Mexico Energy - April/May 2015

INVESTMENT OPPORTUNITIES IN THE NEW ERA

CHINESE BANKS

FINANCING PETROLEUM PROJECTS

GE - SETTING THE BAR IN WIND ENERGY

KNOCK, KNOCK, KNOCKING

ON MEXICO’S DOOR! SECOND BIDDING OF ROUND ONE - MORE THAN 15 OIL COMPANIES SHOW TREMENDOUS INTEREST IN EXPLORING AND EXPLOITING OIL AND GAS. Vol. 2 No. 2 April - May 2015

MLPs FUELING

MEXICO’S ENERGY INFRAESTRUCTURE

LETTER FROM THE EDITOR

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As I get ready to go to the Offshore Technology Conference (OTC) in

Houston, I can’t stop thinking about the first time I visited this grand event last year. I was so impressed by the magnitude of the industry and remember with great enthusiasm that Mexico’s Congress was about to pass a set of Secondary Laws that would unlock the country’s energy potential to private and foreign investment. That was a year ago, and we had just published two editions of Mexico Energy and Business Magazine.

Since then, our team of reporters has written stories on many subjects, especially those pertaining to Mexico’s open energy market and the investment opportunities that have been taking place, as well as those that lie ahead.

For the April/May edition, we report on the companies that paid fees to access data on seismic information for the first set of oil blocks in the bidding process of the National Commission of Hydrocarbons (CNH) in December. Regarding the second bidding round of Round One, as of April 6, there were 16 companies who had expressed an interest in exploring and exploiting oil, here we present the list and provide further details.

As we mentioned in our last edition, wind power is expected to grow significantly in the next five years across Latin America. In the latest issue, we interview Renato R.M. Santos, director of GE, a supplier of wind turbines and related services. Santos talks about the company’s business prospects to achieve 80 percent of the wind power generation market in Latin America and how important Mexico’s sector is for the firm.

In other coverage, Milton Méndez, Petroleo&Energia’s editor-in-chief, sat down with Carlos de Regules Ruiz-Funes, executive director for the Security, Energy, and Environmental Agency (ASEA), Mexico’s safety and environmental regulator for the energy industry. The two discussed ASEA’s new role, which ensures that all modifications in the oil and gas sector are developed by obliging to safety and environmental regulations.

With the opening of Mexico’s energy sector, banks are interested in contributing to the capitalization of petroleum projects. Such is the case of the Industrial and Commercial Bank of China, which requested an authorization from Mexico’s Ministry of Finance to operate with a multiple banking license in the country. The bank brings a social capital of about $45 million U.S. dollars. Don’t miss this brief, but very informative, piece by Flory Anette Dieck Assad.

Finally, you’ll want to check out “MLPs South of the Border: A New Financing Scheme to Fuel Mexico’s Energy Infrastructure,” by Eduardo Canales and Steve Otillar from Houston-based Akin Gump Strauss Hauer & Feld. In this study, the authors suggest that Master Limited Partnerships could connect institutional and retail investors with midstream companies to jumpstart the Mexican midstream sector.

I’m really looking forward to OTC 2015, and I hope the event brings plenty of opportunities to learn from, and connect with, industry leaders and our readers. See you there!

Sincerely,

MEXICO ENERGY AND BUSINESS MAGAZINE VOLUME 12 APRIL / MAY 2015 Publishers

Managing editor

Reporters

Photography

Editor in Chief Co-editor

Translations:

Art and Design

Administration Treasury Circulation/Distribution Sales Sales and Public Relations Sales and Advertising

Director Operations Sistems Public Relations Auditions Distribution

Raúl Ferráez & Jorge Ferráez José Manuel Escobedo

Milton Méndez, Hugo Hernández R., Flory Anette Dieck Assad, Arturo Gutiérrez E. and Esther Arzate Óscar Agis

Milton Méndez Hugo Hernández Ramos

Pamela Rogers

Fernando Izquierdo Romero Rodrigo Valderrama Viveros Carlos Cuevas Martínez Luis Enrique González Piceno Cathy Lopez Claudia Garcia Bejarano Carlos Anchondo Gabriel Torres Origel Javier Senderos Francisco Abad Carlos Pozos

Diego Amauri Plaza Alex Prida Miguel Ángel Muñoz Karen Arriaga Iván Castelán Raúl Hernández DALLAS

15443 Knoll Trail, Suite 210, 75248 Dallas, TX, USA Tel: (214) 206-4966 Fax: (214) 206-4970 MÉXICO Insurgentes Sur 1898 Siglum 12, Col. Florida. Delegación Álvaro Obregón C.P. 01020, México D.F. Tel. 91365100 NEW YORK 4 Lexington Ave. Suite 1A New York, NY 10010 Tel: 646-641-5068

José Manuel Escobedo Reachi Managing Editor jescobedo@latinoleaders.com (214)- 206-4966 ext. 227 2

April / May 2015 Mxe Mexico Energy and Business Magazine

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ISSN-1665-8205 Copyright © 2003 - Derechos Reservados All Rights Reserved.

PETRÓLEO & ENERGÍA” es ® Marca Registrada Hecho en México - Printed in Mexico

INDEX APRIL / MAY 2015 06 ASEA PROTECTING MEXICO’S ENVIRONMENT The Security, Energy, and Environmental Agency (ASEA), Mexico’s safety and environmental regulator for the energy industry, began its activities on March 2 and is led by Carlos de Regules RuizFunes, who is enthusiastic about the newly created agency and is ready to confront the challenges along the path.

14 GE - SETTING THE BAR IN WIND ENERGY A supplier of wind turbines and related services, GE is focusing on developing its wind energy business in Latin America, from Mexico to Chile, to become a major stakeholder and leader in the region.

22 A NEW PATH FOR THE ENERGY SECTOR

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British BP, U.S. Chevron, Colombian Ecopetrol, Japanese Japan Petroleum Exploration, Russian Lukoil, Anglo-Dutch Shell, French Total, Norwegian Statoil, Brazilian Petrobras and Mexico’s, Pemex, Petrobal and Diavaz, show great interest in exploring and exploiting oil and gas in the 23 areas located in the Gulf of Mexico currently in the bidding process called Round One.

34 CHINESE BANKS: FINANCING PETROLEUM PROJECTS The spirit of the recently passed financial reforms permits foreign capital participation in financial intermediaries. Such is the case of the Industrial and Commercial Bank of China, which requested an authorization from Mexico’s Ministry of Finance to operate with a multiple banking license in Mexico with a social capital of approximately $45 million U.S. dollars.

44 TRANSPLACE – EMPOWERING MEXICO’S GROWTH With the Energy Reform in full swing, foreign companies that provide business development and consulting services in Mexico are optimistic about the increase in trade the Reform will bring.

Transplace’s Alaster Love, vice president of business development whose specialty are transportation management systems, tells Mexico Energy and Business Magazine about the opportunities and challenges facing Mexico’s energy sector today.

48 MLPS SOUTH OF THE BORDER: A NEW FINANCING SCHEME TO FUEL MEXICO’S ENERGY INFRASTRUCTURE The MLP model provides a successful scheme that could connect institutional and retail investors with midstream companies to jumpstart the Mexican midstream sector.

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April / May 2015 Mxe Mexico Energy and Business Magazine

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CARLOS DE REGULES RUIZ-FUNES Executive director of the Security, Energy, and Environmental Agency (ASEA).

ASEA

PROTECTING MEXICO’S ENVIRONMENT 6 April / May 2015 Mxe Mexico Energy and Business Magazine

INVESTMENT OPPORTUNITIES IN THE NEW ERA

Milton Méndez

Óscar Agis

The Security, Energy, and Environmental Agency (ASEA), Mexico’s safety and environmental regulator for the energy industry, began its activities on March 2 and is led by Carlos de Regules Ruiz-Funes.

O

April / May 2015 Mxe Mexico Energy and Business Magazine

n August 19th President Enrique Peña Nieto and the Secretary of the Environment and Natural Resources (Semarnat), Juan José Guerra Abud, appointed De Regules as executive director of the ASEA. Petroleo&Energias’s editor-in-chief Milton Méndez recently interviewed De Regules, considered one of the most important professionals in Mexico and part of the backbone currently governing Mexico’s energy industry.

In this Q&A, De Regules is enthusiastic about the newly created agency and is ready to confront the challenges along the path and, above all, with the firm conviction that he will be contributing to Mexico’s future growth just as he did during the 18 years he worked for Petróleos Mexicanos (Pemex).

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Q- How was ASEA created?

A- ASEA, also called the Industrial Security and Environmental Protection of the Hydrocarbon Sector Agency, was once part of the Secretary of the Environment and Natural Resources (Semarnat). It was created for a particularly strategic economic sector that is also a priority in terms of managing industrial risks.

This regulatory agency needs to be led by a group of experienced professionals with not only knowledge of the hydrocarbon sector and its operations but also with experience in industrial security and environment. I insist, it is the regulator that will take the initiative and the leadership to accompany this profound Reform with the creation of a technical and robust regulator.

Q- Can we talk about the constitutional mandate and the primary function of the ASEA? A- Our aim is to regulate and monitor the

INVESTMENT OPPORTUNITIES IN THE NEW ERA

April / May 2015 Mxe Mexico Energy and Business Magazine

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industrial security, operational security and environmental protection of the hydrocarbon industry.

This means that we are charged with planning, designing norms, industrial regulations and environmental protection, record-keeping, issuing or denying permits, and authorizing new projects. We are also responsible for monitoring, that is, inspecting and, in some cases, sanctioning that the hydrocarbon chain conforms according to what the law stipulates.

Established by Article 19 of the Energy Reform Decree for the Transitory Regime, our vision is that ASEA will have around 200 to 300 employees.

Q- What is ASEA responsible for?

A- The responsibilities range from the exploration of new resources, oil and gas perforation and production, and natural gas.

It is responsible for the industrial processing of gas and petroleum into natural gas and different petroleum products and their transport by pipeline, ship, ground, or by rail train - also warehousing these products and inclusively their final sale to the public at gas stations and others. The scope is the entire value chain of hydrocarbons.

Q- In which areas?

A- Industrial security, that is, the prevention of industrial accidents and emergency preparedness in the case that it is necessary, and in environmental protection, air emissions, water, residuals, contaminated soils, and so on.

It is probably the broadest mandate of an agency of this kind in the world. As such, it not only emits standards and regulations; authorizes, monitors, and sanctions permits; but it also operates in low stream, midstream, and retail in security matters and environmental protection.

For example, the most visible regulator in these matters in the United States is the Bureau of Safety and Environmental Enforcement (BSEE), which monitors exclusively off stream, off shore, and environmental protection. And it is an office of more than 200 or 300 persons. Then ASEA’s scope is unique worldwide.

Q- How did ASEA come about?

A- What we are building is an agency that operates under a logic of institutional architecture. We began understanding our mandate and defining what our vision, mission, and acting principles should be to meet this mandate. Then we defined a strategic map with objectives for our clients, for our internal processes, for knowledge and learning and the distinct objectives that we needed to accomplish our mission.

Q- What is ASEA’s mission?

A- Our mission is to guarantee the personal security and environmental integrity related to activities in the hydrocarbon sector but at the same time offer the industry, its operators, and those regulated a certain judicious and procedural framework.

INVESTMENT OPPORTUNITIES IN THE NEW ERA

Our regulation has to be rational, pertinent, and cost efficient because we want to stay abreast of the Energy Reform and we want it to be manifested correctly.

Q- What is your vision?

A- Our vision is to aspire to be the regulatory agency that will make Mexico’s hydrocarbon sector the most secure and the cleanest in the world. There is no structural reason for not achieving this vision.

Today Petróleos Mexicanos, which is the largest operator in Mexico’s hydrocarbon sector, has a frequency of accident rate comparable to international benchmarks.

Our intention is to not only sustain this but to make improvements in time and with the entrance of new operators.

April / May 2015 Mxe Mexico Energy and Business Magazine

Q- What are the processes that you are putting in place to achieve your mission and principles and achieve what is mandated in law?

A- The processes that we need to accomplish are planning, regulatory, management, inspection, and supervision. It is important to talk about processes because they are not isolated silos but actually a continuum of inputs and outputs.

For example, in the planning process one of the products is identifying gaps. Risk in this area in the hydrocarbon sector is above a desired level or, that is, accident performance is shooting upwards.

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Not only will it be available to the public, but it will be available to interested parties. To conclude, information will be provided on how these processes are linked, information on inspections, and the detection of gaps and anomalies.

Q- What are ASEA’s requirements?

A- Since its start, ASEA has developed close relationships with CNH, CRE, and SENER with the intention of facilitating its processes at initiation. For example, for CNH to grant allocations of blocks, the agency’s criteria requirements must be met. In the case of the bidding processes of Round One, there are two basic requirements: first, the eligibility criteria to participate in the round, and second, the contract model. ASEA is already present in these two instrumental areas.

Q- How will you achieve this process?

A- Each year participants will have to present a series of permits, similar to an annual certification, an inventory of emissions, and so on. We will record the permits on a trimester, semester, or annual basis, whatever is appropriate. An important consideration depending on the risk of the project will be the need to conduct an inspection every three or six months, whatever is necessary.

Q- What can you tell us about the eligibility criteria?

A- Companies intending to operate in Mexico will have to show financial solvency to deal with the consequences of possible accidents and demonstrate experience and knowledge operating administrative systems that address both security and environmental protection. These are not ASEA requirements, but required by the CNH in the process.

In the different contract clauses that cover the project’s life span are the agency’s criteria. What we have is an integral contract where in each of the business clauses are the environmental security clauses incorporating the stipulations of CNH, ASEA, CRE, and SENER.

Q- Is it possible to obtain information on the certification process of these projects?

A- Of course (everything will be public), all that we do, the intention is to be transparent.

De Regules is a chemical engineer from the Instituto Tecnológico y de Estudios Superiores of Monterrey. Has a master’s degree in Engineering and Environmental Management from the École des Mines in Paris, France.

De Regules was the subdirector of strategic planning and operations at Pemex.

INVESTMENT OPPORTUNITIES IN THE NEW ERA

GE - SETTING THE BAR IN WIND ENERGY A supplier of wind turbines and related services, GE is focusing on developing its wind energy business in Latin America, from Mexico to Chile, to become a major stakeholder and leader in the region.

Hugo Hernández R. Oscar Agis

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Renato R.M. Santos, director of GE Power and Water in Mexico talked to Petróleo&Energía during the recent Mexico WindPower 2015 about the company’s business prospects to achieve 80 percent of the wind power generation market in Latin America and how important Mexico’s sector is for the company.

“What the company is looking for is to become number one or at least get to second place within the renewables market in the region of Latin America, and I’m talking about from Mexico to Chile, where we see the greatest business opportunities, even though it is a business more about volume than benefit (ROI). Thus, we have to capture a great portion of the market,” he points out.

Since GE entered the sector with the acquisition of Enron Wind in 2002, it has installed more than 18,000 wind turbines and increased power generation from 500 MW to 28 GW. “In 2008 when the economic crisis in the United States became global, we decided to look outside of the United States for other markets. That is how we began to enter many markets in Europe, Asia, and also Latin America,” Santos says.

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GE’s global fleet operations produce enough clean energy to provide power to cover an area as large as New York City.

In 2013, GE met its goals in Brazil, even though there is still more to do, Santos says. He explained that there is now a team ready to work in turbines, services, and about 160 persons operating there in the area of renewables.

“Now the second country we have set up business is in Mexico. Since I acquired the technical expertise and business knowledge of operating in Brazil, then GE decided to send me to Mexico to do the same that we had done in Brazil.”

During the last decade, one out of every two installed turbines in the United States belonged to GE, and the company introduced its wind technology to new markets such as Australia, Brazil, Canada, China, Poland, Turkey, and recently Mexico.

Since 2013 GE’s Mexico’s team has been focused on marketing, engineering, personal technology and local suppliers.

“Overall we now have 20 persons working in Mexico who are not only working in renewables but in other negotiations, which has increased our competitiveness,” Santos tells.

Since 2002, the company has invested globally more than $2 billion U.S. dollars in the wind industry. This investment has transformed the industry and turned wind into a source of renewable, reliable, competitive, and carbon-free energy.

“We have approximately 80 percent of the Latin American renewables market.

We started with Brazil, which is the largest market. In 2009, we targeted the Brazilian market to finalize sales and they were outstanding; at the end of 2014 we had reached 1,500 installed wind turbines in

Brazil,” explains Santos who is an aeronautical engineer trained at the Aeronautics Institute of Technology (Brazil).

Mexico and its expectations Since 2013 to now, GE has managed to install 2,400 MW in Mexico, of which 500 MW were installed in 2014 with a total investment of $2 billion U.S. dollars, through the utilization of wind energy.

“It is not a huge market because in Mexico there are other types of power generation, not only wind, especially if you compare it to the European Union, Germany, or China,” Santos says.

Mexico’s market is smaller, and we believe that its average renewable energy consumption is around 600 MW annually.

Nevertheless, it is large enough that GE can no longer remain on the outskirts as it is a rather significant market for us, Santos explains.

According to GE estimates, wind energy costs have fallen from double to single digits because of the efficiency of wind turbines,

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industry productivity, and improvements in availability.

According to GE, the wind market will continue to grow in Mexico.

GE plans to take advantage of the situation and also increase its operations, underscores the director.

“This market is one that does not have many incentives other than competing economically, and at the same time there are more competitive forms of power generation in Mexico. Nevertheless the government has a goal to reach 35 percent of clean power by 2024, so this motivates us”.

GE confirms that in a short time – one or two years – wind power will generate 5 percent of the planet’s electricity and will continue as one of three new energy sources most important in the next decade.

“We see Latin America as a whole; Mexico and Brazil have more than 80 percent of the market. Thus there is no way to stay outside,” Santos emphasizes.

For Santos, getting to be number one in the region of Latin America would require bringing the best solutions to clients with the development of equipment and best quality and efficient turbines in addition to offering integral services to accompany each project.

“Project development and wind power is a very good opportunity for Mexico and there is space for all investors,” he adds.

Since 2013 when GE’s division of wind power was established in Mexico, it has implemented two strategies: start up projects from gestation periods and later accompany the project through construction.

Currently GE is working in Mexico on a project of 1,000 MW, of which 400 MW are in an advanced phase to start in 2016.

“With the implementation of the Green Certificate, there is no certainty of how much will have to be invested, while an established market still does not exist,” points out the director.

Energy Reform In the recent years, GE has supported several of the most important global wind projects, such as the Shepherds Flat wind farm of 845 MW installed in Oregon, United States, and the Fantanele wind park of 600 MW located in Romania, the most important wind power park in Europe.

In Mexico, GE counts with a workforce of 11,000 employees, which includes 1,800 engineers working in the Engineering Center located in Querétaro in different sectors – Aviation, Transportation, and Power and Water – and there is an exclusive team for the area of renewables.

“We understand that the energy reform proposed by Mexico’s government is a reform that arrived at the right moment for us to take advantage of - thanks to our presence since 2013 in the wind energy sector,” Santos says.

After the energy reform, even though there is still a lot of uncertainty, we predict a very good market for renewables in Mexico.

In addition to supplying equipment, GE’s wind energy business continues to grow rapidly. The company doubled its investment in research and development in services while adding to its world-class portfolio.

GE’s service solutions incorporate advanced technologies, global resources, service installations, and a network of skilled experts who are closely connected to GE’s engineering organization.

Mexico’s Ministry of Energy announced that as of this year and until 2018, it would invest $14 billion dollars in wind parks, in addition to the $5 billion already invested.

GE is also participating in these projects, in which 8 wind parks will be developed with an installed capacity close to 2,300 MW and investments approximately $52 billion pesos in the upcoming years.

Infrastructure

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Despite the opportunities to develop wind power that currently exist in Mexico, GE warns that if the tendency continues as it has been and the infrastructure does not improve, this will generate major problems in the short- and medium-term.

Santos emphasizes that it is necessary to invest in the development of infrastructure alongside projects planned for the upcoming years and that not pursuing this “would be an impediment.”

“In Mexico there is a great opportunity to generate wind power but if the authorities don’t invest in infrastructure development this won’t function. We are sure that this will be gradual, but yes, it is necessary,” he points out.

Currently, GE Works in four large projects in Mexico to produce wind power which will start producing next year and in 2017 with the aim of generating 1,000 MW. “There is infrastructure but it is not sufficient. When we started developing wind projects, there was a need to make infrastructure investments such as transmission lines where the turbines are located. I hope that SENER, the government, the CRE, and CENACE are planning very well so that the wind projects that are currently under development will happen,” he concludes.

A

Esther Arzate

Ecopetrol and Lukoil

new path April / May 2015 Mxe Mexico Energy and Business Magazine

for the energy sector

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Foreign and national companies – especially foreign– show an enormous interest in exploring and exploiting oil and gas in the 23 areas located in the Gulf of Mexico currently in the bidding process called Round One.

T April / May 2015 Mxe Mexico Energy and Business Magazine

he oil fields are lo-

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cated along the coasts of Veracruz, Tabasco, and Campeche that until the Energy Reform of 2013 had been reserved for the operations of Petróleos Mexicanos (Pemex).

Now, Pemex, like any other market competitor, added itself to the list of interested companies to obtain one or various blocks of marine fields that contain primarily light crude oil, the most valued in the market.

The list of companies that paid fees for data access containing seismic information for the first set of oil blocks in the bidding process of the National Commission of Hydrocarbons (CNH) in December 2014 includes large well-known petroleum companies with an international presence such as British BP, U.S. Chevron, Colombian Ecopetrol, Japanese Japan Petroleum Exploration, Russian Lukoil, Anglo-Dutch Shell, French Total, Norwegian Statoil, and the Brazilian Petrobras. For Mexico, the list includes Pemex and the recently created Petrobal and Diavaz, among others.

According to information from the Energy Ministry for the first bidding of Round One, in which Mexico’s government through Sener and the CNH put up for bidding 14 blocks of shallow water in Campeche, Tabasco, and Veracruz, 39 companies paid $5.2 million pesos to have access to geological data on the areas and 32 were already registered.

In an interview with Petróleo&Energía, Jordy Herrera, a management consultant from Fractal Energía and the ex-secretary

of energy under the Felipe Calderón administration, estimated that of the 39 companies registered independently in the CNH to compete for marine areas of hydrocarbons in the first bidding of Round One, it is likely that consortiums will be formed.

It is probable, he said, that Mexican companies will associate with companies that provide evidence of financial capacity and demonstrated experience in hydrocarbon production in other global areas. “It would be a surprise if a Mexican company won a block because it is the first time they have been put up for bidding,” he estimated.

Once the consortiums are formed (of two, three, or more companies) and provide evidence of financial and technological capacity, as well as experience, the contracts will be awarded in July 2015. Recently Energy Secretary Pedro Joaquín Coldwell assured that in the first two bidding rounds of Round One, the extension of the pipeline network and electricity sector projects, Mexico will receive an investment close to $62.530 billion U.S. dollars, which would generate 212,000 jobs.

Regarding the second bidding round of Round One, as of April 6, there were 16 companies who had expressed an interest: Lukoil, Total, Sierra Oil & Gas, CASA Exploración, Shell, Sánchez Oil & Gas Corporation, BP, CNOOC, Pemex, Eni International, Diavaz Offshore, Premier Oil, Exploration & Production PLC, Compañía Española de Petróleos (CEPSA), Sinopec Limited, and SapuraKencana Petroleum.

The second bidding round, published in February 2015, covers the awarding of five contracts for nine blocks of shallow waters in Tabasco and Campeche.

November 2014 Mxe Mexico Energy and Business Magazine

Once finished the hydrocarbon exploitation projects are estimated to attract an investment of $4.480 billion U.S. dollars in three years and 42,000 jobs.

The areas included in the bidding process will be awarded according to the contract model of production sharing (CPC), in which according to the CNH is designed to protect the interests of the State without appearing less attractive to investors. Mexico’s government will

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“THE ENERGY REFORM CAUGHT MEXICAN COMPANIES BY SURPRISE BECAUSE THE LAW PREVENTS THEM FROM PARTICIPATING AS DIRECT OPERATORS, BUT WE HOPE THAT THE COMPANIES WILL REACT AND THAT THEY CAN GO FORWARD AS SERVICE PROVIDERS OR AS PARTNERS IN OIL INDUSTRY PROJECTS”.

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receive the production and distribute part of the proceeds to cover exploration and production costs while providing a reasonable profit margin to the contractor as determined during the bidding process.

Under this production sharing agreement, the exploration activities are performed at the contractor’s sole cost and risk. The contractor receives payments once the production stage has been initiated.

A member of the Energy Commission and vice president of the chemical sector of the National Chamber of Transformation Industries (Canacintra), Gilberto Ortiz believed that the exploration and exploitation projects in place that are in the bidding round will help to lessen the budgetary impact on public finances as a result of the resounding drop in oil prices.

The active participation and interest shown by global companies in the bidding rounds sends a signal to national and international markets that the implementation process of the Energy Reform is going ahead, and the crisis derived from the fall in oil prices is temporal and cyclical.

Fortunately, petroleum companies are very familiar with international oil markets and their cyclical behavior, such that their participation in the bidding rounds indicate that these companies are looking towards the future and that low prices will not last for long, he added.

He admitted that the bidding areas could have been explored and exploited by Pemex, but also accepts that many of the companies participating in the process have worked in the Mexican market for years as service contractors for Pemex by providing technical services and machine and equipment rentals.

The difference, he added, is that now instead of being contractors they will be active

participants and competitors in the oil market recently open to private investment.

The tenders are seen as attractive for international companies operating in consortiums because of the availability of capital and experience, but occasionally they are unfamiliar with internal markets. In the case of Mexico, which has been a closed industry for more than seven decades, it is probable that they will associate with local companies to merge their international experience with local knowledge. “This is a characteristic of global companies,” explained the executive from Canacinitra.

“The Energy Reform caught Mexican companies by surprise because the law prevents them from participating as direct operators, but we hope that the companies will react and that they can go forward as service providers or as partners in oil industry projects,” said Ortiz.

For Pemex the options are limited since CNH prevents alliances between operators that produce more than 1.4 million barrels.

This prevents offers of alliances with companies such as Total, Chevron, Exxon, BP, Petrobras, Lukoil, to mention a few.

However, the first forays of international companies towards creating a partnership or to strengthen their trade relations with Pemex were with Memorandums of Understanding (MOUs) to exchange technical and commercial information.

When the idea of the Energy Reform seemed far away but still possible, the first companies to sign such exchange agreements were Shell, Petrobras, ExxonMobil, BP, Statoil, and Chevron.

Enthusiasm for the MOUs was at the root of the changes that took place in the energy sector’s legal structure in 2013. Agreements were signed with those companies that

“IT WOULD BE A SURPRISE IF A MEXICAN COMPANY WON A BLOCK BECAUSE IT IS THE FIRST TIME THEY HAVE BEEN PUT UP FOR BIDDING”.

showed interest and participated in Mexico – to the extent permitted by law – mainly Lukoil, Kuwait Foreign Petroleum, Pacific Rubiales, Eni, India’s Reliance Industries, China’s CNOOC, Malaysia’s Petronas, and Ecopetrol.

Precisely, Colombia’s petroleum company, Ecopetrol, is one of the companies that are in the two bidding rounds of Round One that until now have been published by Mexico’s federal government through the CNH, under the leadership of Juan Carlos Zepeda.

April / May 2015 Mxe Mexico Energy and Business Magazine

Ecopetrol wants a partnership with Pemex

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In an interview with P&E, the vice-president of Ecopetrol’s Development and Production, Héctor Monosalva Rojas, said that ventures in the Mexican petroleum market represent endless opportunities that fit well with the skills and experience that Ecopetrol have developed in mature fields, shallow waters (less than 100 meters of water depth), and in the learning curve that they maintain in exploratory activities in deep waters (more than 100 meters of water depth) in the Gulf of Mexico.

Ecopetrol has a subsidiary Ecopetrol America Inc. that in the last six years has worked in Houston. Currently it has 150 exploratory blocks and five important hydrocarbon discoveries that are in phases of delimitation and development. For now it will produce 20,000 barrels per day (bpd) until the end of 2015 and plans to reach 50,000 bpd during 2017-2018.

The executive highlighted that Ecopetrol maintains close to 30 alliances and partnerships in petroleum projects with Shell, the Spanish Repsol, Eni, and several medium-sized companies operating in the Gulf of Mexico.

As for the possible integration of consortiums to compete for blocks in Mexico, Monosalva admitted that “without a doubt, Pemex is the most important player in Mexico

and with which one could partner to make offers in these bidding processes.”

He added, “For us, it is very relevant to consolidate a partnership with Pemex because it is a reference and a partner with which we would like to have opportunities in these bidding rounds that would benefit both companies.”

However, he declined to give details on the future confirmation of the consortium that will present technical and economic proposals to compete for the petroleum fields. “I think that in the way that the bids are coming out and evaluating the opportunities that are aligning the strategies of companies, negotiations for these consortiums will formalize.”

The vice-president of the Colombian petroleum company admitted that the company has more opportunities for winning the conventional crude oil blocks, since it lacks the skills and experience in unconventional hydrocarbon reserves. “We are in the initial part of the learning curve and we do not feel secure entering in this type of project.”

This signifies that it will be absent when the Mexican government decides to put out for competition blocks in the unconventional reservoir known as Chicontepec, for example, or in northern areas in Mexico where there is evidence of shale gas. “We recognize that we do not have enough experience or sufficient knowledge to do any business proposals in these unconventional reservoirs,” he added.

“On the contrary, we see Ecopetrol competing in the third bidding of Round One that will be released at the end of April 2015 and corresponds to blocks of mature camps.

That is, reservoirs that in other times were explored or exploited by Pemex, but were abandoned for several reasons and have a potential for petroleum, gas, or both.

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April / May 2015 Mxe Mexico Energy and Business Magazine

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Competing for fields located in deep waters in the Gulf of Mexico is clearly our interest, and for this it is important to participate in a partnership with Pemex and the major companies (ExxonMobil, Shell, Chevron, BP, and Total) because they are well known operators of this time of exploratory environment,” said the functionary of the group formed by more than 20 companies with production and exploration operations in hydrocarbons, refining, biofuels, and fuel transport.

On the risk implied by the drop in international petroleum prices, he highlighted that Ecopetrol has developed a strategy for low price scenarios based on two pillars: (1) optimization and cost reduction and (2) an investment selection process that permits maintaining growth reported in recent years.

“The combination of investment processes and efficiency is allowing us to transition through scenarios of low oil prices with an important solid financial footing,” he said.

However, he admitted that Ecopetrol is concerned about the uncertainty in the execution of contracts. The contractual terms define the limits of profitability that – in volatile price conditions – can result in negative cash flows. He said that this uncertainty has diminished as CNH and Sener have modified the contract terms but he considers that there is still an opportunity for improvement to cover profitability and reduce the inherent risks of volatile prices.

Lukoil, supported by experience and financial stability The Russian Lukoil is also part of the two biddings of Round One. It is the private company with the most worldwide petroleum reserves. At the beginning of 2014 it reported 13,461 billion barrels, placing it ahead of ExxonMobil which recorded 12,816 billion barrels.

Lukoil distinguishes itself for having a stable financial position and possibilities to sustain production costs and increase production volumes despite the high turbulence that currently exists in the oil market.

As part of its validation in an international context, this Russian company adjudicated a contract for the exploitation of the second largest petroleum reservoir in the world, known as West Qurna 2 in Iraq. The petroleum field will produce 1.2 million bpd for at least 20 years.

Even though the Company has manifested interest in the exploration and exploitation of conventional and unconventional oil and gas fields, Lukoil’s experience is centered specifically on mature fields and reservoirs located in deep waters.

On these pages we have only talked about the first companies that have come knocking on the door to enter Mexico’s oil industry, which was closed for more than seven decades. As more opportunities open up for private, state-owned, and foreign companies, they will be taking their respective places in the Mexican markets.

“FOR US, IT IS VERY RELEVANT TO CONSOLIDATE A PARTNERSHIP WITH PEMEX BECAUSE IT IS A REFERENCE AND A PARTNER WITH WHICH WE WOULD LIKE TO HAVE OPPORTUNITIES IN THESE BIDDING ROUNDS THAT WOULD BENEFIT BOTH COMPANIES.” The author of this article is Esther Arzate and you can reach at: earzate2003@yahoo.com.mx

Flory Anette Dieck Assad

Chinese Banks: Financing Petroleum Projects

The spirit of the recently passed financial reforms permits foreign capital participation in financial intermediaries.

April / May 2015 Mxe Mexico Energy and Business Magazine

The government’s objective

34

of allowing foreign investment in Mexico’s financial institutions will enhance the development of activities taking place and lead to greater participation and capital to accelerate the volume of operations - which in turn will result in better service for the general public.

Industrial and Commercial Bank of China (Mexico) On September 26, 2014, Industrial and Commercial Bank of China (Mexico), S.A. (ICBC-Mexico), requested an authorization from the Ministry of Finance and Public Credit (SHCP) and the National Banking and Securities Commission to operate with a multiple banking license in Mexico with a social capital of $664.300 million pesos (approximately $45 million U.S. dollars) and with the indirect participation of the Chinese government.

With the Chinese Ministry of Finance owning 35.09

percent of the social capital shares of the ICBC-Mexico, the bank will initiate this new investment with the participation of 70.42 percent of Mexican subsidiaries alongside the Chinese Ministry of Finance and the China Investment Corporation, the sovereign wealth fund that manages international reserves in China.

The document explains clearly Mexico’s financial law requirements that all decision making bodies of the ICBCMexico will operate in an independent manner from the Chinese government, which will not exercise any functions of power in the new institution.

Industrial and Commercial Bank of China Ltd (ICBC) •It is the largest bank in China.

•It is part of the Chinese government.

•Accounts for approximately 2.5 million corporate clients and 150 million individual clients.

•Registered financial assets, as of September 2014 when the application was submitted, were more than 20 billion Chinese yuanes (approximately 3.2 billion U.S. dollars).

•Has a presence on the Asian continent, in Europe, Oceania, in the Americas operates in the United States, Canada, Argentina, Peru, and Brazil.

•Specializes in personal, corporative, electronic, and international banking and credit cards, among others.

Business Opportunities in Mexico’s Energy Sector

2ND MEXICO ENERGY AND BUSINESS FORUM Presented by Mexico Energy and Business Magazine Houston, Texas July 08, 2015

Find out the latest developments in Mexico’s energy sector and take part in the official launching of Mexico Energy and Business Magazine.

Our panel of US and Mexico experts will provide information on business opportunities, research findings and highlight the major breakthroughs, as well as challenges facing the sector today.

Mexican lawmakers and senators will explain the latest regulatory and legislative laws approved by Mexico’s Congress.

We hope you join us and take part in these unprecedented growing business opportunities in today’s Mexican energy sector.

For more information, please contact: José Escobedo Dallas, (214) 206-4966 ext 227 jescobedo@latinoleaders.com Javier Senderos Mexico City, Sales P&E (52) 559136-5100 jsenderos@petroleoenergia.com

“THE GUIDANCE OF THE STATE OVER THE FINANCIAL SYSTEM IS SUPPORTED BY LAW AND IN THE ABILITY TO REGULATE AND SUPERVISE ITS OWN INTERMEDIARIES, AND NOT IN THE NATIONALITY OF SAID CAPITAL.” FINANCIAL REFORM 2013

April / May 2015 Mxe Mexico Energy and Business Magazine

•The ICBC-Mexico will be its first subsidiary in Mexico, authorized by the Banco de México and authorized by the National Banking and Securities Commission on November 7, 2014 with headquarters in Mexico City.

•The SHCP authorized it on November 10, 2014 to begin operations.

36

Pemex signs agreement with China The benefits of the Financial Reform did not depend on Mexico’s energy industry.

Simultaneously on November 13, 2014, Pemex signed two agreements with Chinese banks to obtain financial resources that it requires for its modernization – lines of credit for more than 10 million U.S. dollars.

These two agreements were signed by Pemex’s general director, Emilio Lozoya, with the China Development Bank (CDB) and the Industrial and Commercial Bank of China (ICBC): 1. The first agreement signed with the ICBC consists of a first line of credit of up to 10

million dollars to finance exploration and hydrocarbon production projects; it will also be targeted to purchasing equipment for marine areas.

2.The second agreement signed by the CDB aims to finance infrastructure projects, exploration and production activities as well as the industrial transformation of the hydrocarbon sector.

3.Both agreements specify that the credit lines will be open for Pemex as well as other Mexican companies that provide services.

These events coincide with the analysis published in Petroleo&Energia magazine (year 11, issue 82, October 2014, pp: 68-71) with the title “The Financial Arm of the Energy Reform,” in which it was affirmed that “the Financial Reform is, without a doubt, a strong arm of the Energy Reform.”

Flory Anette Dieck Assad is a member of the National System of Investigators of the National Council of Science and Technology (CONACYT).

Author of Financial Institutions: Structure and Regulation. Coauthor of Energy and Sustainable Development in Mexico. National Award for Ethics. Professor and researcher at the Monterrey Institute of Technology, Monterrey campus.

You can contact Flory at: fdieck@itesm.mx

POTENTIA

SECURITY AND CERTAINTY IN THE HYDROCARBON SECTOR

XXXXXXXXX DXxxxxxxxxxxxxx

Mexico’s petroleum industry faces challenges such as the production of hydrocarbons but with the fall in petroleum prices, the Energy Reform may redefine its course.

C

arlos de Regules, general director of the Security, Energy, and Environmental Agency (ASEA) met with members of Club Potentia, Petróleo&Energía’s business club, where he made a presentation and unveiled the primary characteristics of the agency that began functioning in March.

De Regules attended the breakfast at Club Potentia, and highlighted ASEA’s functions clarifying that it will be an agency with the capacity to secure persons and the integrity of the environment with judicial, procedural, and cost certainty in the hydrocarbon sector.

ASEA’s vision is to create the cleanest and more secure sector in the world with values such as professionalism, transparency, impartiality and opportunity - highlights that aroused the interest of the attendees.

ASEA has a clear constitutional mandate to regulate and monitor the entire value chain of Mexico’s hydrocarbon sector by applying

a regulatory policy and awarding permissions that focus on risk management, stressed Carlos de Regules.

During the breakfast, Arturo Carranza of Solana Consultants responded to a request from Club Potentia to present the “Panorama of the Production of Hydrocarbons in Mexico: Challenges and Opportunities,” and reported that the world will need more energy and that this generation plays an essential part in economic growth and employment generation.

Carranza highlighted that energy serves as a starting point to develop infrastructure and used an example from Brazil, where the energy industry led to the take-off of projects and the emergence of national companies.

On this, he was very clear and said that in Mexico the energy sector is a growth and economic development factor, which accounts for its importance in the implementation of the Energy Reform.

Carranza concluded saying that the “challenge was, is, and will be: increase crude oil production.”

As a member of Club Potentia you will have access to important information regarding the industry, such as articles, reports and important documentation that will enable you to prosper and make wise business decisions. You will also have the opportunity to meet and interact with key decision makers in Mexico’s dynamic energy sector.

Club Potentia is located on the first floor of the St. Regis hotel in Mexico City For more information please contact: Jose Escobedo at:jescobedo@latinoleaders.com

38 April / May 2015 Mxe Mexico Energy and Business Magazine

INVESTMENT OPPORTUNITIES IN THE NEW ERA

Arturo Gutiérrez E.

MEXICO SHALE SUMMIT 2015 The Leading Oil and Gas Event for the Mexico Shale Play

DUNCAN WOOD, DORA MANCERA, JAY APPLEWHITE, DAVID MADERO, BRANDON SEALE, RUBEN KURI, SOLL SUSSMAN, AND FERNANDO ALONSO.

The Mexico Shale Summit 2015 took place in San Antonio, Texas in the first quarter of the year with the goal of providing insight and analysis on the industry’s opportunities and challenges in Mexico, facilitating information-sharing and the creation of new commercial relationships by bringing together the highest profile sector stakeholders.

Given the current market conditions, the event allowed for a much needed transparent and honest dialogue about the future of the hydrocarbons industry in Mexico and the role unconventional and onshore exploration can play.

Despite the recent volatility in the markets, the Mexico energy reforms of 2014 have transformed the hydrocarbon industry and continue to attract international investors, many of whom were present at the event in San Antonio.

40

The annual Mexico Shale Summit brought together government officials, oil and gas operators, and related service providers from Mexico, Colombia, United States, Canada, Argentina, Belgium, Japan and the Netherlands, as well as financial institutions, investors and vendors, who analyzed and debated onshore exploration and investment opportunities in Mexico.

The event focused on the important regulatory changes affecting future operators within Mexico’s oil and gas sector and the country’s investment and development scenario. Timeframes and probabilities of how Mexico onshore and unconventional exploration will evolve and when related necessary infrastructure will be in place for efficient market dynamics to work were key to the discussion.

The event reached 300 senior level executives within the oil and gas and related industries from Mexico, the U.S. Canada, China, Japan, Saudi Arabia, Argentina, and the Netherlands.

Jay Applewhite, Chairman of Industry Exchange, welcomed the participants to San Antonio and introduced the Master of Ceremonies, Duncan Wood, Director of the Mexico Institute at the Woodrow Wilson International Center for Scholars. Duncan’s experience, knowledge and insight into Mexico’s Energy Reform provided a unique dynamic to the agenda over the course of the two day event.

THE EVENT REACHED 300 SENIOR LEVEL EXECUTIVES WITHIN THE OIL AND GAS AND RELATED INDUSTRIES.

Article and photographs provided by Mexico Shale Summit

DUNCAN WOOD, DIRECTOR OF THE MEXICO INSTITUTE AT THE WOODROW WILSON INTERNATIONAL CENTER FOR SCHOLARS, PARTICIPATED IN VARIOUS PANELS.

EDGAR RANGEL FROM CNH, MARCO COTA FROM SENER, JAY APPLRWHITE FROM INDUSTRY EXCHANGE, AND JAVIER ESTRADA FROM ANALÍTICA ENERGÉTICA.

GEORGE P. BUSH – COMMISSIONER OF THE TEXAS GENERAL LAND OFFICE, WAS THE KEYNOTE SPEAKER FOR THE LUNCH ON THE SECOND DAY.

42

George P. Bush – Commissioner of the Texas General Land Office, was the keynote speaker for the lunch on the second day.

He opened his speech in Spanish and gave a special welcome to the Mexican business men and women to the state of Texas. He gave a clear overview of the role of the Land Office and its importance to the economic development, education and environment for the state. He also expressed the State’s interest in supporting Mexico achieve it’s goals as the Energy Reform rolls out.

The Mexico Shale Summit, San Antonio 2015, closed the event with an extremely interesting discussion that focused on the economics of natural gas and what the reform means for Mexico. This dynamic included the participation of Chris Faulkner, CEO of Breitling Energy and Glenn Hart, the CEO of Laredo Energy and was moderated by Charles Blanchard – Head of Gas Research for Bloomberg New Energy Finance.

Transplace

April / May 2015 Mxe Mexico Energy and Business Magazine

empowering Mexico’s growth

44

With the Energy Reform in full swing, foreign companies that provide business development and consulting services in Mexico are optimistic about the increase in trade the Reform will bring.

has been my passion. I am fortunate to have traveled the world working with operators, drillers, construction and service companies.

I have worked for Transplace since June of 2014. My focus is on selling our technology and consulting services to the leading exploration & production companies in North America.

Such is the case

business in Mexico in 2008.

We provide cross-border and intra-Mexico integrated transportation management and logistics solutions to the energy, automotive, consumer packaged goods and industrial manufacturing industries in the country.

The service portfolio consists of U.S. and Mexican Customs brokerage, trucking, rail, air, ocean, and warehousing services. We also offer a bilingual proprietary transportation management system (TMS).

of Dallas-based Transplace, a leading provider of transportation management services specializing in third party logistics and technology, transportation management and supply chain management and consulting.

Alaster Love, a supply chain management consultant, is currently the vice president of business development whose specialty are transportation management systems.

In this Q&A, Love tells Mexico Energy and Business Magazine about the opportunities and challenges facing Mexico’s energy sector today.

Q - Would you please tell us a little bit about your professional background and for how long have you been working for Transplace International?

A - I have worked in the logistics industry for 15 years. Oil & gas logistics and supply chain

Q - When did Transplace begin doing business in Mexico and in what fields does it specialize in?

A - Transplace started doing

Q - What are the main challenges Pemex faces today and what would be some of the obstacles it may encounter in the near future in terms of logistics?

A - PEMEX, like all international oil companies, has to balance its domestic interests with an international landscape of petroleum producers.

ALASTER LOVE, VICE PRESIDENT OF BUSINESS DEVELOPMENT - TRANSPORTATION MANAGEMENT SYSTEMS – TRANSPLACE, DALLAS, TEXAS.

Onshore exploration and production has its own unique set of challenges, as does offshore.

In terms of procurement, centralizing this process and creating common process for all five divisions of PEMEX will be a big step in the right direction.

April / May 2015 Mxe Mexico Energy and Business Magazine

Q - In comparison with other Latin American countries, where does Mexico stand and perform in terms of logistics and what are the challenges it faces in the energy and oil industries?

A - Mexico has an accomplished group of

46

domestic and international providers of logistic services. In comparison to other countries in Latin America, Mexico is more mature, since it has been importing materials from global providers for over 20 years.

Mexican Customs, however, does not have a special customs regime for imports of materials to be used in industry like Brazil does. In Brazil this program is called “repetro.”

Mexican Customs have programs for definitive and temporary imports that are managed by over 700 Mexican customs brokers, who have four ports to choose from.

Unlike the rest of Latin America, Mexico shares a border with Texas. Generally speaking, the Port of Laredo is used for crossing materials that go to Ciudad del Carmen (offshore) and all explosives and hazardous materials used in the industry. The Port of Reynosa is used for imports to the Burgos Basin and onshore operations in Tamaulipas and Veracruz. There are ocean services available from Louisiana and Houston to Dos Bocas and Progreso on a charter basis or on a fortnight.

The biggest challenge for Mexico is that it is close to Houston, yet far enough that there are necessary procedures, such as customs, on both sides of the river that can slow shipments for those who are inexperienced with the process or don’t work with a freight forwarder or customs broker who understands the industry.

Q – Where do you see opportunities for companies to do business in Mexico’s open energy markets?

A - I foresee many opportunities for Transplace in Mexico in the coming years in regards to the energy reform. Several areas of particular focus will be technology, using our TMS services and Transplace’s deep knowledge and experience in Mexican Customs brokerage, rail, and truck brokerage.

Q - As far as logistics are concerned, are you seeing any trends in today’s energy sectors?

A - Just-in-time logistics is a trend in the energy sector, as is the use of technology like a TMS, which gives the owner of the freight visibility into financial and carrier performance and commonly established key performance indicators.

The energy industry is adapting technology that has been used in other industries for more than a decade, in order to save valuable percentage points on cost and to enforce their need for QHSE.

Q - What advice would you give a foreign company wanting to do business in the Mexican energy sector?

A - My advice would be to make a carefully prepared decision to focus on the offshore or onshore before operations. It’s a big country with lots of kilometers between Reynosa and Ciudad del Carmen!

The interview was conducted by Dienst International - An international consulting firm specialized in advising and assisting U.S., Mexican and Latin American clients in locating opportunities in exporting, franchising, foreign investment and representative services in industries such as oil and energy, aerospace, manufacturing and food processing, contact: Virginia Arteaga at varteaga@ dienstinternational.com

Eduardo Canales and Steve Otillar

MASTER LIMITED PARTNERSHIPS SOUTH OF THE BORDER: April / May 2015 Mxe Mexico Energy and Business Magazine

A New Financing Scheme to Fuel Mexico’s Energy Infrastructure

48

For several years, many international oil and gas companies (IOCs) have desired to enter the Mexican energy market, global energy markets’ last frontier.

April / May 2015

49

INVESTMENT OPPORTUNITIES IN THE NEW ERA

April / May 2015 Mxe Mexico Energy and Business Magazine

E

50

ven though Ronda Uno and the upstream sector (exploration and production) has captivated the attention of IOCs and the media, some of the best opportunities lie in the Mexican midstream industry given the continued growth of demand for gas and refined products in Mexico, with rather limited transportation, distribution and storage infrastructure.

Even if the Mexican energy reforms lead to significant increases in domestic production, Mexico will not see the full benefits of expanded exploration until it solves the dilemma of infrastructure constraints.

The US unconventional oil and gas boom was slowed by the inability to get shale oil and gas to market, and the problem will be exponentially more challenging in Mexico. Although transportation demands exist and will continue to grow, the country risks, including the lack of certainty surrounding the new roles of existing regulatory agencies such as the Comision Reguladora de Energia (CRE) together with the newly formed regulatory bodies such as Centro Nacional de Control de Gas Natural (CENEGAS) may limit the amount of direct foreign investment in the early stages of the reform.

Thus, Mexico has been developing other means to incentivize investment and encourage the development of the midstream sector.

One key financing vehicle that has played a vital role in pipeline development in the US is the master limited partnership (MLP).

This article will examine the potential for Mexico to utilize MLP model domestically to try an incentivize midstream investment, and investment in the energy sector more broadly as well.

Current Status of Mexico’s Midstream Industry For most of the 20th Century, Petroleos Mexicanos (Pemex) was in charge of building, financing, regulating and operating the national pipeline system.

Due to the constitutional changes enacted in late 2013, Pemex is no longer an energy monopoly, and it is being stripped of its regulatory functions.

PEMEX will now focus primarily on upstream and downstream endeavors while the CRE and CENEGAS have been granted the regulatory authority to administer the National Pipeline System. Currently, Mexico has over 3,000 miles of oil pipelines and 5,500 miles of gas pipelines.

In comparison, the United States (US) has over 57,000 miles of oil pipelines and Texas alone has over 58,000 miles of gas pipelines. In addition to the limited midstream capacity, this map shows that the National Pipeline System does even come close to reaching all of Mexico.

Challenges to Satisfy Domestic Demand and Industry Growth Mexico has been experiencing one of the fastest growth rates in natural gas consumption over the last 10 years worldwide.

As seen below, increased demand has been driven mainly by the industrial and electricity generation sectors. While demand has been rising, domestic oil and gas production has been lagging at an increasing rate. Several studies have estimated that Mexico will need approximately USD$17 billion [in infrastructure investment] to address the lack of midstream capacity by 2035. This rapid growth in demand, coupled with declining domestic production, was one of the key drivers behind the revolutionary energy reforms in 2014.

INVESTMENT OPPORTUNITIES IN THE NEW ERA

THE CLUB Potentia Club, Is The only private oil and energy business club in Mexico opens its doors and welcomes everyone who would like to establish partnerships in Mexico.

Located inside the luxurious and modern The St. Regis Mexico City, Potentia Club offers its members exclusive benefits and services that only a world renowned hotel like St. Regis can provide.

Local and international leaders in the energy sector have access to the hotels’ business centers and services, as well as a list of added member’s benefits, providing the ideal situation for networking opportunities while enjoying your stay.

Potentia Club welcomes business executives as well as government officials. As a member of Potentia Club you will have access to important information regarding the industry, such as articles, reports and important documentation that will enable you to prosper and make wise business decisions. You will also have the opportunity to meet and interact with key decision makers.

petroleoenergia.com

Club Potentia Lounge

THE CONTENT Potentia Club provides it’s members with high value content relevant to the industry in a week to week reunion format with high profile players in the sector, sharing their point of view, opinions, latest information and creating a networking space between members.

Potentia Club is a source of the latest and most relevant information in the energy industry, complementing it’s members agenda with forum invitations and constant electronic content.

With relevant guest speakers sharing their views and knowledge of the industry at the exclusive Potentia Club weekly reunions, Potentia has become a key aspect of the industry in terms of networking opportunities and access to high value information and forum invitations.

EXPERTISE Potentia Club is backed up by the expertise and professionalism of our publications, like Petróleo & Energía, Mexico’s top oil and energy magazine for the past 13 years. Mexico Energy and Business Magazine, a monthly English digital magazine specializing in providing information to investors and industry leaders that would like to do business in Mexico’s energy sector.

Líderes Mexicanos (Mexican Leaders) magazine, one of the country’s most important magazines profiling Mexico’s key influential decision players. Latino Leaders magazine tells the stories of prominent Hispanics and Latinos in the United States.

And of course, the wide portfolio of events and services specific to the energy sector, mainly the yearly gathering of the “100 Leaders of the Energy Sector”, business forums both in Mexico and in the United States and an exclusive gala reserved for the key players of the industry.

(million cubic feet per day)

10k 8k 6k 4k 2k 0k

2011 Supply

2012 Domestic

Imports

2013 Demand

2014 Industrial Sector

2015 Electricity sector

Thanks to its energy revolution in the Eagle Ford Shale and the Permian Basin, the US has become a net exporter of natural gas to Mexico in the last decade. This trend particularly expanded with four new cross border pipeline construction projects starting in the last two years and at least three that are currently under negotiations or scheduled to commence construction by 2017.

With ever-rising demand, potential new supplies offshore and in Eastern Mexico, and prospects of inexpensive imports from the US, there is one key question: Now that the Mexican government is not directly involved in the financing, development and operation of midstream infrastructure, where will the money to finance these projects come from? While foreign investment, public debt, and project finance provide possible solutions, there remain vast, relatively untapped financing resources within Mexico itself, and MLPs could be the answer everyone is looking to bring those funds to market.

April / May 2015 Mxe Mexico Energy and Business Magazine

MLPs 101

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MLPs are publicly-traded entities that focus on taking advantage of specific US tax rules to produce stable and predictable cash flows through “Qualified Income”. Properly structured MLPs do not pay taxes at a corporate level as revenues are allocated directly to its limited partners.

MLPs first appeared in 1981; in 1987 US Congress limited their use mainly to the energy industry by requiring at least 90% of an MLP’s gross income for each taxable year “Qualifying Income”. Qualifying Income includes income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or marketing of any mineral or natural resource generated anywhere in the world.

While many MLPs may have internal restrictions on having investments abroad, there is no restriction from a legal perspective.

Generally speaking, for purposes of the midstream sector, as long as the MLP is earning income from the transportation or marketing of oil, gas or liquids, that income will be qualifying income.

MLPs are usually two-tier entities: the first tier is a holding company, either a partnership or LLC, which fully owns the Operating Company.

Its ownership is split between the “investing public” and the sponsor. The holding company will wholly own a second tier operating company, either a partnership or LLC, which directly or indirectly, holds operating assets that generate Qualifying Income such as pipelines, storage facilities, etc. This corporate structure allows the MLP to access two different financing sources: the public equity markets at the holding company level and the debt markets at the Operating Company level.

While a detailed analysis of the structure and formation of MLPs is beyond the scope of this article, there are essentially [three] fundamental characteristics that each MLP must have: (i) The MLP must be created as a passthrough entity for tax purposes so it does not pay federal income taxes at the corporate level; (ii) The MLP’s underlying business activity must generate stable and predictable cash flow; (iii) The units constituting equity ownership of the MLP must be listed and publically traded on a major securities exchange to ensure liquidity and to provide access to the capital markets.

In the past 25 years, over 100 energyrelated MLPs have been formed with a collective market capitalization of USD$470 billion. The majority of these MLPs are focused on operating midstream assets that connect oil and natural gas producers to distributors and end users because natural gas transportation services are usually provided under longterm fixed-fee contracts to mitigate potential commodity price volatility. Such long term agreements are also very well suited to generate Qualifying Income for an MLP.

MLPs Role in the US Energy Revolution Hydrocarbon producers in the US rely heavily on MLPs to finance and develop the necessary midstream infrastructure to connect with consumers. During the last 10 years, MLPs have invested over USD$130 billion in midstream domestic projects and are currently aiming to

INVESTMENT OPPORTUNITIES IN THE NEW ERA

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expand their investments into export facilities to match the increasing domestic supply and the global demand.

April / May 2015 Mxe Mexico Energy and Business Magazine

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Currently, Mexico has limited domestic financing sources for midstream infrastructure projects.

The closest thing to MLPs in Mexico are the Certificados de Capital de Desarrollo (CKDs).

CKDs are securities issued by Trusts to raise capital for infrastructure, real estate, mining, technology and entrepreneurial ventures.

Similar to MLPs, CKDs must issue dividends directly linked to the revenue generated by the underlying property or assets held by the Trust.

The CKDs are not debt instruments or bonds; rather, they are cash flow-based securities similar to MLP units, Income Trusts in Canada or the Specialist Fund Market in Great Britain.

The CKDs are regulated by the Comision Nacional Bancaria y de Valores (CNBV) and they trade in the Bolsa Mexican de Valores (BMV).

Some of the rules imposed on CKDs require fixed-income, predetermined maturity date, more than 20 CKD-holders, and compliance with corporate reporting requirements similar to Sociedades Anonimas Bursatiles (“SABs”).

When first created in 2008, the CKDs main goal was to promote market growth through the entry of new securities issuers and the creation of new financing sources for strategic projects. They experienced a short-lived boom in 2010 driven by Mexican pension funds (SIEFOREs) and institutional investors need for low-risk, cash-producing securities. However, the creation of FIBRAS (Mexican real estate investment trusts) together with low yields, market underperformance and legal uncertainty surrounding their underlying projects has significantly weakened investor’s interest.

Necessary Changes in Mexican Laws Even though the CKDs share some traits with the MLPs, they remain very different financing vehicles. CKDs lack the key economic driver behind MLPs, the tax efficiency by avoiding double taxation against income generated from operating company assets. CKDs also do

Capital Investment (billion)

Importing the MLP Scheme to Mexico

Capital Spent on Investment Projects by MLPs

$30

$30.1

$25

$22.2

$20

$16.5

$14.7

$13.3

$15

$11.1 $10

$9.7

$5.5 $5 $0

$0.4

$0.9

$1.0

$1.0

$1.4

$2.7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E

not offer the flexibility of MLPs in being able to access debt and capital markets for financing needs.

The BMV is currently working with investors, midstream companies and the government to create a scheme that replicates some of the MLP’s fundamental elements like creating a tax pass-through entity capable of issuing securitized-participation interests under the Ley General de Sociedades Mercantiles and the Ley del Mercado de Valores to entice retail and institutional investors or creating a “Qualified Income” carve out under the Ley de Impuesto Sobre la Renta to directly promote midstream activities.

Conclusion Today, Mexico faces an uphill battle to build and modernize oil and gas pipelines that can fuel its internal growth and ignite its global competitiveness. Domestic energy demand continues to outgrow its supply, progressively tipping the net export balance into negative numbers. Additionally, the current midstream infrastructure does not cover the national territory, making significantly more expensive the distribution and marketing of natural gas and oil to areas far from the urban centers, forestalling their economic development.

These are the challenges that the Energy Reform must address by creating a competitive marketplace where midstream companies, whether domestic or international, can gain access to cheap capital with relative ease. However, there are limited investment vehicles within the Mexican legal and financial systems to allow for national and foreign investors to infuse the necessary capital that would ultimately transform such lagging sector. The MLP model provides a successful scheme that could connect institutional and retail investors with midstream companies to jumpstart the Mexican midstream sector. The Mexican government, the BMV and the public in general must push to enact these changes to take full advantage of the Energy Reform momentum and ultimately create a vibrant energy industry.

Eduardo Canales and Steve Otillar from Akin Gump Strauss Hauer & Feld.

Since 1945, Akin Gump has provided a comprehensive suite of services for global energy companies and investors encompassing business transactional, dispute and regulatory matters in key global energy “capitals”.

Partners in its energy practice were pioneers in the MLP sector 35 years ago and since then have represented MLPs through their full cycles.

INVESTMENT OPPORTUNITIES IN THE NEW ERA

AGENCIA DE COMUNICACIÓN Y MARKETING ESTRATÉGICO DE FERRAEZ, ESPECIALIZADA EN CONSTRUIR EXPERIENCIAS, COMUNIDADES Y CONTENIDO HACIA LOS LIDERES DE NUESTRO PAÍS.

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