Plight of Mexican industry spotlights need for 'profound' energy
reform
Mexico City (Platts)--20Nov2013/553 pm EST/2253 GMT
The plight of the Mexican energy industry highlights the urgent need
for what President Enrique Pena Nieto has called a "profound" energy
reform, whose details have yet to be revealed.
Mexican business leaders say they lost $2.25 billion in revenue in the
first six months of 2013 as a result of natural gas shortages, according
to the Mexican industrialists' trade group, CONCAMIN. In addition, the
group says that the state-owned Federal Electricity Commission, or CFE,
has also lost $1.5 billion in revenue over the same period as a result
of these issues.
Meanwhile, the Mexican central bank has forecast economic growth of as
little as 0.9% in 2013, down from an earlier 3% prediction. In the
second quarter of 2013, the gas shortages hit growth by 0.3 percentage
points, according to the bank.
Ruling party officials have only said that a congressional debate on the
energy reform is to begin, though they maintain that it will be passed
by the end of the current session on December 15.
Gas shortages began in 2012, spurred by lower prices. Mexican gas
prices equate to the US benchmark Henry Hub price plus transportation
costs. When the US shale gas production boom began, the price of gas
dropped and Mexican industry began using more of it.
Through June, Pemex had imposed 15 "critical alerts" that rationed
supplies for several days, according to Mexico's energy secretary, Pedro
Joaquin Coldwell. Each alert cost Mexican industry 462,000 Mcf/d.
The crisis has led the two state energy monopolies, CFE and Pemex, to
spend billions of dollars on building two pipelines to bring US shale
gas to Mexico. Meanwhile, Pemex currently produces 6.3 Bcf/d of gas,
down from 7 Bcf/d only three years ago.
The gas crisis is a result of the failure of Pemex to heed the advice of
the Energy Regulatory Commission, or CRE, says George Baker, president
of the Energia.com consultancy.
The rush by Pemex and the CFE to build new gas pipelines show "how the
market and the state have been blindsided by the absence of information
about capacity utilization," said Baker.
"Had a secondary market in pipeline capacity existed -- a goal that the
CRE has pursued for years -- pipeline companies, shippers and customers
would have foreseen the pinch in gas deliverability and would have taken
timely steps to devise a financing package for new lines that would not
have had Pemex or CFE as the anchor customer," he added.
The CRE and the National Hydrocarbons Commission are not regulators in
the usual sense -- their findings are usually regarded only as
recommendations.
Mexico has plenty of shale play potential. The country's geological
formations may hold 545 Tcf of shale gas and 13 billion barrels of shale
oil, according to the US Energy Information Administration. Pemex,
however, has only carried out exploratory drilling.
PEMEX'S CRUDE OIL PRIORITY
Luis Miguel Labardini, a partner of the Mexico City-based Marcos y
Asociados consultancy, says Pemex has no plans to develop the gas
resources. "The priority of Pemex is to revive its slipping crude
production," he says. "That's its priority."
"It would make no sense to invest in shale, where the margins are
extremely tight," he added.
That is why energy reform is important. "And the companies involved in
[the Eagle Ford play] in the US are not going to come to Mexico unless
they get the same terms and conditions as they get north of the border,"
said Labardini. "Eagle Ford is fiercely competitive, and Pemex couldn't
live with that."
Shale and deepwater exploration are two of the main targets of the
reform program, Pena Nieto has said, but he has yet to explain how that
could be done.
Mexicans themselves are bemused. As Baker says: "The Pena Nieto
administration has not explained its reasoning, nor has it tried to
educate the public about why ... energy reform is at all necessary ...
In 2008, the previous Felipe Calderon administration at least tried to
explain the reason for partnerships in deepwater" fields.
Opinion polls show that the majority of Mexicans are very critical of
Pemex and want it to be reformed. But 60% of them are opposed to
allowing the private sector to explore for and produce Mexican oil,
which is the nub of the reform.
However, "Mexican legislators do not respond to their electorate's
wishes," said political analyst Jorge Zepeda.
He, and most other analysts, believe that Pena Nieto's Institutional
Revolutionary Party (PRI), and the pro-business National Action Party
(PAN), have sufficient votes to ensure the new legislation, whatever the
form it takes.
The government first said that the reform would provide for joint
ventures between Pemex and the private sector on the basis of
profit-sharing. That was meant to soften the proposal for its political
critics, who remain true to the 1938 nationalization of the oil
industry.
But, as Adrian Lajous, a former Pemex chief executive and current board
member of Schlumberger, has argued, profit-sharing and
production-sharing amount to the same thing in practice, and neither has
produced satisfactory results.
Lajous and others have recommended the introduction of licenses, which
they say are much more attractive to international companies. Leaks to
the press on what are secret talks between the PRI and the PAN indicate
that licenses are being considered.
"That seems to be the way things are going, at least for deepwater, but
there's no clear information," said Labardini.
--Ronald Buchanan,
newsdesk@platts.com
--Edited by Keiron Greenhalgh,
keiron.greenhalgh@platts.com
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