Natural Gas in Mexico

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					Natural Gas in Mexico
Current trends and alternate scenarios

The Geopolitics of Natural Gas May 27, 2004 The James A. Baker III Institute for Public Policy Rice University Houston, Texas

Francisco X. Salazar Diez de Sollano
Chairman of the Energy Committee Chamber of Deputies of the Mexican Congress

Legal framework
• Natural gas is maily regulated by the following laws: – – – – • Constitution (articles 27 and 28) Oil and Gas Act (derived from Constitution’s art. 27) PEMEX Act Natural gas regulations

While the legal framework on NG has opened the down-stream industry for private direct investment in 1996, the up-stream segment is still under the direct control of the state through PEMEX.

Multiple Service Contracts Since 2003 Exploration Production

Mexican Natural Gas market structure
First hand sales Transport Storage Distribution

Private participation allowed since 1995

PEMEX
Mexican NG market structure

- Direct investment - Open access to national pipelines system - Construction, operation and ownership - Commercialization, exports and imports

Current infrastructure
• According with the legal framework, PEMEX owns production infrastructure such as wells and gas processing centers. Most of the pipelines in the territory are also owned by PEMEX. • Private investment is basically concentrated in distribution although there is also investment in transport pipelines.

Distribution Zone PEMEX pipelines Private open access pipelines Gas processing center

Demand outlook
• NG demand in mexico will grow at a strong 6.8% to the year 2012. In other words, consumption will almost double to 9.4 BCF, a total increase of 4 BCF from 2004 to 2012. • A NG consumption increase mainly driven by new power sector´s Combined Cycle plants.

National consumption of natural gas
(Billion cubic feet per day) day)
10

Cumulative consumption of natural gas 2004-2012
Total: 71 bcfd

aarg: 6.8% aarg:
8

Power
6 4 2 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

aarg: 5.8% aarg:

Industrial 22%

40% Residential: 2% Residential: Services: 1% Services: Transport: .001% Transport:

PEMEX 35%

aarg: average anual rate of growth. aarg: growth.

Power demand
• By 2012, combined cycle power plants will generate 54% of the gross domestic electric supply. • The IPPs scheme will continue to be the main driving force for the expansion of the Mexican power sector. Most IPP plants will be gas fuelled.

New facilities (2004-2012) by technological type:
Internal combustion Wind Steam Coal Hydro Combined cycle To be defined 96 MW 101 MW 429 MW 700 MW 2,586 MW 6,990 MW 11,479 MW

Total

22,380 MW

Supply outlook 2000-2010
Domestic Supply (BCF per day) day)
4.1
4.1

4.1
0.4

4.1
1 3.2

4.4
1.8 2.6

4.8
0.4 2.1 2.3

5.7
0.7 3.1 2

6.1
0.8 3.5 1.7

6.8
1 4.4

7.3
1

7.5
1

7.3
1

MSC Increasing output fields Declining output fields

5.2

5.6

5.5

3.7

1.5

1.2

0.9

0.8

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Imports (BCF per day) day)
1.0 1.4 0.8
0.1

1.2 0.8
0.3

1.3 0.8
0.3

0.3
2000

0.4
2001

0.7
2002

0.8
0.3 0.3

Pipelines LNG

2003

2004

2005

2006

2007

2008

2009

2010

Source: PEMEX, SENER

Import infrastructure
• Currently, there are 15 crossing points with a total import capacity of 3 BCF and a 1 BCF LNG terminal already in construction in the Gulf of Mexico. NG imports have a direct impact over the mexican key macroeconomic variables. In year 2003, imports of NG valued a foreign exchange outflow of US$ 2 billion, 35% of the balance of payments defficit. NG growing imports could be an important factor to take care regarding Mexico’s currency exchange rate and macroeconomic stability.
Cross border and LNG import terminals

•

•

LNG import projects
Location Coronado Ensenada Ensenada Altamira L.Cardenas Federal Permit Pending Yes Yes Yes Pending Starts operations 2007 2007 2007 2006 2008 Capacity (million cfpd) 700 1,000 1,000 1,000 400-1,000 Investment (million US dlls) 650 747 669 370 300-500
L. Cárdenas

LNG terminals Cross border Pipelines

Altamira

Supply outlook: the MSC scheme
• MSC are public works contracts based on unit prices that comply with the Mexican Constitution and national laws. Under this scheme:
–

Contractors receive a cash payment based on fees for the execution of the works PEMEX owns all hydrocarbons and works performed

–

•

The MSC scheme will help to reduce imports and replace declining existing production.
National supply of natural gas
(Billion cubic feet per day) day)
10 8 6 4 2

Cumulative gross supply of natural gas 2004-2012
Total: 74.6 BCFpd

Imports with MSC Imports 20% with CSM 9% Domestic supply without MSC 71%

Domestic supply without MSC

0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: SENER

Natural gas potential and the MSC scheme

The Burgos Basin
Sabinas Basin

TEXAS

• Burgos has the same geological conditions as the South of Texas. • With the right amount of investment it could increase its current production 3 fold.
Dry natural gas reserves

Burgos Basin

Veracruz Basin

MSC so far

Concept Start operations

Burgos Basin Dec / 03

South Texas Dec / 02 1935 33,500 67,651 83,336 9,643 3.8

1945 31,000 8,100 4,843 1,749 1

• Since late 2003, 5 MSC have been awarded in Burgos. 2 more are to be bidded soon this year.

Area (square miles) Cumulative output (BCFpd) Drilled wells Pruduction wells Current production (BCFpd)

Awarded and Signed Contracts
Location 1. ReynosaMonterrey P. Negras 2. Misión Signing date Nov 14 2003 Nov 28 2003 Nov 21 2003 Dec 8 2003 Feb 9 2004 Awarded company Repsol Tecpetrol IPC Techint Petrobras Diavaz Teikoku Petrobras Diavaz Teikoku Lewis Energy Amount (million USD) 2,437 Savings for PEMEX (Million USD) 392

1,036

179

5
Nuevo Laredo

3. Cuervito

260

130

4. Fronterizo

265

47

5. Olmos TOTAL

344 4,342

57 805

2 4 3

Reynosa

Matamoros

1

MSC next steps: Burgos II + other potential sites

New fields have been discovered and PEMEX is already studying the posibility of using the MSC scheme in:
Coahuila’s Sabinas Basin Veracruz’s basin including in-shore and off-shore fields

5

B A
Tam Tam pico pico 4 4 6 6 3 3 1 2 1 2

Second Round:
Burgos -mid 2004 A Ricos B Corindón - Pandura

Third Round:
Potential Sites -early 2005
1 2 3 4 5 6

Coatzacoalcos Gas Terciario Cuichapa Chicontepec Monclova – P. Negras Lankahuas
Area with hydrocarbons potential

Achieved benefits of first round of MSC
Implications of the 5 succesful MSC tenders:
• Investment: US$ 4.3 billion • Cost savings for PEMEX: US$ 805 million • Additional production: 440 million cfpd • Currency savings: US$ 800 million per year • New jobs: 5 thousand • International experience along with the technological and financial capabilities guarantee the achievement of the investment and production goals

Supply outlook revisited
National supply of natural gas
(Billion cubic feet per day) day)
10 8 6 4 2

Cumulative gross supply of natural gas 2004-2012
Total: 74.6 BCFpd

Imports with MSC Imports 20% with CSM 9% Domestic supply without MSC 71%

Domestic supply without MSC

0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Two facts: • • Even with the MSC scheme, by 2012 Mexico could be importing 2.6 BCF, 27% of its total consumption. PEMEX resources and the current legal framework play a key role to increase domestic output of NG.

Source: SENER

Driving forces for market openness

1. 2. 3. 4. 5. 6. 7.

Strong demand growth Limited domestic supply Limited execution capabilities of PEMEX Limited acces to new technology for PEMEX Continuous need for alternative financial sources in PEMEX Need for reductions in price volatility and imports Mexico’s NG production potential

Alternate scenarios

1.

Upstream liberalisation: private investment would be allowed to bid for concessions of non associated natural gas • Support from the industrial sector • Sponsored by some members of other parties • Stimulates competition

2.

PEMEX reform: the state owned company would be allowed to look for more attractive public-private partnerships • Scheme designed mainly for deep waters oil production • Competition limited scheme • Support from other parties, since it does not imply privatisation Both schemes require a constitutional reform

Upstream liberalisation scenario
Supply/Demand Balance with PEMEX direct investment + CSM + private investment

12
Bcfd

10 8 6 4 2 0 (2)
99 00 01 02 03 04 05 06 07 08 09 10

Local supply
Source: CERI, CONCAMIN

Demand

Exports

Imports

Price forecast under an exports scenario

USD/MM BTU

7.0 6.0 5.0 4.0 3.0 2.0 1.0
1T98 1T99 1T00 1T01 1T02 1T03 1S04 1S06 1S08

Historic Current Trend Exports scenario

Source: CERI, CONCAMIN

Constitutional amendment process

• Constitution Art. 72
– Successive discussion and approval of both chambers (Deputies and Senate) – The President has veto power

• Constitution Art. 135
– Constitutional amendments require: 2/3 of the votes in both chambers plus 51% of local legislatures in favour

Political composition of Mexican Congress

Chamber of Deputies
PRD: 19% PVEM: PT: Conv: 3% 1% Conv: 1% PRD: 13% PRI: 45%

Senate
PVEM: 4% PT: 1%

PRI: 47%

PAN: 30%

PAN: 36%

• No political party in Congress has the 2/3 required by law to pass a Constitutional change.

Final remarks
• • In order to fully develop its economy, Mexico will need increasing amounts of energy and specially of natural gas. Importing gas from a country that is a net importer and part of the region with the highest natural gas prices in the world, is something that requires immediate actions. Mexico enjoys a great potential in Natural Gas, but large investments are needed to take advantage of it. Although in the right direction, current policies are not enough to solve the dilemma. Reforms either allowing PEMEX to form partnerships with other companies or liberalising access to the resource would help much more. Any of these policies would be in the best interest of Mexico and its sovereignty.

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