Session vi c giralt cabrales

Energy Interdependence in the Western Hemisphere Global Interdependence Center November 5th, 2015

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In 2015, the Mexican Government has two priorities regarding the economy:  Maintaining fiscal discipline and macroeconomic stability.  Enacting profound changes in order to fully implement the Structural Reforms recently approved.

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 Mexico is widely regarded and recognized as an emerging economy: its economy shows solid indicators on economic activity, customers’ trust, manufacturing and construction sectors, which make the country an attractive market with a proper business environment.  In 2015 it is expected that the GDP will grow around 2.4 % - 2.6% (estimated, JanuaryDecember).  The current account deficit is low in comparison to other emerging economies.  Mexico´s total debt (public and private) has increased slowly in comparison to other emerging economies.  Mexico holds abundant liquid reserves: our international reserves account reaches $175.6 billion dollars (October, 2015); and The International Monetary Fund renewed (2014) a Flexible Credit Line equivalent to an additional $70 billion dollars. In total, $245.6 billion dollars in liquid assets, ready to confront any instabilities in the international markets.

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 Low inflation levels expected in 2015 (2.5 – 2.7% estimated). This will benefit wages and consumption.  During the past two decades, Mexico has kept a floating exchange rate that works as a buffer to external shocks.  The Mexican Government implemented a counter-cyclic policy that includes a budgetary deficit equivalent to just 1% of GDP for 2015; and a goal of a balanced budget towards 2017. Fiscal discipline is the name of the game.

 The Energy Reform will impact the Mexican economy positively in the short term: in a couple of years, Mexico will have competitive markets in diesel, gasoline, petroleum and electricity since it is intended to encourage competitiveness and build industrial capacity in the energy sector.

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10 Structural Reforms were approved in the first 20 months of President Enrique Peña Nieto’s Administration (plus one in the last months of the previous federal administration).

The Reforms pursued three main objectives: 1) Increasing Mexico’s productivity to trigger growth and economic development.

2) Strengthening and extending rights so that they become part of everyday reality for the Mexican society.

3) Strengthening Mexico’s democratic freedoms.

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Energy Reform is comprehensive and was designed to attract investment and modernize the energy sector in order to achieve the following:     

Supporting for the family economy.

Enhancing social development.

Caring for the environment.

Encouraging competitiveness of the country.

Boosting productive and industrial capacity of Mexico.

This Reform grants Mexico a New Energy Model based on six guiding principles:

1) The hydrocarbons contained in the subsoil belong to the Nation.

2) At the same time, free market access and direct competition among State Owned Enterprises and private companies.

3) Strengthening of the regulatory bodies.

4) Transparency and accountability.

5) Sustainability and environmental protection.

6) Maximize Mexico’s revenues and its long term development.

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Some key elements of the Energy Reform are:  Private investment is now allowed in areas that were previously reserved for the State, such as transformation, transportation, storage, distribution, and commercialization of hydrocarbons.  A new institutional environment: The institutional framework is strengthened through the creation of new public agencies and the reinforcement of the existing ones. For example, the Energy Coordinating Council will issue recommendations and approve coordination mechanisms to ensure the fulfillment of the energy policy.  New legal framework on State-Owned Productive Enterprises: PEMEX (Petróleos Mexicanos) and CFE (Federal Electricity Commission) will no longer be decentralized public bodies.

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 Mexico’s new oil and gas industry legal framework establishes a novel, efficient and sustainable model for the production of hydrocarbons and defines in detail the two instruments by which the State will carry out exploration and extraction activities: entitlements, awarded only to State-Owned Productive Enterprises and contracts, signed by the state with State-Owned Productive Enterprises or with private companies.  Entitlements: The Ministry of Energy, with prior consent of the National Hydrocarbons Commission (CNH), will be responsible for issuing and modifying entitlements, basically to PEMEX.

 Contracts: These contracts will be designed by the Ministry of Energy and will be awarded through public and transparent bidding processes conducted by CNH. The fiscal terms and award variables will be established by the Ministry of Finance.

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 PEMEX and CFE are now State-Owned Productive Enterprises, 100% owned by the State, but with real budgetary and operating autonomy. Also, these companies will face a new tax regime related to entitlements and contracts, in similar conditions as those applicable to any company in the oil industry. In other words, they are in the process of becoming real enterprises, reducing their monopoly dominance in the sector.  Security and Environment: The new National Agency for Industrial Security and Environmental Protection of the Hydrocarbons Sector will be responsible for regulating, supervising and enforcing the law within the energy sector.  Transparency and Accountability: Institutional checks and balances framework will be enabled between relevant actors: Ministry of Energy (SENER), National Hydrocarbons Commission (CNH), Ministry of the Finance (SHCP) and the Mexican Petroleum Fund.

• Contracts and all related payments information will be publicly available.

• All State-Owned Productive Enterprises will publish their information according to the Mexican Stock Market Act. 9

 Entitlements and contracts will be exceptionally awarded to PEMEX to participate in strategic projects.

 Exploration and extraction contracts can be signed with:  • State-Owned Productive Enterprises.

• State-Owned Productive Enterprises in association with private companies.

• Only with private companies.  The State can choose to participate directly in specific exploration and extraction contracts for three main reasons: 1) when fields coexist, 2) to promote technological transfer or 3) when the State has an economic interest.

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Objectives of the natural gas business model:

 Enhancing energy security.  Infrastructure development.

 Opening access to all producers.  Guaranteeing fuel supply.

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New rules:  Controls to prevent monopolistic behavior in gas transportation.  Centralized planning, authorized by the Ministry of Energy in consultation with the Energy Regulatory Commission.  Stronger institutions.  National Center for Gas Control (CENAGAS) will tender strategic projects through open and transparent bidding processes.

 Also, a New Model for Hydrocarbons Transformation, Transport, Storage, and Distribution is introduced: the CENAGAS will be in charge of operating the national pipeline and storage infrastructure system.

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PRIVATE SECTOR

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 The New Model on the Electric industry: Private investment is allowed in the power generation sector through three models: independent generation, cogeneration, or contracted by CFE. Also, a decentralized public entity, National Center for Energy Control (CENACE), will control dispatch and manage the wholesale market.  Clean Energy and Energetic Efficiency • Markets Interconnection : Possible interconnection and sale of products in time and without over costs.

• Clean energy certificates: promotes low cost clean energy sources.

• Intelligent demand: The reduction in demand (surplus of energy) can be sold to CFE or to other suppliers.  Geothermal Energy Law: Use of energy from the subsoil • This Law regulates in accordance with the best international practices, the stages of recognition, exploration and production of geothermal resources found in Mexico’s subsoil.

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ESTIMATED INVESTMENT Billion USD

298,000 Billion USD 81,340 Billion USD

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 Mexico is widely recognized as a successful emerging economy.  Mexico has maintained and will preserve fiscal discipline and macroeconomic stability.  The Mexican Government is undertaking profound changes to fully implement the Structural Reforms.  The Reforms will seek to increase Mexico’s productivity to trigger growth and economic development; as well as benefiting Mexican society’s economy and strengthening democracy.  It is expected that The Energy Reform will reach its objectives faster; per example, in a couple of years Mexico will have competitive markets in diesel, gasoline, petroleum and electricity.

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Most of the information and graphic materials for this presentation were provided by the Mexican Ministry of Energy (SENER).

Contacts:

cgiralt@sre.gob.mx Twitter: @ConsulmexFila Twitter: @CarlosGiraltCab Consulate of Mexico in Philadelphia, PA 111 S. Independence Mall East Suite 310 The Bourse Building, Philadelphia, PA 19106 Tel. (215) 923-8384 ext. 450 Fax: (215) 923-7281

V 4.0, Nov 5, 2015

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