Mexico Energy - Feb/March 2015

INVESTMENT OPPORTUNITIES IN THE NEW ERA

14 BILLION DOLLARS FOR WIND PROJECTS THE CNH – IN SEARCH OF TRANSPARENCY

INVESTMENT PARTNERS FUNDS IN ENERGY Vol. 2 No. 1 February - March 2015

LETTER FROM THE EDITOR

A

After a nice holiday break

and having spent time with family and friends, I’m back and ready to continue delivering relevant information on Mexico’s energy industry.

As many of you know, Mexico Energy and Business Magazine is the first magazine in English that specializes in today´s Mexican energy sector. Our publication is aimed at leaders in the industry, as well as private and foreign investors who would like to capitalize on Mexico’s open energy market.

Our reporters, columnists and editors provide the industry with the latest news and information, including expert profiles, business updates, legislative regulations and report on investment opportunities.

For 2015, Mexico Energy and Business Magazine will publish bi-monthly, six times during the year. In addition, we anticipate that these six issues will contain more editorial content than the previous ten.

On a related note, we are proud to announce Mexico Energy newsletter, which will be distributed in the coming months to thousands of readers across the U. S., Canada and Mexico.

For the February/March issue, we report on the oil giants interested in participating in the first tender of 14 areas in shallow waters in the Gulf of Mexico. Exxon Mobil, Chevron, Shell, and Ecopetrol are among 30 international companies ready to explore and produce crude in Mexico.

For our cover story, Investment Funds - Partners in Energy, Esther Arzate presents various financial institutions, commercial banks and investment funds that will be fine-tuning their evaluation mechanisms to resource energy projects across the country.

The wind power industry is expected to grow substantially in the next five years. The plan is to increase by four times the capacity, and reach a production goal of 9,500 MW, according to Adrián Escofet, president of the Mexican Association of Wind Energy. In this article, we explain how public and private investments will finance these projects worth $14 billion.

In other coverage, Héctor A. Acosta Félix, Commissioner of the National Hydrocarbons Commission (CNH), writes about how the CNH is preparing to become a transparent agency and gives recommendations on how to combat corruption.

Lastly, we are happy to announce that Soll Sussman, managing director of S cubed Studio, a consultant specializing in cross-border energy contacts and coordinator of the annual U.S.-Mexico Border Energy Forum, will be a frequent columnist for our publication. Don’t miss his latest piece, Change and development in Mexico despite low oil prices.

If you would like to contact me, please do not hesitate to e-mail me. I will be more than happy to answer any questions you may have. Until April, everyone!

MEXICO ENERGY AND BUSINESS MAGAZINE VOLUME 2, NO. 1 FEBRUARY / MARCH 2015 Publishers

Managing editor

Reporters

Editor in Chief Co-editor

Translations:

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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

Esther Arzate Héctor A. Acosta Félix Orlando F. Cabrera C. and J. Damián González Rivera Milton Méndez Hugo Hernández Ramos

Pamela Rogers

Fernando Izquierdo Romero Rodrigo Valderrama Viveros Carlos Cuevas Martínez Luis Enrique González Piceno Pete Alvarado Claudia Garcia Bejarano Stephanie Rivas 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

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

February / March 2015 Mxe Mexico Energy and Business Magazine

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INDEX FEBRUARY/MARCH 2015

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First tenders: The president of the National Hydrocarbons Commission, Juan Carlos Zepeda, comments that 30 companies have demonstrated an interest in participating in the first tender of 14 areas in shallow waters in the Gulf of Mexico.

14 Investment funds, partners in energy: Now that the

Energy Reform is in full effect, commercial and development banks did not hesitate to open their portfolios to finance petroleum and electricity projects. Here we present various financial institutions, commercial banks and investment funds that will be fine-tuning their evaluation mechanisms to resource projects.

24 14 billion dollars for wind projects: Public and private

10 14

investment for wind energy projects will reach 14 billion dollars between 2015 and 2018, three times the amount destined in the last eight years, according to Adrián Escofet, president of the Mexican Association of Wind Energy (AMEE).

28 In search of transparency: The National Hydrocarbons

Commission (CNH) approved the first round of hydrocarbon exploration and extraction contracts in 14 Mexican fields last December. This agreement, as one would expect, divided public opinion between those who distrusted any constitutional change and those who welcomed private and international investments. Nevertheless, the majority of the people (opinions) agree on one thing –the use of hydrocarbons should be protected from corruption. Here we present CNH’s recommendations.

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A promising future: Mexico’s new Electric Industry Law (LIE) and its regulations, part of the Constitutional Reform of December 20, 2013, promises great opportunities for private investment never seen before. Here the authors describe the general characteristics of the new electric sector with an emphasis on the clean energy certificates and comment on their applications in other international markets.

40 Change and development in Mexico despite low oil prices: Soll Sussman, managing director of S cubed Studio and a consultant specializing in cross-border energy contacts says that despite the slump in oil prices, these will not deter Mexico’s energy sector transformation potential.

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February / March 2015 Mxe Mexico Energy and Business Magazine

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BUSINESS UPDATES

Business updates MEXICO ENERGY AND BUSINESS

Mexico’s oil production drops to 2.43 million barrels per day

Smart grids attract investors: CFE The general director of the Federal Electricity Commission (CFE), Enrique Ochoa, said that with smart grids it will promote installing solar panels in homes.

Ochoa said that within the business community of the Davos Forum there is interest to develop a higher quality transmission and distribution grid to improve service.

“You can develop smart grids,” explained Ochoa Reza.

He added that this type of infrastructure would facilitate the installation of solar panels in homes, promoted by the energy reform.

“The energy reform promotes distributed generation, and we are in favor of citizens installing solar panels.”

In an interview with Milenio Television, the CFE director commented that abroad there is a continued interest in reform implementation in Mexico.

Ochoa said this year the industrial tariffs will drop 16 percent, commercial tariffs by 9.6 percent, and 2.0 percent, domestic.

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February / March 2015 Mxe Mexico Energy and Business Magazine

Pemex oil production has been dropping since 2004, but last year’s decline of 3.69% is the highest in the last five years.

Petróleos Mexicanos (Pemex) oil production dropped last year to 2.43 million barrels per day, compared to its alltime high of 3.38 million.

Pemex oil production has been dropping since 2004, but last year’s decline of 3.69% is the highest in the last five years. Specialists have warned that if the trend is not reverted it will affect the company’s earnings.

The 2014 production figure is the lowest for a full year since 1986, according to estimates from El Universal based on Pemex data.

The lack of investment and a government budget model that relies on Pemex to obtain almost one third of its income forced the company to focus on developing fields in shallow waters as Cantarell and Ku-Maloob-Zaap, instead of allocating resources to areas with better prospects, Gonzalo Monroy, head of the specialized consulting firm GMEC, explained.

If the downward trend continues, Mexico’s government revenues may be affected despite its oil-hedging program, said Luis Miguel Labardini, expert of the specialized consulting firm Marcos y Asociados.

El Universal

BUSINESS UPDATES

SENER and CFE Launch Tenders The energy secretary and president of the board of directors of the Federal Electricity Commission, Pedro Joaquín Coldwell, and CFE’s general director, Enrique Ochoa Reza, announced tenders for 12 electric power infrastructure and natural gas transport projects that require an investment of US$3.300 billion and allow a tariff reduction in favor of the users.

Enrique Ochoa Reza indicated that the projects will add 666 MW of installed capacity of the electric grid, 989.10 kilometers of transmission and distribution networks, and 1,015 kilometers to pipeline networks.

CFE’s general director announced it will offer tenders for three gas pipelines, one Project of natural gas transport for Baja California Sur, a combined cycle power plant in the state of Sinaloa, four transmission projects, and three distribution projects.

Abengoa to develop largest combinedcycle powerplant in Mexico Abengoa has been chosen by Mexico’s Federal Electricity Commission (CFE) to develop the Norte III project, a 924MW combined-cycle power plant in Ciudad Juárez, Mexico as part of the National Investment Plan 2014-2018 recently announced by the Mexican government.

Under the $1,550 million contract, Abengoa will handle the engineering, design and construction of the plant, as well as the operation and maintenance for a 25-year period. During the peak construction phase, more than 2,000 direct and indirect jobs will be created.

The project is expected to be completed within 30 months, and upon completion, the Norte III project will be the largest combined cycle plant in Mexico.

The construction phase investment will total around $700 million, which will be financed with a mix of equity and non-recourse debt.

Power Engineering magazine

ABB strengthened Pierre Comptdaer, president and general director of ABB in Mexico, commented that the Group he represents has started thinking in 2015 about organic growth. “During the last two or three years, ABB acquired several large companies, and we worked a lot in 2014 on integrating them into our structure. We have learned how to create synergies, and how we can grow together much more.”

Comptdaer explained that “ABB has always been a company with a very internal focus. All this we want to change with this strategy. At the global level we continue with the same organization as other areas, like business units.

“We used to have eight regions, but now they have been reduced to only three. Greg Scheu (ABB CEO) is responsible for the focus on the region of the Americas, where we have representatives in four large countries reporting directly to him. Meanwhile, ABB’s director in North America Enrique Santacana, coordinates the remaining countries of Latin America,” Scheu concluded.

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February / March 2015 Mxe Mexico Energy and Business Magazine

F I R ST February / March 2015 Mxe Mexico Energy and Business Magazine

TENDERS

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The large oil companies, Exxon Mobil and Chevron, as well as the Colombian Ecopetrol, are among those companies interested in the initial round of tender that, for the first time in seven decades, allows private investors to explore and produce crude in Mexico.

T

he president of the National Hydrocarbons Commission, Juan Carlos Zepeda, told reporters that as of now 30 companies have demonstrated an interest in participating in the first tender of 14 areas in shallow waters in the Gulf of Mexico and of these, 16 companies have applied formally to obtain the “data file,” that contains geographic and seismic information for each area.

The representative said that after reviewing their profile, seven companies were authorized to receive the information

in the data file, including U.S. companies, Exxon Mobil, Chevron, and Hunt Overseas Oil Company; Colombian, Ecopetrol; British, BG Group; and Anglo-Dutch, Shell.

The companies will pay slightly over 360,000 dollars to obtain the technical information over the 14 tendered blocks. Zepeda said that the actual process of tenders has not been affected by the worldwide slump in oil prices, in part because the cost of investing in these areas is low.

Nevertheless, Mexico’s government said there is a possibility of postponing tenders in those areas where access is more difficult or requires complex technology and thus require greater investments than in other areas, such as the current shallow water blocks.

Zepeda said that between March and April a decision will be made as to how many tenders will be postponed, but as other representatives

INVESTMENT OPPORTUNITIES IN THE NEW ERA

February / March 2015 Mxe Mexico Energy and Business Magazine

have stated, he signaled that it is almost for sure that these will be zones that contain “shale,” and that they are rocky formations from which oil and gas can be extracted.

“Without a doubt, an adjustment has to be made,” he said. “Shale has to be reviewed,” he added during a tour of the hydrocarbon commission installations where companies can consult the information contained in the data files.

Oil prices have registered important slumps in the last months, after they reached 100 dollars per barrel, including Mexican crude for export. In the past month Mexico’s mix has lingered around 40 dollars per barrel.

Zepeda mentioned that shallow waters are still attractive, because considering the current oil prices; the cost to remove oil from these areas is estimated at less than 20 dollars per barrel.

In contrast, the costs in shale areas are superior to 40 dollars per barrel, which in view of the current situation is not attractive.

This first tender process represents the startup of a wideranging energy reform that ended an era begun in 1938 with the nationalization of the oil industry.

Since then and until before the legal modifications, the stateowned Petróleos Mexicanos (Pemex) was the only company that could explore and produce oil.

The government hopes that the reform will not only attract millions in investment but also help boost Mexico’s declining oil production.

The country’s oil production reached its maximum level in 2004 with 3.4 million barrels per day, and since then has fallen to about 2.4 million barrels.

With the Energy Reform, the government predicts an increase of 3 million barrels per day for 2018 and 3.5 for 2025.

(AP).

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INVESTMENT OPPORTUNITIES IN THE NEW ERA

Investment Funds, Partners in Energy

February / March 2015 Mxe

By Esther Arzate

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Now that the Energy Reform is in full effect, commercial and development banks did not hesitate to open their portfolios to finance petroleum and electricity projects. Until now, those that have been the most ready are the large national and foreign investment funds that not only demonstrate an interest in funding projects to get them started but are also eager to become partners.

For the most part, it is expected that large foreign consortiums wanting to be investors and shareholders will participate in some projects. Nevertheless, opportunities for small and medium sized companies are flourishing, such is the case in Oaxaca, where a business credit union will offer credits totaling 35 million.

The commercial and development banks, especially investment funds, will be fine-tuning their evaluation mechanisms to understand, first, the nature of the Energy Reform promoted by the current federal administration, and hence the implications in terms of risk-benefit the slump in oil prices as this macroeconomic variable will be fundamental in investment decisions in the next months.

Gilberto Alfaro, Energy and Natural Resources leader, KPMG-Mexico, assures that the owners of some

companies will lean toward investment funds to finance their projects because they are more flexible and faster to concede their credits, but primarily because the processes that they have in place allow them to know the market and its variations.

Several types of diverse funds manage the pension funds of some syndicates or labor groups. These are large funds that have their eyes upon Mexico to find attractive projects.

Their capital comes from the exportation of raw

material such as oil and gas, and its investments are made up of bonds, shares, financial derivatives, or others such as real estate.

The Evercore fund, directed by the exSecretary of Mexico’s Secretariat of Finance and Public Credit Pedro Aspe, holds 20 percent of the capital of the exploration and production division of the Mexican company Diavaz, which was the first to obtain service contracts for the exploration and exploitation of hydrocarbon resources from Pemex.

services, considers that financing conditions will fluctuate, depending upon the type of firm, but insists that investment funds will represent those with greater experience and specialization in the energy sector.

However, he assures that commercial banks will play an important role to act rapidly and fund this type of initiatives.

Santander, for example, has a line of credit of 130 billion pesos; Banamex has a similar amount; the Nafin-HSBC fund has resources of 26 billion pesos; Interacciones has approximately 10 billion 600 million pesos, and Banorte, 6 billion 500 million pesos.

February / March 2015 Mxe Mexico Energy and Business Magazine

“MARKET CONDITIONS IN TERMS OF PRICE OBLIGE US TO RECONSIDER MORE ATTRACTIVE STRATEGIES UNDER THE CURRENT SITUATION”.

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Even ex-President Vicente Fox wants to position himself in the sector. Fox is confident that he can raise 500 million dollars for an investment fund targeted at shale gas, shale oil, and electricity projects.

Integradora de Servicios Petroleros Oro Negro, a company directed by an ex-director of Pemex, Luis Ramírez Corzo, was founded in February 2012 on the same date that they secured 250 million dollars in international capital markets to develop investment projects in the petroleum sector in Mexico. The resources originated from Management (United States); Axis Capital (Mexico) Temasek (Singapore).

In June 2012 the investment fund Morgan Stanley Private Equity announced a partnership with Jesús Reyes-Heroles, who was Minister of Energy during Ernesto Zedillo’s administration and Pemex director in the government of Felipe Calderón.

Advent International announced recently that it would make available 2 billion dollars to finance infrastructure projects in Latin America, especially in Mexico, Brazil, and Colombia.

KPMG’s representative, one of the four most important global firms of professional

The Leader, Santander Indeed, the institution that directs Marcos Martínez Gavica in Mexico is positioned to be the number one private bank in project financing in Mexico, according to Dealogic, since it already participates in 20 energy projects with a production capacity above 2,800 MW and in the industry of natural gas.

Currently, Santander is the financial assessor of Los Ramones project, the most important gas pipeline in decades that stretches 960 kilometers.

Santander brings its learned experience in Spain with its participation in renewable energy projects, especially in wind energy, while the other banks have registered a less active participation in the area.

Alfaro considers that the experience of commercial banks in terms of industry knowledge will be fundamental, and they should offer different or incomparable rates that will make them a serious competitor of investment funds. “Not only would commercial banks gain in the contracting area, but would

February / March 2015 Mxe Mexico Energy and Business Magazine

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maintain an inversion scheme and make its credits flow rapidly,” he added.

Alfaro, a consultant of a global network of professional services firms that offers auditing, fiscal, and financial and business services in 156 countries, emphasized that the delay in Mexico’s pipeline infrastructure to benefit and strengthen the electric energy production and renewable energy plants is greater than in other nations. Because of this we have to duplicate our power generation with renewable energy in the next 15 years.

“I think that investment levels will reach that goal,” he added.

Alfaro references the portfolio of Round One, which will be the first tenders of the federal government and the effect of current low oil prices: “Market conditions in terms of price oblige us to reconsider more attractive strategies under the current situation,” he indicated.

From Round One, the first tenders will be shallow waters because they require less investment; their realization and production can be fast and a proposal can be structured

that offers advantages to the producer.

However, in the medium term all of the projects are attractive, and there precisely is the goal – regulators need to structure within a reasonable time and with the correct strategy the form in which all of the rounds of tenders will take place.

In the Hands of the SHCP Carlos Huerta Durán, independent consultant of oil negotiations and architecture firms in Mexico indicated that companies listed to compete for the blocks of activities in exploration and oil and gas extraction, as well as electricity infrastructure, should project their investments, current and future, on oil price behavior. Depending on their proposed projects, they should have vast sector experience, consider the geological risks, the profitability, and their financial capacity; on the contrary they will not have an opportunity to compete.

The key actor in this environment will be the Secretariat of Treasury and Public Credit (SHCP). It will be responsible for capturing a larger share of the profits of oil revenue for the

February / March 2015 Mxe Mexico Energy and Business Magazine

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government and will determine if competing companies are within an established range. He clarifies that this responsibility will not be easy, as the Secretariat needs to achieve a balance between capturing a larger share of the profits and making Round One look attractive.

It is pertinent to mention that the work of the criteria and tenders have been maintained by regulatory agencies since last year, and will be in effect throughout 2015, and that investments will begin over the course of 2016 and 2017. As a result stronger economic growth rates is expected in Mexico.

Huerta agrees with Alfaro that the costs of the price of a barrel of oil will influence for the moment the discussion of finding alternative sources of public income that will permit a depetrolization of the public debt. For Huerta, it is extremely important to achieve tax selfsufficiency to stabilize over the long term the new energy model and to guarantee the security of national energy in Mexico and in North America.

Almost one third of the 169 blocks of tender pertain to the category of shale with production costs ranging around 40 dollars. While these projects are quite expensive and the production is immediate, the price of hydrocarbons in the short term is a very relevant variable. This category will be revisited as current prices lessen their profitability and thus are less attractive to companies.

Huerta underscores that current oil prices will impact the form and the fund if investors decide to invest, even where and to what degree they are willing to hand over the major share of oil profits.

It is important to emphasize that in these tenders, Pemex can participate alone or in partnerships with other companies.

Business Credit Unions For

small

and

medium-sized

companies

business credit unions will operate in Mexico.

Juan Morales Robles, general director of the Union of Industrial and Commercial Credit of Oaxaca, commented that the group was founded 40 years ago and currently has 2,000 partners-clients and has an available portfolio to support Pemex’s small suppliers that eventually will offer services to new companies that enter the market.

The Union will offer credits up to 35 million pesos in working capital, which is reasonable given that it equals the expected payment of a project worth 100 million pesos. It also has available bank overdrafts that function like a credit card in which a predetermined amount is approved for two years.

The credit’s interest rates granted by shareholders will vary from 11 to 13 percent annually with an initial commission of 2 percent.

This seems more attractive than the more traditional financing offered by banks. “We know the operations well, and we can put together deals for Pemex’s suppliers,” Robles said.

He revealed that to date the Union has channeled its financial support to companies dedicated to maintaining refining infrastructure in Salina Cruz, Oaxaca.

Now that the rules of the game are on the table, the National Commission of Hydrocarbons only needs to open the record to know the participants of the first 18 petroleum blocks of shallow water that will be tendered in Mexico, which cover an area of 771 square kilometers if you add the exploration and exploitation fields.

Meanwhile, Luis Téllez Kenzler, president of the Mexico’s Stock Exchange, declared recently that there are at least 10 funds from the United States, Europe, the Middle East, and Latin America that are watching and ready to participate actively in the energy sector as soon as the mechanisms are worked out.

THE UNION WILL OFFER CREDITS UP TO 35 MILLION PESOS IN WORKING CAPITAL, WHICH IS REASONABLE GIVEN THAT IT EQUALS THE EXPECTED PAYMENT OF A PROJECT WORTH 100 MILLION PESOS. IT ALSO HAS AVAILABLE BANK OVERDRAFTS THAT FUNCTION LIKE A CREDIT CARD IN WHICH A PREDETERMINED AMOUNT IS APPROVED FOR TWO YEARS.

14 billion dollars for wind projects The plan is to increase by four times the capacity and reach a production goal of 9,500 MW, according to Adrián Escofet, president of AMEE.

February / March 2015 Mxe Mexico Energy and Business Magazine

Public and private

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investment for wind energy projects will reach 14 billion dollars between 2015 and 2018, three times the amount destined in the last eight years, according to the industry’s leader.

Adrián Escofet, president of the Mexican Association of Wind Energy (AMEE), detailed that this investment will achieve, at the end of the six-year administration, an installed capacity of 9,500 MW, almost four times current capacity.

With a bright outlook, they could attain 30 billion dollars in investment in the following seven years, to reach 15000 MW capacities.

Private companies such as Acciona, Iberdrola, and Gamesa, among others, as well as the Federal Electricity Commission already have their portfolio of projects ready for the next years.

Miguel Ángel Alonso, general director of Acciona, commented that wind energy will maintain an exponential growth globally and that, despite crude price volatility, Mexico will not be exempt from this development.

In almost all countries of the Organization for Economic Co-operation and Development (OCED) practically 50 percent of their national goals of renewable energy is based on wind power.

In 2015 six projects will start operating that will add 732 MW of wind power, and the more than 9,000 that is

expected for 2018 will represent close to 8 percent of total energy production in Mexico.

The association’s representative of clean energy noted that projects for the next three years remaining in Enrique Peña Nieto’s have already been identified - Oaxaca, Tamaulipas, and Coahuila are the states where the combined major installed capacity will reach 7494 MW. Eduardo Reyes, director of strategy in the energy and infrastructure sector of PricewaterhouseCoopers (PwC), emphasized in his most recent study, “Wind Potential in Mexico,” that the installed capacity of this renewable energy will grow each year due to efficiency advancements, potentially reaching up to 20,000 MW. Escofet said that AMEE’s goal is to reach 12,000 MW in wind power by 2020. If achieved, this would result in a benefit of 170 billion pesos in gross domestic product.

In this context, Alonso commented that Acciona is planning to bring an investment of 650 million dollars and that they are building wind parks, two in Nuevo León and one in Oaxaca.

Hipólito Suárez, Gamesa’s director of Mexico and Central America, underscored that in the next two years the Spanish firm will develop 500MW of wind power with an investment of 950 million dollars.

Iberdrola forecasts an investment of 5 billion dollars between 2014 and 2018 for the installation of wind and combined cycle power plants.

Despite being a mining company, Grupo Peñoles will also develop a wind farm in Coahuila with a potential of 200 MW, which it predicts will enter into operations between July and September of 2016.

MIGUEL ÁNGEL ALONSO GENERAL DIRECTOR OF ACCIONA.

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Meanwhile, Federal Electricity Commission’s (CFE) director Enrique Ochoa Reza said that it is extremely important to promote this type of projects, since Mexico’s needs to promote the diversity of energy resources to increase the national power system.

The CFE has a portfolio of eight wind projects with a capacity of 2,300 MW with an estimated investment of 52 billion pesos.

Financing GE Capital Mexico announced an offering of 1 billion pesos to finance cogeneration projects during 2015 for those companies interested in developing self-sufficiency plans in electric and heat energy.

“In the last couple of years, we have seen that the efficient consumption of power has become an important concern among our clients. So since 2012 we have taken on the task of creating a vertical cogeneration market. To date we have dedicated more than

700 million pesos to this type of projects,” commented Diego Zarroca, GE Capital’s marketing director.

GE Capital together with specialized cogeneration industry companies has identified more than 26 marketing opportunities in different industries; among these are automotive, food and beverage, paper, pharmaceutical, and textile.

Tenders The Federal Electricity Commission released a tender to buy 13 shipments of liquid natural gas for delivery between February and November, announced two operators to Reuters.

The tender is for one shipment per month from February to November 2015, with the exception of August when it will rise to two shipments and in September in which the requirements are three shipments, detailed one of the operators to the news agency.

For 2027 the installed capacity for renewable energy electricity generation will reach 21 million MW. Patricia Tapia Milenio

In Search of

By Héctor A. Acosta Félix*

Transparency On December 11, The National Hydrocarbons Commission ((CNH) approved the first round of hydrocarbon exploration and extraction contracts in 14 Mexican fields and broke a paradigm that had turned into a constitutional taboo – the monopoly of petroleum exploitation by MExico’s government – a practice that lasted close to 80 years.

February / March 2015 Mxe

The reasons behind

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the justification of the 1938 petroleum expropriation were far removed from the actual reality and made necessary the Constitutional Reform in energy, approved by the Congress in December 2013. The reform, as one would expect, divided public opinion between those who distrusted any constitutional change and those who welcomed new forms to take advantage of the most important natural resource that Mexico offers economically.

Nevertheless, the majority of the people (opinions) agree on one thing –the use of hydrocarbons should be protected from corruption.

Globally, many are concerned about what happens in those countries with abundant natural resources where generated wealth stands in stark contrast to the high levels of poverty among the poor. This contrast is only explained by

inefficient regulatory environments that either distributes income derived from extractive industries unequally or by the presence of high levels of corruption that allow benefits to fall into the hands of a few businessmen and public servants.

There is evidence enough to doubt the transparency and impartiality in the allocation of petroleum and gas extraction contracts. At a global level, there is a growing tendency to distrust governmental institutions. For several decades corruption cases in Mexico involving state-owned companies have provoked distrust at the local level of opening the energy sector.

As such, our past strategies in the areas of transparency, prevention, and combating corruption have shown to be insufficient to meet the legitimate concerns

“IN THE CASE OF OUR COUNTRY, THE CNH HAS BECOME THE FIRST MEXICAN AUTHORITY TO REQUIRE A DECLARATION OF INCOME AND ASSETS OF ITS PUBLIC SERVANTS, AND THUS THE ONLY ONE TO DATE THAT HAS STATED IN AN ARTICLE (THIS ARTICLE) THE NEED TO INTRODUCE THIS MOST URGENT AND ESSENTIAL ELEMENT THAT SHOULD BE CONSIDERED BY THE REFORM TO COMBAT CORRUPTION.”

of the population to prevent dishonest acts.

The declaration of assets of public servants has been insufficient to detect the improvised and unexplained fortunes of a few, and what is needed more is an effective strategy that will produce positive effects in the prevention and combat of corruption in Mexico.

In this context, the seven commissioners of the CNH, almost at the same time as the approval of the first tender of Round One, agreed unanimously to make public the

personal declarations of those integrated in the government and those working at a second-tiered administrative level under the Commission.

In a live session transmitted on the Internet to the public, each Commissioner read out their declaration of income and assets that contains a signed declaration which includes whether the

individual has been employed as a director, a service provider, counselor, assessor, supplier, and so on, of any entity regulated by the Commission. They must also declare whether a blood relative or any other relative up to the fourth-degree of kinship has a relationship with any economic agent of the sector.

This declaration will be annual so that the potential interests of the Commissioners and those bureaucrats employed at an administrative level at the Institution with the petroleum sector will be available for public scrutiny. Also as mentioned by Federico Reyes-Heroles, president of Transparencia Mexicana in a recent newspaper article, the best defense a public servant can have when working in sensitive areas is to make public his or hers assets.1 This is only one effort among many that as public servants we can make to strengthen and in some cases recover our citizens’ confidence in their institutions. For public opinion, it is not sufficient to merely follow the formality of the law (such as present a declaration of income and assets which the public does not have access to), but to create strategies that allow access to major decision points so that the public can contextualize the factors that motivated the decisions of its public servants, detecting those that were made in an exercise of good faith and judgment (that even so could be human errors) and others that could be induced by self-interest and unbeknownst by citizens but lead to the government’s decisions to conserve and protect the interests of a few over the greater good.

February / March 2015 Mxe Mexico Energy and Business Magazine

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The act of declaring income and assets are found in the best practices of international organizations and governments that demonstrate the highest regard in annual indexes of transparency. Such is the case of Chile, where the declaration of income and assets is required for all public servants in the federal government, as well as in countries such as Australia, France, and the United Kingdom, whose legislation also requires it.

In the case of our country, the CNH has become the first Mexican authority to require a declaration of income and assets of its public servants, and thus the only one to date that has stated in an article (this article) the need to introduce this most urgent and essential element that should be considered by the Reform to combat corruption.

The declaration of income and assets can lead to a greater transparency in the bidding process of the assignment of hydrocarbon extraction contracts and contribute to uplifting confidence, a fundamental element to attract new investment to our country.

For public servants who regulate sectors involved in economic resources of great dimensions, such as energy and others, I would recommend the creation of a mechanism to balance the equilibrium between personal risk, which implies knowing the assets of public servants, and the imperious need to assure that their wealth is consistent with paid salaries. This is our next challenge. *The author is the Commissioner of the National Hydrocarbons Commission (CNH). The article expresses solely and exclusively the opinions and conclusions of its author and do not represent the official position of the CNH. 1. Federico Reyes-Heroles wrote a column Thursday, December 18, 2014, published by the Excélsior an opinion column titled, “Declaration of Assets.” “Declaración de Intereses”.

1. The Regulation for the Declaration of Assets of Authorities and Bureaucrats of State Administration regulates the declaration of income and assets that, according to Law Number 18.575 of the General Basis of State Administration, authorities and bureaucrats mentioned in the legal code must abide by.

A PROMISING FUTURE Mexico’s new Electric Industry Law (LIE) and its regulations, part of the Constitutional Reform of December 20, 2013, promises great opportunities for private investment never seen before. Here we describe the general characteristics of the new electric sector with an emphasis on the clean energy certificates and comment on their applications in other international markets.

Orlando F. Cabrera C. ocabrera@iparkman.com.mx and J. Damián González Rivera1 jgonzalez@iparkman.com.mx 34 February / March 2015 Mxe Mexico Energy and Business Magazine

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February / March 2015 Mxe Mexico Energy and Business Magazine

The New Electric Sector

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As part of the Energy Reform, the electric industry is made up of four primary areas related to the power generation, transmission, distribution, and marketing of electric energy; such as the planning and control of the National Electricity System (SEN) and the operation of the Electricity Wholesale Market (Electric Market).

Power generation and electricity marketing are now governed by a regime of free enterprise. From its previous activities, the federal government reserves the planning and control of SEN, as well as electricity transmission and distribution. However, the federal government can now develop with private enterprises certain activities.

The National Center for the Control of Energy (CENACE) will be in charge of SEN’s administrative operations, determine the policies of the National Transmission Grid and the General Distribution Grids, and will

also operate the Electricity Market. CENACE can establish contracts or associate with entities offering to provide auxiliary services to operate the Electricity Market.

Transportation and distribution networks: 1) are responsible for the National Transmission Grid and the General Distribution Grids, according to CENACE’s guidelines; 2) will extend and modernize preexisting grids; and 3) can create associations with entities for the financing, installation, maintenance, and operation of transmissions and distribution.

The expansion of Mexico’s National Transmission Grid aims to address the low density of the transmission grid, increase the mesh network, modernize the technology, as well as generate a competitive power generation market. At the same time, the new distribution grid regulation hopes that these entities will contribute the experience and technology needed to expand distribution networks. It is considered that this (contribution) will help combat energy losses and increase efficiency in the distribution process.

Clean Energy Certificates In response to the Law for the Use of Renewable Energy and Financing of Energy Transition and the General Law of Climate Change published in 2012, Mexico established a goal by 2024 to generate 35 percent of electricity from clean energy resources. However, non-fossil energy

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February / March 2015 Mxe Mexico Energy and Business Magazine

sources currently account for only 17 percent of consumed electricity.

In order to meet this goal, the Energy Reform introduced the Clean Energy Certificates (CELs), which will promote greater electricity generation from clean energy. The LIE included as clean energy wind, solar radiation, oceanic energy, geothermal, bioenergy, hydroelectric plants, and cogeneration plants, among others.

The CELs are securities issued by the CRE that approve the production of a certain amount of electric energy as part of the clean energy strategy. The objective is to meet the goals of electric power generation with clean energy sources at the lowest cost possible and based on market mechanisms. That is, the CELs are an instrument to promote new clean energy investments to meet Mexico’s national goals of clean electric energy generation in the most efficient and cost-effective manner.

To function, you create a market, in which the government establishes a minimum percentage of energy generation based on clean resources each year (in the first trimester of 2015, the Ministry of Energy will establish the 2018 percentages, the year in which the CELs will be offered to producers that use clean energy. The percentages for the years 2016-17 will be 0), which should be covered by producers or distributors.

In this way, if the producers or distributors do not reach the goal they will need to buy a

number of certificates that permits them to meet this requirement. If they do not, they must pay a fine imposed by the regulatory agency, which will be the maximum price of the certificates.

Clean energy plants can achieve greater resources to market: (1) the electricity that is generated and sold to the network or to some consumer outside of the electric grid; (2) the certificates that represent the environmental rights and benefits embodied in commercial bonds.

The CELs can be traded in the Electric Market in bilateral transactions as long as you meet the requirement of monitoring, reporting, and verifying established by the CRE to validate the titling of the CELs, considering this a mercantile exchange. Thus, qualified producers, marketers, and consumers can enjoy electric hedge contracts to acquire or commence operations related to the CELs.

International Markets International experience illuminates the future of CELs, focusing on the successes and failures that other markets have faced. The price of the green certificates in Sweden has increased by 15 percent after their Energy Agency recommended an increase in the level of obligations of 8TWH annually for the period 2016-19. The announcement came after years of excessive supply led to lower prices.

In contrast, India’s market of green certificates just completed three years and faces a terrible crisis. Its success has been affected by a deplorable demand, an increasing supply, credits that accumulate each month, and the declining capacity of growth. Whenever the annual supply continues to be greater than demand, the situation will continue to deteriorate if the demand does not increase drastically, and it is not going to occur if the government has a weak enforcement of regulations.

Without a doubt, an extremely weak demand is the result of the poor enforcement of renewable purchase obligations. Because of this, signals indicate market failure. At this rate the market will not survive more than a couple of years if the regulatory agency does not take steps to improve the situation.

Final Comments The CELs constitute an efficient tool to boost the growth of renewable energy in Mexico, representing an unprecedented opportunity for the sector. Yet a major part of its success depends on the authority and strict compliance of the regulations.

A lax enforcement of renewable obligations could drive the market to its death. In contrast policies focused on increased demand can increase the price just as in Sweden. These are lessons learned that skillful regulators should learn so that the CELs are a success.

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INVESTMENT OPPORTUNITIES IN THE NEW ERA

Lawyers de Ibáñez Parkman.

1

Soll Sussman

CHANGE AND DEVELOPMENT IN

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MEXICO DESPITE LOW OIL PRICES

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The intense focus on falling oil prices and whether they may slow or completely disrupt Mexico’s Energy Reform takes too much attention away from its comprehensive, transformational potential.

W

hile Round One for the first tracts to be auctioned may be starting this summer later than originally planned, many of the other aspects of the reform are proceeding as planned. Change and development can be expected in the opening of the retail gasoline market, energy efficiency, geothermal and other renewables, pipeline infrastructure, and many other areas.

Indeed, one of my favorite phrases about the Energy Reform doesn’t involve oil and gas exploration at all, or at least directly. At

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FerraezConecta

@FerraezConecta

February / March 2015 Mxe Mexico Energy and Business Magazine

an event last fall in Austin, Luis Farias, senior vice president of energy and sustainability for Cemex, called the changes related to electricity “the silent reform” for their farreaching impact without the frenzy of media attention surrounding oil and gas.

Did anyone truly expect that, after the passage of the Constitutional Reforms in December 2013, shale drilling in northeastern Mexico would immediately expand to the levels reached in Texas’ Eagle Ford? Most projections are for mid-term and long-term growth, which may explain why attendance is still soaring at Mexican energy conferences and seminars.

Certainly, the major cuts in budgets and widespread layoffs announced at many U.S. and other international energy companies can be expected to have some impact.

But long-term economic forecasts and the fundamentals of domestic energy needs in Mexico favor continued growth in the energy sector.

I can still remember, during the 1995 Mexican economic crisis, one American company that I was working with suggested stopping its contact across the border because of the falling value of the peso. That company is long gone; the peso is still here.

Even with their tiny initial staffs, the formation of the Centro de Control de Gas Natural (Cenegas) and the Centro Nacional de Control de Energía (Cenace) as entities independent of Pemex and the Comisión Federal de Electricidad represent a huge transition.

Another important step to be watched closely is the opening of the Agencia de Seguridad, Energía y Ambiente (ASEA).

Emilio Lozoya Austin, the CEO of Pemex, has been quoted as saying that annual exploration and production spending still is expected to double from $25 billion to $50 billion annually. “Mexico offers an interesting opportunity because our all in cost per barrel is $23, so even at current prices, Pemex’s total upstream portfolio remains highly competitive.”

Similarly, a recent announcement from the Asociación Mexicana de Energía Eólica (AMDEE) and the Secretaría de Energía forecast $14 billion in new investment in the wind sector from this year through 2018.

Ever since the initial flurry of interest in Mexico prompted by the constitutional reforms, I have been suggesting to American and other international investors that this is the time to get to know the Mexican market, make contacts and learn as much as possible.

Any bumps caused by the rise and fall of international oil prices, slower than hoped for development of bureaucratic staffs, or other unanticipated hurdles are all part of the process. I wouldn’t wait to jump in 5 or 10 years from now when all becomes clear.

Soll Sussman, managing director of S cubed Studio, is a consultant specializing in cross-border energy contacts. He has coordinated the annual U.S.-Mexico Border Energy Forum since its start in 1994.

42 EMILIO LOZOYA, CEO OF PEMEX

INVESTMENT OPPORTUNITIES IN THE NEW ERA