ST 31 APEC ENERGY WORKING GROUP MEETING Singapore, Singapore, May 17-18, 2006 Notable Energy Developments MEXICO Oil Strong gasoline prices and uncertainty concerning Iran’s nuclear program and Nigerian outages sustained the benchmark crude oil prices by the end of the year and early January. The contango structure for both WTI and Brent was maintained, but inventory levels seem not to be a key factor in determining prices. Even though we have been observing high prices for oil and products, the market is characterized by a sound balance, i.e. demand requirements have been met. Across the main OECD countries, stocks have been replenished of both crude and refined products. The Mexican Mix (MM), averaged US $48.57 per barrel for the period between august 2005 and February 2006. However, the average for the first quarter of 2006 was considerably higher: US $ 54.40 per barrel. Oil prices during the period in question have not been determined exclusively by market fundamentals, rather by a series of geopolitical risks that have maintained price levels up. In order to ensure that we are capable of satisfying market needs in the future, we have to be careful enough to incorporate all factors that might impact the international oil market, i.e. political, social, etc. According to the International Energy Agency (IEA), demand grew less than expected in the last part of 2005, due to climate related temporary shocks, and warmer than expected beginning of the winter season. However, last December, temperatures drop out in key consuming areas, which stimulated the demand. Yet, several agencies, including the IEA, revised downwards the expected demand growth rate for 2006, in spite of a robust Chinese demand. In any case, expectations of a possible tight supply maintain a bullish sentiment, that have been driving prices up even before any signal of market imbalance. Producing countries have made a concerted effort to keep supply sufficiency and contribute to energy security, and Mexico is no exception. The Government of Mexico has considerably increased investments in order to maintain oil production levels and increase the rate of reserve replenishment. As part of the Government’s strategy to face the oil and gas challenge, the Executive branch and Congress have been discussing a series of initiatives to reform and restructure the energy sector, covering areas such as a new corporate governance structure of PEMEX; cross border field unitisation; strategic alliances for deep water exploration and production, and opening up private participation in marginal fields. All these efforts are seen as a driver for the country’s economic development. In Mexico’s view, all countries have a shared responsibility in the oil market, therefore, continuity of a constructive dialogue between producing and consuming countries is key to cope with market challenges. In addition, multilateral cooperation and global policies will become crucial elements for the benefit of all. Natural Gas th On October 2005, the Energy Regulatory Commission (CRE) held a Seminar to celebrate its 10 Anniversary, where members from the public and private sectors participated. The focus of the event 1 was on the achievements and challenges of the energy regulation in Mexico . Last December, the Secretary of Energy, Fernando Canales-Clariond, appointed Mr. Francisco Salazar as the new President of the CRE. During this ceremony, Secretary Canales highlighted the importance of the Commission’s work in regulating the energy sector. Mr. Salazar expressed his commitment to strengthen CRE’s role, in order to consolidate a strong regulatory framework, to ensure clarity and transparency to the benefit of all market participants. Between September 2005 and February 2006, CRE granted the following natural gas permits: • Rancho Lucero. Transportation permit for self consumption with a maximum total capacity of 86 thousand cubic feet per day for a system with a length of 18 miles. The system represents a commitment of 170,000 U.S. dollars investment, located in the state of Durango. • Gas Natural de Otay. Transportation permit for self consumption with a maximum total capacity of 3.44 million cubic feet per day (mmcfd) for a system of 2.73 miles in length. The total estimated investment will be 800,000 U.S. dollars and will be located in the state of Baja California. • Gas Natural de Michoacán. Transportation permit for self consumption with a maximum total capacity of 13.22 mmcfd for a system with 9.53 miles in length. It will be located in the state of Michoacan. • San José y su Agricultura. Transportation permit for self consumption with a maximum total capacity of 6.24 mmcfd for a system with 1.71 miles in length. It will be located in the state of Querétaro. • Pilgrim’s Pride. Transportation permit for self consumption with a maximum total capacity of 5.1 mmcfd for a system with 0.72 miles in length. The total estimated investment will be 100,000 U.S. dollars and will be located in the state of Hidalgo. • Technocast. Transportation permit for self consumption with a maximum total capacity of 7.55 mmcfd for a system with 0.81 miles in length. The total estimated investment will be 518,000 U.S. dollars and will be located in the state of Coahuila. 1 For presentations visit: www.cre.gob.mx/diez/diez-i.html (only in Spanish). Last November, a liquefied petroleum gas transportation permit by pipeline was granted to Ductos del Altiplano. The system represents a 267 million U.S. dollars in committed investment with an overall length of 175 miles and a total maximum capacity of 35,000 barrels per day. The project is integrated by four LPG pumping stations with a maximum capacity of 49,371 barrels per day. Electricity Between September and December 2005, the CRE granted a total of 133 self supply power generation 2 permits to fourteen companies . The total capacity will be of 263.36 MW with an estimated annual production of 625.73 GWh. The total estimated investment is estimated in 257.85 million dollars. Additionally, 21 self supply power generation permits were granted by the CRE during the first two months of 2006. The total capacity will be of 507.77 MW with an estimated annual production of 3,668.28 GWh per year. The plants will have a total estimated investment of 694.20 million US dollars. 3 These permits were granted to seven companies . Also, three permits to import electricity from the United States with a total demand of 28.24 MW and an annual consumption of 172 GWh were granted to Nelicor Puritan Mexico (2.0 GWh), Jumex Mexicali (0.01 GWh) and Samsung SDI Mexico (170 GWh). These permits will use the Electricity Federal Commission’s transmission grid. A cogeneration power permit was granted by the CRE to Cogeneration de Monclova company. The project will allow a total capacity of 5.13 MW and an estimated annual electricity generation of 39.74 GWh. The total estimated investment of the project will be 4.1 million US dollars. A wind power generation permit was granted by the CRE to Vientos del Istmo company under a self supply type. The system will be integrated by 40 aerogenerators with a capacity of 3MW each one. The total capacity will be of 120 MW with an estimated annual production of 517.29 GWh. The plant will be located in the state of Oaxaca and is expected to start operations in September 2007. 2 Companies: Medica Sur, Nueva Wall-Mart de México, Barcel, Maquila Teta Kawi, Panasonic de México, Fundilag Hierro, Cinemex, Telefonos de México, Sabritas, Porcelanite, Vientos del Istmo, Marindustrias, Draexlmaier Components Automotive de Mexico and El Palacio de Hierro. 3 Companies: GDC Generadora, Cinemex, Generadora La Paz, Yoli de Acapulco, Dsarrollo Tecnológico del Pacífico, Manantiales La Asunción and Telefonos de México. Last January, the CRE published in the Official Gazette the Resolution RES/007/2006 approving the Interconnection Contract Model Amendments for Renewable Energy projects. The main amendment recognizes the power supplied by the electricity power generators during the maximum demand peak hours within the National Grid System. Further information on natural gas and electricity can be consulted in CRE’s website: www.cre.gob.mx Renewable energy Last December, the Mexican Congress approved the Law for the Use of Renewable Sources, which encourages the use of alternative sources of energy, and defines a framework of action providing legal certainty. It establishes clear and reliable conditions, as well as acknowledge and value the benefits, in the short and long terms, derived from the use of renewable energy sources. The Law will contribute to the diversification of our energy mix, reducing the oil dependency and an extra effort to ensure energy security, in addition to the reduction of the environmental effects from the use of energy. The new legislation establishes modalities for public and private participation, and encourages the sound use of renewable resources such as wind, solar, hydro, biomass and geothermal, except nuclear energy. The Law defines attributions for the CRE, related to the dispatching and reviewing of methodologies, models and regulations to foster renewable energy projects. According to the Law, the Secretariat of Energy is responsible for undersigning a coordination agreement with state governments in order to establish encourage regional participation. In this sense, the Congress considered necessary to strengthen state and municipal powers, as define concurrent competences. Furthermore, the Secretariat of Energy will develop the Programme for the Use of Renewable Energy Sources, where an inventory of such resources will be included, as well as international commitments that Mexico has to comply with. The creation of a Trust to provide incentives for projects that promote the use of renewable energies, in addition to the “green fund” that encourages power generation in connection with the National Electric System network, a Fund for Emerging Technologies, another for Bio-fuels, for Research and Technological Development of Renewable Energies, ultimately creating a General Fund for Renewable Energy.