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I. Goals of the Reform.

The bill that the Federal Executive is submitting for the consideration of the Mexican Congress proposes that the wording of Article 27 of the Constitution be restored to the original text written by President Lázaro Cárdenas concerning development of the oil industry under the State’s guidance. In addition, it promotes the development of a national electric power system based on technical and economic principles subject to State management and regulation.

The goals of this Energy Reform are the following:

(i)     Improve family economies: Gas and electric bills will fall. Cheaper gas will make it possible to produce fertilizers at a better price, which will lead to cheaper food.

(ii)    Increase investment and create more jobs: In coming years new jobs will be created. With new companies and lower rates, almost half a million jobs will be created during this government, and 2.5 million jobs will be created by 2025 throughout the country.

(iii)    Strengthen Pemex and the Federal Electricity Commission (CFE): Each of these companies will have greater freedom to make decisions so that they can modernize and produce better results. Pemex and the CFE will continue to be 100% Mexican and 100% publicly-owned companies.

(iv)     Strengthen the State’s leadership role: As owner of the oil and natural gas, and as the regulator of the petroleum industry.

II. Energy Reform for oil and natural gas.

Energy Reform at a constitutional level is necessary for two reasons: 1) to produce more hydrocarbons at lower cost, allowing private companies to complement Pemex’s investment through contracts for oil and gas exploration and extraction; and 2) to achieve better results through competition in refining, transportation and storage, allowing private companies to participate in compliance with Mexican Federal Government regulations.

The country will keep its oil profits, that is, all of the benefit obtained from oil and gas production once companies are paid to defray their capital and operating costs, in accordance with predetermined and transparent rules. Furthermore, all companies will have to pay the corresponding taxes and royalties.

Pemex will neither be sold nor privatized, but it will be strengthened. Pemex will continue to be a 100% Mexican company. It is time to allow Pemex to work together with national and international associates to carry out new projects, without putting our patrimony at risk. It will also be possible for private companies to invest in refining, petrochemicals, transport and storage of oil and gas, and their derivatives, so that we have more and less costly fuel. This is what President Lázaro Cárdenas established in his era.

1.     How is our oil industry doing today?

Today we Mexicans face two great challenges when it comes to oil and gas: 1) to permit private companies to share their experience, technology and risk with Pemex, when this is advantageous for the Mexican people; and 2) to ensure enough cheap energy to promote development of the country.

Do we need privately owned companies to complement Pemex’s work?

Although Pemex is a company with expertise in extracting oil offshore at shallow depths, there is a great deal of oil that is found in difficult-to-access places that require technologies, experience and more investment for extraction.

For example, the projects for extracting oil in deep waters (where the seabed lies at a depth between 500 and 1,500 meters) and in ultra-deep waters (where the seabed lies at a depth over 1,500 meters) are very costly and very risky. The deposits that are found in U.S. waters in the Gulf of Mexico are similar to those in Mexican territory. However, while our northern neighbor already produces a million barrels of oil a day in deep waters, in Mexico not even one barrel of oil has been produced from this type of deposits.

It has not been easy for the United States to reach and sustain this production in deep waters. To do this, each year more than 100 wells are drilled in deposits of this kind. In 2012 alone, 137 deepwater and ultra-deepwater wells were drilled. This would not have been possible without the participation of more than 70 oil companies.

In contrast, although 2012 was a record year in Mexico for Pemex’s deepwater activity, only six wells were drilled, purely for exploration, and oil is not yet being produced in deep Mexican waters.

The following map shows the Gulf of Mexico, which is shared between Mexico and the United States. In the U.S. part, the location of many wells may be seen. On the Mexican side, meanwhile, practically no activity is evident.

Nor are we appropriately exploiting the oil and gas that we have in shale (rock containing gas and oil, requiring a fracking process to extract them). In 2012, permits to produce shale oil and gas were issued for more than 9,000 wells in the United States, while in Mexico only three were issued permits. The same is true with oil that is in mature fields (fields that have less and less natural pressure pushing the oil out). If we used the proper technology, we could extract more oil and gas from those fields.

For example, the following satellite image shows the vast area covered by the Eagle Ford Shale Field in the United States. There is so much activity there that even at night the area’s economic development is clearly visible. Meanwhile, on the Mexican side—which has the same potential for oil and gas—there is no activity, and the only light comes from street lights in cities in the region.

Mexico has oil and gas in deep and ultra-deep waters, as well as in shale formations and mature fields, but today the Constitution says that only Pemex may search for it and extract it. We need more companies, technology and investment to better develop our national oil industry.

Furthermore, easily obtained oil is running out in Mexico and around the world. Although we have allocated increasing amounts of money to Pemex, the nation’s oil production has dropped, as shown in the following figure. In just 8 years, production has declined by almost a million barrels of oil a day, despite investment of record amounts in this sector.

No company in the world extracts all kinds of oil by itself, nor is any company expert in all kinds of oil. That is why we—like Brazil, Colombia and many other countries— must allow other companies, which have the experience in extracting oil in deep waters and from shale, to complement the company that all Mexicans own. In other words, it is essential for Pemex to work with private companies when that is advantageous for Mexico.

We cannot demand that Pemex do everything and do it alone; where it cannot perform efficiently no one else can either. It is to our benefit that other companies share with the Mexican Government the risks of extracting oil and gas found in areas that have not been studied.

Why is it necessary to ensure the nation’s energy supply? Is there a risk of not having energy in the future?

The Constitution establishes that only Pemex can produce gasoline and diesel fuel, so if Pemex does not produce enough, no one else may do so.

That is why we have to import 49% of the gasoline we use. Although we export a large part of our crude oil, we have to import it once it has been processed into fuel.

The same happens with natural gas. Pemex does not produce enough, so we import 33% of the gas we consume. We have even resorted to limiting industrial gas consumption. In addition, 65% of the petrochemicals consumed in Mexico come from abroad.

That is why we must strengthen oil and gas exploration and extraction, as well as the nation’s refining and petrochemical capacity, with the participation of private companies to ensure that we have enough fuels and at fair prices.

2.     The impact of Energy Reform on oil and natural gas.

The reform proposed for oil and gas consists of:

a)     Restoring the wording of Article 27 of the Constitution to what President Lázaro Cárdenas wrote, word for word, following the oil expropriation.

Mexico’s first great energy reform was championed by President Lázaro Cárdenas. The spirit of Cárdenas’ reform was undoubtedly nationalistic, but it was also modernizing, visionary and pragmatic. Its fundamental content was that it guaranteed the State’s ownership and guidance in controlling hydrocarbons, while it also provided for private sector investment in several activities.

He conceived of a model based on the State’s exclusive ownership of subsoil resources; the suppression of the rights that private parties held over oil and gas through concessions; incorporation of contracts with private parties for oil and gas exploration, and extraction under conditions established by the nation—and it provided for the possibility of private parties carrying out refining and transportation, among other activities, on their own account.

The model President Lázaro Cárdenas advocated is not consistent with the current language of the Constitution, which is the result of later amendments. Therefore, restoring Cárdenas’ original project—the motivation for presenting this bill to this sovereign body—necessarily implies a constitutional amendment.

b)     Strengthening Pemex by giving it greater freedom and an organization that consolidates its identity as a productive and modern state company that will be a source of pride for many generations.

The Energy Reform will enable Pemex to concentrate on the substantive activities of the oil industry. The foundation of this restructuring is threefold: elimination of the duplication resulting from the existence of four Subsidiary Bodies by creation of a single, unified Pemex; the strengthening of operational support functions; and increasing transparency in value-creation in each of its activities.

Pemex’s Subsidiary Organizations will be integrated into two Divisions: Exploration and Production, focused on hydrocarbon (oil and gas) extraction from the establishment of reserves to the delivery for processing or final use, and Industrial Processing, oriented toward processing oil and gas to produce fuels, petroleum products and petrochemicals.
Centrally, the current departments of Administration, Finance, Operations, Legal Affairs and Information Technology and Business Process Management will be maintained. Departments of Procurement and Logistics will be created to take advantage of synergies and eliminate duplication. Centralized procurement of critical supplies will make it possible to improve purchasing terms, transparency and efficient communication with suppliers. Ties with national suppliers will be strengthened. Integrating the logistics departments will enable Pemex to take advantage of synergies and provide transparency in relation to the costs of transporting and storing hydrocarbons.

By integrating the four Subsidiary Bodies into two Divisions together with Pemex transfer pricing, Pemex will eliminate duplication without losing economic and operational control over core activities.

c)    As a part of the Fiscal Reform, a new tax regime for Pemex will be established, with conditions similar to those that apply to other companies in the rest of the world. This will enable it to be more competitive and to secure additional resources for investment.

One of the pillars of the Energy Reform is to strengthen Pemex. The aim is to redefine the State's relationship with Pemex, moving from a narrow vision of it as a short-term generator of public income to a broader and more long-term perspective. The new tax regime for Pemex to be proposed as part of the Fiscal Reform will be consistent with this change of approach.

At present, Pemex's tax regime is based on a rigid model of royalties, which are set without fully acknowledging the company's investment needs. In other countries, such as Brazil, Colombia, and Norway, national oil companies pay lower taxes than those currently paid by Pemex and then, depending on the profitability of their investments, a more flexible decision is made regarding whether the remainder is reinvested in the company itself or passed on to the public treasury.

The proposal to be included in the Fiscal Reform is in line with Pemex's need for greater flexibility in order to achieve better results. This represents a paradigm shift, with two essential components: first, lower royalty payments than at present, and, second, the remainder left after those royalty payments will be managed in a flexible way—it may be reinvested in the company or a part could be transferred to the budget, as if it were a dividend, to be used for spending on schools, hospitals, or water or highway infrastructure. This new model will mean Pemex’s tax situation is comparable to that of other oil companies in the rest of the world. In contrast to the current regime, the proposed model will align the incentives between Pemex and the Federal Government, while at the same time allowing the company to be more competitive.

d)    Promoting greater transparency and accountability in the oil and gas sector, through the institutional strengthening of the Federal Government and its decentralized agencies, the National Hydrocarbon Commission and the Energy Regulating Commission.

If this constitutional amendment is passed, changes could be made to secondary legislation to develop a model that would guarantee and strengthen greater transparency and accountability within it.

The amendment states that the Federal Government will be in charge of oil-related activities and expands the authority of the Energy Ministry and its decentralized agencies, the National Hydrocarbon Commission and the Energy Regulating Commission.

e)    The amendment proposes that the Federal Government be able to grant profit-sharing contracts to Pemex and private companies for the extraction of oil and gas. In addition, the Federal Government will grant Pemex and private parties permits for refining, producing petrochemicals, and transporting and storing oil, gas, and their derivatives.

First of all, it proposes a system of contracts for oil and gas exploration and extraction, to be awarded by the Federal Government. Those contracts can be given to Pemex—either alone or in partnership with private companies—and to private companies wishing to participate in the sector. This will provide the people of Mexico with greater control over our oil.

The illustration below shows the current situation in the oil sector, with Pemex responsible for everything. This hinders the extraction of the oil we need and the possibility to earn healthy profits. With the reforms, the Federal Government will decide when to drill for oil and gas and who will be responsible for their extraction. In this way, we will obtain greater profits to benefit our country.

Second, the amendment provides for private companies to invest in the areas of refining, petrochemicals, and the storage and transportation of oil and gas and their derivatives.

Finally, it will introduce a national policy to encourage the use of domestic suppliers in oil and gas sector procurement, in order to develop Mexican industry and generate added value. The creation of supply chains will be promoted to reduce supply costs through the closer nationwide integration of inputs.

3. Benefits of the Energy Reform in the areas of oil and gas

The reform processes in Colombia and Brazil clearly indicate what can be achieved by equipping the oil and gas sector with appropriate rules. Thanks to their reform processes, their levels of oil production have risen significantly, in contrast to falling output levels in Mexico. In Brazil, 841,000 barrels a day were produced prior to the 1997 reforms. Fifteen years later, Brazil has almost tripled its output. Following the energy reforms, it produces 2.1 million barrels a day.

At the same time, Colombia's energy reforms have allowed that country to almost double its former level of output.

In the case of Mexico, the investments obtained through the adoption of this initiative will enable the country to consolidate a sustainable hydrocarbon model for the long term, providing for the well-being of future generations.

Objectives of the oil and gas policy

1. Achieve replacement rates of proven reserves of oil and gas in excess of 100%. That means that increased output will go hand-in-hand with the discovery of an equal or greater volume of new reserves.

2. Increase oil production, from the current 2.5 million barrels a day to 3 million in 2018 and 3.5 million in 2025.

3. For natural gas, output would rise from the current level of 5.7 billion cubic feet a day to 8 billion in 2018 and to 10.4 billion in 2025.

With the amendment, Mexico would enjoy the following results:

• The Mexican people will have enough fuel, produced competitively.

- In particular, gas prices will drop, which will enable domestic fertilizers to be produced more cheaply, and lead to cheaper food.

- Cheaper, abundant gas will also lower electricity bills.

• The Mexican economy will grow by an additional percentage point over the forecast level in 2018, and by approximately 2 percentage points by 2025.

• In addition, almost 500,000 new jobs will be created in 2018, with 2.5 million more by 2025.

• Pemex will once again be one of the world's leading oil companies.

• Increased oil and gas output will bolster the country's budget: additional income will be earmarked for education, fighting poverty, improving public health, and building more roads and highways and more water infrastructure.

III. Energy reforms in the area of electricity

The Energy Reform will also mean that Mexican families, businesses, and industry pay lower electric bills. This constitutional amendment is being proposed to modernize the electric industry and to generate power more cleanly.

1.    How does the electric sector stand today?

Currently, the electric industry faces five major problems:

a) High electricity prices. Electricity costs are high, and that affects the pockets of Mexican households and small and medium-sized businesses, hampering job creation in Mexico. Our electricity prices are higher than in the United States: for each dollar they pay, we pay on average the equivalent of 1.25 dollars. That is in spite of the high fiscal subsidy applied to electricity prices each year.

b) Limitations on electricity generation. Although in certain situations private citizens and companies can already generate their own electricity, the benefits of cheaper generation are enjoyed by only a few.

c) The absence of an impartial arbitrator to decide which electricity is sold. Currently, the CFE generates the electricity, decides from which plants it is taken, and sells it to the end consumers. It is forced to act as both the decision-maker and an interested party, having to choose between the output of its own plants and electricity generated by private companies—which can on occasions be cheaper.

d) Problems in using cleaner energy. We have been unable to expand the use of natural gas for electricity generation because of its scarcity, even though it is up to six times cheaper than other fuels and creates less pollution. In addition, there are barriers to the development of renewable sources, such as wind, solar, and small-scale hydro energy.

2.    The impact of the Energy Reform on electricity

The electricity sector reform consists of the following:

a) An amendment to Article 27, to allow private parties to invest in electricity generation. With the proposed amendments, more electricity will be available at lower costs, to the benefit of all users, including households and the micro, small and medium-sized companies that account for three out of every four jobs in the country.

b) The State will maintain sole control over the National Electric System and over the public transmission and distribution network, ensuring all electricity producers access to them. Under this model, the cheapest energy will be purchased in blocks from each producer.

c) The Federal Electricity Commission will be strengthened, through greater operational and organizational flexibility, which will help cut costs. In addition, the Commission will be strengthened by allowing it to compete to win back the large users who buy the most electricity, and it will be given the tools it needs to reduce energy losses, theft, and uncollected bills.

d) The reforms will bolster the planning and leadership powers of the Energy Ministry and of its decentralized agency, the Energy Regulating Commission.

e) The Energy Reform is also green, insofar as it encourages greater investment in technological developments and the adoption of cleaner and cheaper sources of energy, such as solar, wind, and gas.

The illustration below summarizes the electric industry reforms and shows that with the reforms, electric bills will be cheaper because purchases will only be made from the cheapest producers and because losses will be reduced along the supply chain.

3.    Benefits of the energy reforms to the electric industry

• The most important benefit of the constitutional amendment as regards the electric industry will be that families, businesses, and industry will pay lower electric bills, because there will be a greater diversity of generating sources, including cheaper gas and renewable energy. At the same time, electricity will be generated by those who can produce it at the lowest cost.

• There will be an independent arbiter to ensure that the electricity sold is the cheapest available.

• In addition, the Federal Electricity Commission (CFE) will be strengthened to make it a more autonomous and efficient company.

IV. Conclusion

It is clear that if nothing is done with regard to energy in Mexico, we run the risk of stagnating and failing to grow. We are a fortunate country in that we have natural resources that can be used to benefit the people of Mexico.

We are ready to compete and to cooperate. The time has come to modernize, to return to the basic principles of President Lázaro Cárdenas, and to take them into the 21st century in order to strengthen our national identity as a power and to raise the living standards of the Mexicans of today and of tomorrow.

Last Updated on Tuesday, 13 August 2013 09:23

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