline
Reserves
Replacement
Aging Plants,
Inefficient Fuels Use
Growing
Natural
Gas
Imports
Source: IHS CERA.
© 2012 IHS
No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
9
What might the PRI bring to the energy table?
Peña Nieto’s proposals build on 2008 reform
Promote strategic alliances to help Pemex diversify exploratory risk
Review Pemex’s fiscal regime
Build new refineries, allowing private sector participation
List Pemex on stock exchange (minority shares)
Strengthen the domestic petrochemical industry
Boost onshore oil & gas exploration projects
New rules for public-private partnership projects
Reduce retail electricity tariffs
Revise fuels price subsidies
Foster renewable energy projects
Reduce energy commodities’ production costs
Promote research, innovation, and technology transfer
Improve Pemex’s corporate governance
Ensure Pemex’s transparency and accountability
Difficulty
level
Maintain Pemex under state control
Source: IHS CERA.
© 2012 IHS
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10
National Energy Strategy 2013-27: A blueprint of the
Peña Nieto Administration’s energy reform plans
Strategic
goals
• GDP growth
• Social inclusion
Integration
elements
Policy
measures
• Efficiency
• Security
• Sustainability
• Transport, storage
and distribution
• Refining,
manufacturing,
generation
• Oil production
• Energy transition
Source: IHS CERA, Mexico’s Energy Secretariat (SENER).
© 2012 IHS
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11
Challenge 1: A heavy-loaded policy agenda
National security
•
•
•
•
•
New police corps
Anticorruption measures
Military strategy
US financial and technical aid
Government intelligence
Fiscal reform
• Tax rates
• Taxation base
• Special tax schemes
• Evasion and elusion
• Pemex fiscal regime
Labor reform
•
Unions’
transparency and
accountability
Political reform
Judicial reform
•
•
•
•
Justice administration
Judge selection process
Oral trials
Law enforcement
Social development
Education system
National security
Social development & education
•
•
Political reform
•
Anticorruption agency
• More transparency and
accountability
• Reduce size of Congress
Labor reform
Social security, food support, health Fiscal reform
Extend education networks, financial
support, and infrastructure
Judicial reform
Source: IHS CERA.
© 2012 IHS
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12
Challenge 2: Running against the clock
Nov 15
Deadline for
deputies to approve
next year’s federal
spending budget.
This process takes
place every year.
2012
Ideal time
for energy
reform
2013
Sep 1
New Congress
kicks off next
three year period
(2012–15).
2014
July
Midterm legislative
election to renew
Chamber of
Deputies
PRI retains influence in
Congress
2016
2015
Mar-Jun
Parties hold political
campaigns toward
the 2015 midterm
election.
2018
July
Presidential and
legislative elections
2016
Sep-Dec
New Congress
discusses fiscal
income and spending
budget for 2013.
2017
2017
2018
PRI loses influence in
Congress
Source: IHS CERA.
© 2012 IHS
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13
Challenge 3: Mexico’s Congress through 2015,
a new shift in the balance of power
PT
3%
PANAL
1%
MC
1%
Senate
PVEM
7%
PRD
17%
PRI
41%
PAN
30%
2006–12
2012–18
PT
3%
MC
3%
PANAL
2%
Deputies
PVEM
6%
PRI
42%
PRD
21%
PAN
23%
2009–12
• PRI now leads the Senate, but
needs 10% more to at least
pass legal amendments
• PRI needs the PAN to promote
promarket changes
• A PAN-PRD coalition may
easily block constitutional bills
2012–15
• PRI lost seats but remains the
leading political force
• Potential legislative padlocks:
promarket versus state-centric
• PRI may block constitutional
changes in favor of status quo
Source: IHS CERA, IHS Global Insight, Mexico’s Federal Electoral Institute.
Note: PANAL = New Alliance Party; PT = Labor Party; MC = Citizens’ Movement.
*Mexico’s Congress is composed of a 128-seat Senate and a 500-seat Chamber of Deputies.
© 2012 IHS
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14
New congress, new opportunities?
Leading parties’ energy agenda: Key proposals
Oil
•
•
•
•
•
•
•
•
Power
Gas
Open new spaces for
private sector, but still
under state control
Build new refineries
•
Reinforce institutional
framework and clarify
rules for competition
•
List Pemex on stock
exchange
JVs for deepwater E&P
Private participation in
fuels distribution
•
JVs for unconventional
gas development
•
Promote renewable
energy projects
Preserve stateownership model
Reduce fuels prices
Review Pemex fiscal
regime
•
Reduce retail gas
prices
•
Reduce retail power
tariffs
•
Reduce retail power
tariffs
Promote renewable
energy projects
Source: IHS CERA.
Note: JV = joint venture; E&P = exploration and production.
© 2012 IHS
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15
Chances for further changes in energy legislation:
Most likely coalition paths*
48%
48%
7%
48%
1%
78%
30%
1%
6%
7%
6%
7%
6%
50%
1%
1%
73%
23%
70%
65%
30%
41%
42%
23%
58%
63%
21%
17%
61%
63%
3%
2%
3%
66%
17%
Source: IHS CERA.
*Rounded figures; totals may not coincide with the additions.
© 2012 IHS
3%
21%
17%
Senate
3%
21%
Enough to block constitutional changes
Enough to pass legal amendments
3%
69%
Deputies
Enough to pass constitutional changes
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16
Zooming into PRI’s real power in Congress
Energy committees
seat distribution
Likely winning coalitions:
Coalition
Chamber
% Share
PRI
Senate
41
PRI+PVEM
Senate
48
PRI+PVEM+PANAL
Senate
49
PRI+PVEM+PANAL+PAN
Senate
79
PRI+PAN
Senate
71
PRI+PRD+PT+MC
Senate
71
PRI
Deputies
41
PRI+PVEM
Deputies
48
PRI+PVEM+PANAL
Deputies
50
PRI+PVEM+PANAL+PAN
Deputies
73
PRI+PAN
Deputies
64
PRI+PRD+PT+MC
Deputies
77
Senate
PVEM
6%
PT
7%
PRI
40%
PRD
20%
PAN
27%
Deputies
PT
MC 7%
3%
Other
3%
PVEM
7%
PRI
40%
PRD
17%
PAN
23%
Source: IHS CERA.
Note: PANAL = Partido Nueva Alianza; MC = Movimiento Ciudadano.
© 2012 IHS
Back
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17
Mexico’s political map: PRI controls the majority of
state governments and legislatures
PRI controls 21 of the
32 state governments
in Mexico (66%)
PRI
PAN
PRD
PRI = PAN
PRI
PRI = PRD
PAN
PRD
PAN+PRD
PRI holds majority in
23 of the 32 state
legislatures (72%)
Source: IHS CERA.
© 2012 IHS
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18
Energy policy change: What will it take?
Share of seats required for congressional approval
Senate
Chamber of
Deputies
Higher impact, but less viability
Constitutional
amendments
4
66%
66%
Legal
amendments
3
50%+1
50%+1
33%+1
Veto
force
Lame
duck
2
33%+1
1
Fox
Calderón
Lower impact, but more viability
1
Complexity level
4
Source: IHS CERA.
© 2012 IHS
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19
Pending changes in energy sector*
Oil
Power
Gas
Upstream
• More competitive wholesale
• Allow JVs for deepwater development
• List PEMEX shares in stock market
• Decarbonize energy mix
Downstream
• Diversify PEMEX’s exploratory risk
• More private participation in
• More competitive retail
• Further investment autonomy for PEMEX
• New financing options
4
• More progressive oil fiscal regime
• Further incentives for
• Allow JVs for unconventional gas development
refining industry
• Revise unionized labor
4
3
• Develop new pipeline
mechanisms
sales regime
3
2
3
electricity market
3
• Implement new first hand
2
4
renewable energy
infrastructure investment
provisions
• Change tariff setting
2
authority
2
• Revise retail power tariff
1
subsidies
Source: IHS CERA.
*Lists are not exhaustive.
© 2012 IHS
and electricity market
1
Complexity level
4
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20
The “crude” reality:
Mexico’s oil production in a continued downtrend
4.0
120
Outlook
3.8
100
3.6
3.4
Million
barrels
per
day
80
3.2
US
3.0
60 dollars
2.8
40
2.6
2.4
2.2
Liquids productive
capacity
20
2.0
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Mexican crude basket price (US$/barrel)
Fiscal revenue from hydrocarbons production (billion US$)
Source: IHS CERA, historical data from PEMEX and SHCP.
Note: Total oil revenue includes taxes and duties paid by PEMEX and the company’s own income.
© 2012 IHS
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21
Production decline seems irreversible
4,000
IHS CERA outlook versus PEMEX target
3,500
PEMEX business
plan target
3,000
2,500
Thousand
barrels
per
day
2,000
Other fields in
production
Filling this gap will
require reserve
additions of 12
billion barrels
1,500
2 million
barrels
per day
gap
YTF
1,000
500
Cantarell
0
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: IHS CERA.
© 2012 IHS
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22
Trión-1 and Supremus-1: The tip of the iceberg?
Kunah
Trión 1
Supremus 1
Piklis
Labay
Nen
Lakach
Noxal Leek
Exploratory
well
Nab
Tamil
Source: IHS EDIN.
© 2012 IHS
Nab 1
Noxal 1
Lakach
Lalail 1
Tamil 1
Leek 1
Labay 1
Nen 1
Piklis 1
Kunah 1
Trión-1
Supremus 1
Lalai
Oil recoverable
Gas recoverable Discovery
(million barrels) (billion cubic feet)
year
16.3
15
175
125
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1
180
622
243
2
102
1,200
217
395
140
20
14
2004
2006
2007
2007
2008
2009
2010
2011
2011
2012
2012
2012
23
Incentive-based service contracts:
Far from solving the problem
• The contract is attractive for the development of discovered reserves, but
its present form does not favor a large exploratory project with
substantial risk, such as those in deepwater.
• Production volumes expected from the awarded contracts is adding very
marginal volumes.
60
Marginal fields of the first bidding
round: Production history and outlook
Marginal fields of the second bidding round:
Better than the first one?*
60
50
50
40
Tierra Blanca
40
Thousand 30
barrels
per
day 20
San Andres
Thousand 30
barrels
per
day
20
10
Panuco
Atun
10
Arenque
Magallanes
0
1957
Altamira
Carrizo
1967
1977
1987
1997
2007
2017
0
2013
2016
2019
2022
2025
2028
Source: IHS CERA.
*Expected production is even lower given that the Arenque and Atun fields were not awarded.
© 2012 IHS
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24
Long lead times despite high investment plans
Mexico’s Crude Oil Production and
Upstream Investment through 2020
35
2.4
30
2.3
25
2.2
Billion 20
US dollars
(2013) 15
10
2.1 Million
barrels
2.0 per day
1.9
5
1.8
0
1.7
2013 2014 2015 2016 2017 2018 2019 2020
Incremental production
Additional investment
PEP budgeted investment
Crude oil production outlook (IHS CERA)
Source: IHS CERA.
© 2012 IHS
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25
Key findings
• Peña Nieto Administration faces new reality:
• Ever-strengthening Congress, increasing number of stake holders, stilladverse external conditions
• PRI has a big chance to push for incremental changes in energy policy,
but challenges will likely persist
• Pros: PRI’s interest in deepening 2008 energy reform, PAN willing to
support PRI’s promarket proposals, strong political fundamentals
• Cons: PRI has historically supported the status quo, opposition may easily
block constitutional reform, overloaded policy agenda
• Reality check: Government revenue constraints call for urgent changes in
fiscal and energy sectors
• Campaign pledges largely depend on fiscal revenue flows
• Fiscal reform would have a more visible short-term impact
• First half of administration: Best suited for major changes in energy sector
 longer-term impact, adjustments may continue to be incremental
• Major policy setbacks in early stage could put PRI’s agenda at odds
Source: IHS CERA.
© 2012 IHS
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26
Annex
27
Mexico’s 2012 general elections: Key facts
President of the Republic
Congress of the Union
50%
39.2%
40%
PANAL
2%
PANAL
1%
32.4%
26.1%
30%
PAN
23%
PAN
30%
20%
10%
2.4%
0%
Enrique
Enrique
Peña
Nieto
Peña
Nieto
Andrés
Manuel
López
Obrador
Josefina
Vázquez
Mota
PRI-PVEM
48%
PRI-PVEM
47%
Gabriel
Quadri
15 State legislatures*
PRD-PT-MC
22%
128 Senators
PRD-PT-MC
27%
500 Deputies
6 State governments
1 Federal District’s chief of government
876 Municipalities**
PRI
16 Boroughs or delegaciones
(Federal District)
Source: IHS CERA, Mexico’s Federal Electoral Institute.
*Including the states of Campeche, Chiapas, Colima, México, Guerrero, Guanajuato, Jalisco, Morelos,
Nuevo León, Querétaro, San Luis Potosí, Sonora, Tabasco, Yucatán, and the Federal District.
**Plus 20 municipal councils elected in Campeche.
© 2012 IHS
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PRD
PAN
28
For more information about this presentation or
IHS in general, please contact
Ricardo Falcón
[email protected]
© 2012 IHS
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29