Mexico Energy - August 2014 by Mexico Energy

I n ves tm e nt op portunitie s in th e ne w e r a

Arturo HenrĂquez Autrey Turning Pemex into a competitive and efficient company

Approval of the Secondary Laws

MexicoÂ´s energy industry transformation begins

Pemex partners with private firms

and forecasts a 50 percent growth in investments in 2015

Vol. 1 No. 6 August 2014

Business Opportunities in Mexico’s Energy Sector

1st Mexico Energy and Business Forum Presented by Mexico Energy and Business Magazine Dallas, Texas November 10, 2014

8 am- 2:30 pm InterContinental Dallas (Addison) 15201 Dallas Parkway Dallas, TX, 75001

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

Letter from the Editor

Immediately after Mexican President Enrique Peña Nieto signed the secondary laws that serve as a rule book for the comprehensive energy reform, news started pouring in about plans from the private sector and foreign firms to capitalize on major projects and billions of dollars in investments. In an article published by Reuters, Credit Suisse said in a report issued Aug. 11 − the day the secondary laws were enacted − that the accelerated timeline announced by Peña Nieto “should bring more (investment) interest” to the sector. Two days after the secondary legislation was promulgated, Mexico’s top oil and energy officials announced the Round Zero and Round One tenders, and said they expect the country to bring in more than $50.5 billion dollars in new private and foreign investment by 2018. According to published reports, oil industry powerhouses Royal Dutch Shell and ExxonMobil have been carefully supervising the legislative process and are expected to compete for contracts and licenses early next year. Mexico’s Federal Electricity Commission says it expects to take bids on almost $5 billion (U.S) in electrical generation and natural gas pipeline projects, although it did not state when the actual bidding would take place. The stories in this edition shine more light on the secondary laws. They also address how Pemex plans to re-structure its procurement division to accommodate changes in the industry, while also partnering with private firms to develop projects. In Mexico’s energy reform to attract international interest former ambassador to Mexico Antonio Garza is content with the approval of the secondary laws because they serve as the basis on which business and investment decisions will be made. Although, he emphasizes that efforts should start focusing on the implementation period. In Keeping it Simple, Pemex’s Chief Procurement Officer, Arturo Henríquez Autrey, tells Petróleo&Energía that doing business with Pemex will be a much simpler process than in the past, and discusses how buyers and suppliers can benefit from the new procurement process. In the last issue I said exciting times were just around the corner. It appears we may have just turned that corner. Sincerely,

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

The staff of Petróleo&Energía and Mexico Energy extend our condolences to the family and friends of our dear co-worker Laura Sánchez Acuña who recently passed away. 2

August 2014 Mxe Mexico Energy and Business Magazine

Mexico Energy and Business Magazine Volume 6 august 2014 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

Maribel Zavala

Maritza López

Milton Méndez Maribel Zavala Rivas

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

CIRCULACIÓN CERTIFICADA POR EL INSTITUTO VERIFICADOR DE MEDIOS Registro No. 248/02

INDEX AUGUST 2014

06 Business Updates 10 What was approved in the Energy Reform?: Mexico’s Congress recently approved a set of laws necessary to implement a strong Energy Reform destined to grow investment and kick-off the economy. Here we present some of the main points of the secondary legislation derived from the constitutional reform introduced in December by President Enrique Peña Nieto.

32 Pemex will partner with private firms in

ten projects: Emilio Lozoya, general director of Petróleos Mexicanos (Pemex) announced plans to create a joint venture with the private sector in 10 projects. The projects involve 1.5 billion barrels of 2P reserves plus deep-water findings in the Perdido area. An investment of 32.2 billion dollars will be required in periods ranging from five to 10 years depending on each project.

34 Mexico’s energy reform to attract international interest: Former ambassador

Keeping it Simple:

In an interview with Pemex’s Chief Procurement Officer, Arturo Henríquez Autrey, tells Petróleo&Energía that today doing business with Pemex will be a much simpler process than in the past and how buyers and suppliers can benefit from the newly installed procurement process. Henríquez explains upcoming changes with the creation of the new Corporate Division of which he holds the reins.

August 2014 Mxe Mexico Energy and Business Magazine

to Mexico Antonio Garza is pleased with the approval of Mexico’s secondary laws because they enable the constitutional reforms and serve as the basis on which business and investment decisions will be made. According to Garza now it is the time to strengthen efforts that should focus on the implementation period when the institutional and market architecture must go from blueprints to the hard work of build out.

36 Next steps in the energy reform: With the enactment of the secondary laws, President Peña Nieto announced 10 immediate steps to be taken. Here we present the list of actions and time frames.

Business Updates

Business updates Mexico Energy and Business

Auguts 2014 Mxe

Mexico hopes to lure $50.5 billion in historic oil tender

Mexico expects to attract $50.5 billion in new private and foreign investment by 2018 as part of a historic opening of its oil sector that begins next year with a first round of contracts, the country’s top oil officials said on Wednesday. The so-called Round One tender will offer up 169 exploration and extraction blocks, including a mix of both onshore and offshore areas, and cover a total of 28,500 square km. The tender will be organized by Mexico’s national hydrocarbons commission and will happen as early as May 2015 and no later than September, said commission president Juan Carlos Zepeda. The landmark tender will prioritize areas that boost output quickly and leave trickier deep water projects for later, he added. Separately, the energy ministry on Wednesday assigned 83 percent of Mexico’s probable and possible reserves to Pemex under a so-called Round Zero allocation. The allocation provides the Mexican oil company with a new, slimmed-down portfolio of assets to develop on its own or enter into joint ventures with international

oil majors such Chevron Corp and BP Plc. The energy ministry said it had assigned 21 percent of Mexico’s prospective resources to Pemex, versus the 31 percent the company had asked for. The total area assigned to Pemex under Round Zero is equal to 20.6 billion barrels of proven and probable oil reserves. But the company was also given prospective resources totaling 22.1 billion barrels of oil equivalent covering 90,000 square km. “Pemex will continue to be the big business of Mexico,” said Energy Minister Pedro Joaquin Coldwell. Pemex Chief Executive Emilio Lozoya said the company wanted to set up joint ventures with private companies on 10 different projects. “Pemex faces the biggest challenge in its history, the challenge of competing all along the value chain,” Lozoya said. Pemex’s top exploration and production executive, Gustavo Hernandez, said the company still planned to compete in Round One for blocks it was not awarded in Round Zero. The energy ministry said the Round Zero allocation provides Pemex with a production “floor” of about 2.5 million bpd over the next two decades. Pemex will by February seek new contractual arrangements for 11 fields it was assigned to take advantage of a more favorable tax structure under the reform. The company will also seek tie-ups for projects at particularly complex, costly fields, including heavy oil offshore areas, large deep water gas developments and some acreage in the deep water Perdido Fold Belt. By David Alire Garcia and Tomas Sarmiento - Reuters.

Business Updates

Auguts 2014 Mxe Mexico Energy and Business Magazine

AES plans $1 billion investment in Mexican power generation

U.S.-based power company AES Corp plans to invest at least $1 billion to double its existing electricity generation capacity in Mexico, and also intends to enter the country’s new wholesale power market. Juan Ignacio Rubiolo, head of AES’s Mexican unit, said in an interview on the sidelines of a trade mission this week that the company expects to benefit from sweeping energy reform and grow beyond its three existing power plants, which generate a combined 1,050 megawatts. “We have a target of doubling the capacity we have in Mexico,” said Rubiolo, noting that the company’s focus is on plants powered by natural gas. He said the company expects to invest at least $1 billion over the next three to five years to achieve the target. AES (AES.N) is active in power generation and distribution in 20 countries and had revenue of $15.9 billion last year. Rubiolo, previously AES’s top executive in Panama, said the company is also looking to enter a newly created wholesale power market in Mexico. “That’s one of the major changes of the reform,” said Rubiolo. “It’s definitely one of our main targets.” Rubiolo said the company is closely following the creation of a new independent system operator and that body’s independence from the CFE, as well as access to technical data and transparency rules.

He emphasized that the post-reform pace of growth in new power generation will depend largely on access to natural gas. “We would like to be more comfortable with how they’re going to allow private investors to get access to gas and pipeline capacity,” he said. By David Alire Garcia - Reuters.

Mexico Energy Summit 2014

On September 10 and 11 over 300 national and international energy companies, government officials, private investors and service providers will attend Mexico Energy Summit 2014 in Mexico City. Among the topics to be discussed will be oil and gas, electricity, mining, project financing, as well as operational risk and regulations, and the environment.

Mexichem heading to Europe Plastic News Mexican PVC and specialty chemicals maker Mexichem SAB de CV has agreed to buy German PVC paste producer Vestolit GmbH from investment company Strategic Value Partners LLC (SVP Global) for 219 million euros ($293 million). “This transaction represents an opportunity to expand our presence in Europe, enter new market segments and acquire new technology and best practices,” Mexichem said in a statement, posted on the Mexican Stock Exchange, noting that Vestolit has sales representatives in 35-plus countries.

August 2014 Mxe Mexico Energy and Business Magazine

What was approved in the Energy Reform?

Mexico’s Congress approved a package of laws necessary to implement a strong energy reform destined to grow investment and kick-off the economy.

o continue, some of the main aspects of the secondary legislation derived from the constitutional reform introduced in December by President Enrique Peña Nieto:

Hydrocarbons -Private companies may participate in hydrocarbon exploration and extraction through contract models, which may be profit sharing, production sharing, license contracts or service contracts.

● Zones designated for exploration and extraction by the state petroleum company, PEMEX, will be managed under an allocation scheme that may migrate to contracts, in which PEMEX can create partnerships with the private sector. ● Contracts will be tendered by oil regulator, the National Hydrocarbons Committee (CNH). ● The CNH will also be responsible for approving plans for hydrocarbon exploration and extraction and will authorize the drilling of exploratory wells in deep and ultradeep water, among other functions.

● The Secretary of Energy (SENER) will regulate and award permits for the treatment and refining of petroleum, natural gas processing, and the export and import of hydrocarbons and petroleum products. ● The Energy Regulatory Commission (CRE) will supervise and award permits for the transportation, warehousing, distribution, compression, liquefaction, decompression, regasification, commercialization, and public sales of hydrocarbons, petroleum or petrochemical products, and integrated systems management. ● All supplies and materials used in the exploration and extraction of hydrocarbons should be on average at least 25 percent local origin by 2015. This average will rise gradually until it reaches 35 percent in 2025.

● The legislation establishes a schedule of fines for not honoring the terms of agreement of permits or contracts, for starting projects without proper approval from the authorities, or for providing false information. ● Mexico’s government may assume part of the labor liabilities of Pemex and the Federal Electricity Commission (CFE), under the condition that both companies will modify their collective bargaining agreements one year after the start of the agreement.

August 2014 Mxe Mexico Energy and Business Magazine

MEXICAN OIL FUND

● The SENER has established that 20 percent of joint venture assets will benefit Pemex and other state-owned, productive companies for contracts conducted in transborder oil fields. If the existence of hydrocarbons is confirmed, international treaties signed by Mexico will be applied. ● Investors will be required to pay landowners 0.5 to 2 percent of earnings for oil extraction and up to 0.5 to 3 percent where non-associated natural gas is commercialized. ● No contracts and assignments for hydrocarbon exploration will be allowed in natural, protected areas. ● Mexico may revoke contracts and assignments when the company issues false or incomplete reports on more than one occasion, does not meet work deadlines, suspends its activities for more than 182 days without a justified cause, or when a serious accident happens.

● The Mexican Oil Fund for Stabilization and Development was created. It will be responsible for receiving and managing oil revenues excluding taxes. The fund will transfer to the Ministry of Finance the necessary resources so that oil revenue included in the annual budget is kept at 4.7 percent of the Gross Domestic Product (GDP).

PEMEX TAX REGIME AND CONSIDERATIONS ● All contracts will pay a monthly amount per square kilometer of exploration area. Once production starts, a royalty on the gross value of the produced hydrocarbons will be paid. ● The license agreements also include a signature bonus upon signing; and once the production starts, a rate will be applied, either to operating income or to the contractual value of hydrocarbons.

August 2014 Mxe Mexico Energy and Business Magazine

● In the profit and production sharing contracts, a percentage of the operating profit will be paid to the State.

● Contractors may deduct part of their investments in exploration, secondary recuperation applications and improvements, maintenance not capturable, oil and natural gas extraction investments, as well as investments in infrastructure, storage, and transport. ● The tax regime for Pemex was modified. Six of the rights currently paid by Pemex were cut down to three, which are:

a) b)

Shared profit right: 65 percent of the value of hydrocarbons minus deductions.

Hydrocarbon extraction right, which will apply a fixed rate on the total income obtained from hydrocarbon production (equivalent to a royalty).

Hydrocarbon exploration right: 1,150 pesos (86 dollars) per month per square kilometer.

● This amount will be paid during the first five years of the allocation. Once this period expires after 5 years, a monthly fee of 2,750 pesos (208 dollars) per square kilometer will be paid. This right will be updated annually according to inflation. ● Pemex will also pay an annual dividend to the State, determined by the Ministry of Finance and based on the company financials and its investment and financing plans. The expected amount of the state dividend will be included in the revenue bill approved by Congress. ● The dividend will begin in fiscal year 2016, and it will be equivalent to 30 percent of Pemex earnings after taxes in 2015. ● The minimum state dividend will decrease gradually until reaching 0 percent in 2027. ● Published by Excelsior.

Marketing energético

MANOLO GUTIÉRREZ Proximity Cordinator mgutierrez@lideresmexicanos.com www.ferraezconecta.com

COVER

Maribel Zavala

Maritza L贸pez

Arturo Henr铆quez Autrey

August 2014 Mxe Mexico Energy and Business Magazine

Chief Procurement Officer - Pemex

Keeping it Simple

For many years, doing business with Petr贸leos Mexicanos (Pemex) meant entering a world where so many transactions made even the best suppliers decide to withdraw. Now, these times will be different in the new era of Pemex as a state-owned productive company and the Corporate Procurement and Supply Division (DCPA) with a purchasing power between 25 and 30 billion dollars.

August 2014 Mxe Mexico Energy and Business Magazine

rom his office on the 36th floor of Pemex’s Executive Tower in Mexico City, Arturo Henríquez Autrey, gives Petróleo&Energía an exclusive interview on the upcoming changes with the creation of the new Corporate Division of which he holds the reins. Henríquez earned a graduate degree in economics from Boston University and has a Master’s in Business Administration from the Kellogg Graduate School of Management of Northwestern University, in addition to two master’s degrees in International Relations and Communications from the University of Boston. “In the last 10 to 15 years, even 20, there was a natural tendency, inside and outside of the industry, at a global level of centralization or a hybrid form of centralization of what is procurement, because behind it you can begin to specialize and meanwhile have what is known as strategic supply, Henríquez says. Henríquez acknowledges that contracting was very fragmented. “Behind its natural structure of having four branches and one corporate office; five companies – to not include the sister companies, each company was managed in an independent way. They had their own corporate structure, legal department, general director, and even their own support systems.”

“There will be great opportunities for small- and medium-sized businesses because there are a lot of small tasks that large ones can’t do, or don’t want to do.”

August 2014 Mxe Mexico Energy and Business Magazine

Henríquez adds, “in this structure procurement played a very uncoordinated and fragmented role. If you look at Pemex Exploration and Production (PEP), for example, it has more than 16 sub-directorates of which 10 or 11 of them, make purchases. There are more than 120 purchasing departments in Petróleos Mexicanos, ranging from a large supply subdivision to smaller purchasing centers in a clinic or hospital, that also make purchases.” The Boston University graduate considers that this implies the absence of homogeneous processes; “there is a lack of standardization of the contracting process, policies, rules that definitely do not exist, aggregate demand or consolidation.”

Henríquez assures that if there was an analysis of the four subsidiaries there would be one tendency: from the smallest to the largest-sized enterprises what you would find would be far from centralization. There would be total decentralization. “Centralizing what you can is to have everything under one roof. The purchasing staff should understand the buyer’s needs and requirements. Having everything under the same roof where

August 2014 Mxe Mexico Energy and Business Magazine

“In Argentina I talked to my colleagues from Ecopetrol, YPF of Argentina, PDVSA of Venezuela, and Petroamazonas of Ecuador about how to promote local suppliers. In this way as G-10 members we can promote our national supplier chains and do business in the petroleum industry outside of our boundaries.”

you can start to standardize, facilitate, and simplify what in the past required 120 purchasing departments is a qualitative change.” “On the other side, quantitatively you can “consolidate and aggregate demand if there are no longer fragmented processes. Now, different areas in Pemex are buying from the same suppliers, the same equipment, in a different way, in different conditions, with different times that you can

now standardize - including finding strategic frameworks to obtain optimization.” Without hesitating, Henríquez says that all of this is in preparation for a better Pemex, a modern Pemex of which procurement is first priority, alongside finances, alongside productive areas such as production, exploration, and refining, alongside human resources. This is necessary to turn this enterprise into a competitive and efficient company. “This change will benefit Pemex. Now that the Energy Reform has been approved, this change is an important step and sets the foundation to start transforming and modernizing the company in order to compete.”

August 2014 Mxe Mexico Energy and Business Magazine

“Obviously the challenge is enormous, and you should not minimize how it will affect business processes. The sum of 25 to 30 billion dollars (the purchasing power of Procurement) is talked about a lot but applying standardized processes that will be automatized eventually - the amount is just not relevant.”

Strategy and Planning The planning of the Corporate Procurement and Supply Department did not emerge ad hoc, it went through a series of steps to strengthen it. “It was very important for our General Director (Lozoya) for me and

the administration, to meet the two requirements: first, operations cannot be affected at any moment. That is, behind the budget there are 30,000 contracts on average per year. In one year there are 27,000, in another 32,000, depending on the year’s necessities. None of those, large or small, can be forgotten, stopped, or delayed because this could result in mistakes or in consequences directly affecting operations.”

August 2014 Mxe Mexico Energy and Business Magazine

Another consideration was that Procurement would have a smooth and secure transition. “We did not want this to be an effort that would take years, rather that it would happen quickly and surely, but not in an unorganized way.” Henríquez refers to the 3,000 employees involved directly in Procurement and that its functionality could not be created overnight. “Last year, the General Director and I got together first to talk about the scope. From there we got together with the managing group and we got feedback – like the lessons we learned from past efforts when the Human Resources or the legal department was centralized. The most recent effort was in the area of Information Technology.” Henríquez explains that they took the recommendations to the general directors of the subsidiaries, because really it is there that purchasing is done. “With the input of many employers from different areas in Pemex,

we created what is today the DCPA integration plan. Many people participated since the beginning, it was not Arturo Henríquez’s project - it was a Pemex project based on a collaborative effort.” “We created the Corporate Procurement and Supply Division by decision of the Board of Directors on January 17, and the announcement was published in the Diario Oficial. It was then that the integration began. We initiated four phases, making a smooth transition over a year. “The integration began with corporate, contracting, and procurement-related areas that were dependent on the Corporate Operational Division. Later, phases 1 and 2 included Pemex exploration and production, refineries, and Pemex gas and petrochemicals (PPQ).” Henríquez expects that by September the DCPA will be totally integrated. “We acknowledge the great work that many stakeholders did to prepare us for this.”

Centralization is the key Asked about the strategy to move the reform forward, Henríquez uses one word: centralization. “First we centralized all procedures, public bidding and direct adjudication. We centralized also the strategy; when you have 120 procurement-buying units you have no strategy but reactive units. With this, we can include strategic supply by managing by categories, which in reality is a change in how we buy.”

“What’s happening there? First, many suppliers, large or small, do not want to do business with Petróleos Mexicanos. It is a reality that few talk about, but it is true. Also because of the bureaucratic issue that this implies the major consequence of this (system) is that the user (buyer) does not have access to the best conditions (products or services), and as a result, can’t have the best solutions for their needs.”

August 2014 Mxe Mexico Energy and Business Magazine

Niche for SMEs

“The governability and stewardship of the process permits us to standardize or streamline the many bases of contracting, qualification and regulations. There are more than one thousand regulations only dedicated to Procurement, which many of these do not add value and are not valid. They make these processes more bureaucratic and longer.”

A sad reality With the current structure, Henríquez says, it is more difficult for suppliers to do business and have a relationship with Petróleos Mexicanos, because it is handled in a very disconnected way, even within each subsidiary. “Refining does not communicate with PEP, or with PPQ, or even with Pemex Gas. If you are a supplier that sells tubing or turbo compressors, or whatever product that might be transversal, you have to start from zero. You have to make a tremendous effort within a very bureaucratic process. If you decide to do business with PEP, you will knock the door of one of the 16 subdirectorates in the North. If you manage to demonstrate, instruct, or sell your technology or services, they might buy it. If you later decide to do business with the South, then you have to start the whole process from zero again.”

On the benefits that the new organization can bring for small- and medium-sized companies (SMEs), Henríquez says it will focus on all small, medium, or large companies. “We are looking for value-added, mutually beneficial relationships during the long term. If there is no value added, we are not going to consider them. This is a fundamental part of being a state-owned productive company.” “If as a company I am looking for the best value-added, my natural interest is to develop a supplier close to me, because I will reduce the direct and indirect costs of logistics, transportation and services. Thus I will encourage all suppliers located close to the installations of Pemex to do business with us.” The timing of the creation of DCPA put on the table the ability to sanction a bad supplier. “We have the responsibility to have good suppliers. The key phrase is “to establish value-added, mutually beneficial relationships that will endure in the long term.” This implies a two-way highway for suppliers not only to sell but to be good suppliers and honest citizens,” Henríquez explains. “For this, Pemex has to develop a robust program to evaluate the performance of suppliers with an approach that will take us from a transactional relationship (seller-buyer) to a strategic one.” ●

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Pemex

will partner with private firms in ten projects Excelsior

Emilio Lozoya, general director of Petróleos Mexicanos (Pemex), said that the projects involve 1.5 billion barrels of 2P reserves plus deep-water findings in the Perdido area.

August 2014 Mxe Mexico Energy and Business Magazine

Petróleos Mexicanos will partner with

private companies in ten projects that were assigned to it as part of the so-called “Round Zero”, Emilio Lozoya, general director of Pemex, said. He explained that the projects were grouped into four packages that include mature fields (3 terrestrial and 3 marine), extra heavy oil fields and development of gas and deep-water reserves. “Among the fields that were assigned to the company, Pemex identified ten strategic partnership opportunities in the short run, over a period of 13 months beginning in November 2014,” Lozoya added. He explained that the projects involve 1.5 billion barrels of 2P reserves plus deep-water findings in the Perdido area, and that an investment of 32.2 billion dollars will be required in periods ranging from five to 10 years depending on each project. The investment is additional to the integral and financed public works contracts that will represent 44 billion dollars.

Emilio Lozoya – general director of Petróleos Mexicanos (Pemex).

“This represents a total investment of 76 billion dollars in the country. In the first five years, the partnership contracts will bring around 4.1 billion dollars per year in additional net investment,” he added. Lozoya said that considering that Pemex’s investment in exploration and production amounts to 25 billion dollars per year, “these ten partnership proposals will increase investment in the oil industry by 16%.” However, if you add the 44 billion dollars associated with potential investments in exploration and production contracts and financed public works contracts, “the investment in the early years of the energy reform could rise 25% over the 25 billion dollars that we are investing today,” he concluded. * Published by El Universal

Pemex forecasts a 50 percent growth in investments in 2015

With the approval of secondary laws on the energy sector, Pemex expects that sector investment will increase by almost 50 percent, from 27 billion dollars to 40 billion dollars annually, that is, 13 billion dollars more. Lozoya affirmed that the approval of the energy reform will lead to job growth and greater competition in addition to lowering electricity and natural gas prices. In a radio interview with Ciro Gómez Leyva, he said that he has seen a huge “appetite” in energy sector investment since last year when Enrique Peña Nieto’s government put forth the reforms. “The laws are in the right framework, and now the goal is that this appetite - this investment – will turn into infrastructure and jobs, which is one of Pemex’s goals as soon as the law is approved,” he assured. He explained that current annual investment totals approximately 27 billion dollars both in exploration and production and the share of industrial transformation. “We hope, without a doubt, that this investment will reach 35 billion dollars. I think this is a conservative estimate for next year; it is possible it will be more. It depends on our capacity to generate interest and not depend solely on Petróleos Mexicanos, but to work with other regulatory agencies. The National Commission on Hydrocarbons will be issuing tenders in which Petróleos Mexicanos will also participate, and if we do it right, and I am sure this will be the case, because of the dynamism I am perceiving

Pemex’s general director, Emilio Lozoya, said that because of the energy reform investments in the energy sector are forecasted to increase from 27 billion to 40 billion dollars annually. in these institutions, this number could reach 40 billion dollars. I repeat - all of this depends on the regulatory foundation that is being put forth in the secondary laws and how well it can translate this interest into investment in our country.”

- Could it reach then between 35 billion and 40 billion dollars? “That’s right. The numbers, I repeat, depend on the projects and how soon they are approved. Here I am proposing projects both in exploration and production as well as ducts and petrochemical plants. All in all, it is a large number, but it will depend, I repeat, on the capacity to administer projects.” Emilio Lozoya said that Pemex will invest in those projects with a higher return, such as in shallow water. “For Pemex, it is not worth it to get involved in small projects. It distracts resources,” he said. On the date for the first tender on the Internet, Lozoya said that they hope it will be at the beginning of 2015. “That will be considered an important news; the transparency will serve as a tool that will ground this reform and clarify why one company won a tender or not,” he said. * Published by Milenio

“The laws are in the right framework, and now the goal is that this appetite - this investment – will turn into infrastructure and jobs, which is one of Pemex’s goals as soon as the law is approved,”

Mexico's energy reform

to attract international interest

August 2014 Mxe Mexico Energy and Business Magazine

Build out in neighbor country transitions from plans to reality

With final Congressional approvals now in place, Mexico and President Enrique Peña Nieto can begin celebrating the passage of the secondary legislation necessary to codify last year’s constitutional amendments that opened the energy sector to private investment. The confetti will have barely hit the floor when the focus must necessarily turn to the crucial implementation period when the institutional and market architecture must go from blueprints to the hard work of build out.

The December 2013 constitutional reform ended the monopoly of the state-owned energy company Pemex and introduced private investment into every segment of Mexico’s hydrocarbon sector. It also gave regulatory authority to a new set of autonomous, independently funded entities that will oversee licensing, safety and environmental protection. Additionally, the reform required that Pemex be transformed into a “state productive enterprise” and established the Mexican Petroleum Fund, under the purview of the Central Bank, to manage contract payments and oil revenue. There are uncertainties about how Mexico’s new energy model will function when fully implemented, but they appear to be within the norms of other energy sector openings and entirely normal for this type of major reform. And, as others have noted, Mexico derived a bonus from the timing of its overhaul in the form of lessons learned and best practices. The secondary legislation enables the constitutional reforms and serves as the basis on which business and investment decisions will be made. The recently approved package of

Mexico’s Senate

bills included some 21 legislative changes that detail the fiscal regime, including the contract terms for private-sector upstream participation, as well as the responsibilities of the regulatory entities and new transparency and anti-corruption measures that will govern the sector. Though the legislation as finally passed after several marathon sessions does not erase every doubt and eliminate every uncertainty, reaction has been largely favorable. Energy analysts have termed the legislation “fairly pro-market” and worries articulated early on in the process - notably about whether private parties would be able to book oil reserves or the expected revenue streams from them for financial reporting purposes - appear to have been satisfactorily addressed. One aspect of the secondary legislation of particular interest internationally is the provision relating to national content requirements. The legislation specifies a 25 percent national content minimum for incoming companies by 2015, increasing to 35 percent by 2025. Analysts note the requirements are very competitive with those specified by other countries and have commented that they are a “non-issue.” Texans appreciate what it takes to build a vibrant energy sector and know that it requires much more than legislation. The sector’s architecture and the infrastructure that allow it to function are fundamental, and Mexico has done well in meeting expectations in these

areas thus far. But each stage of the transition is important, and as the proximate period entails a central role for Pemex, both as the primary domestic operator and as a potential transitional partner, some are voicing concerns. Quashing these doubts is a tall order for the company, which is not known as efficient and which must overcome perceptions of corruption, demonstrate its commitment to transparency and rapidly move to a new ruledriven, competitive reality. The energy opening has been termed “Mexico’s second revolution.” While some may view the statement as an exaggeration, few would dispute that the reform will be transformational for the country. Given Mexico’s immense existing and potential resource wealth, and its other favorable attributes (stable democracy, solid macroeconomic fundamentals, global economic integration, geographic proximity to the US, to name a few), the energy reform should attract international interest appropriate to the unique and unusual opportunity it presents. For those in Texas involved in a booming energy sector, the extension of North America’s energy renaissance is a good thing.

“There are uncertainties about how Mexico’s new energy model will function when fully implemented, but they appear to be within the norms of other energy sector openings and entirely normal for this type of major reform”.

* The article was written by Antonio Garza - Antonio Garza is a former U.S. ambassador to Mexico. He is counsel in the Mexico City office of White & Case and chairman of Vianovo Ventures.

10 steps

Next steps in the energy reform After signing and promulgating the secondary constitutional laws, president Enrique Peña Nieto communicated ten actions and terms that will now be implemented with the enactment of the energy reform laws.

Accelerate the so-called Round Zero of Pemex. The assignments that Pemex will keep in the areas of exploration and production camps were presented on August 13.

Round One works will be initiated. Areas included in the first round of contracting bids provided in the energy reform were announced on August 13.

At the end of August, the decrees will be issued to create the National Energy Control Center and that of Natural Gas.

This month (August) the President will send the nominations for the CNH and the CRE, the independent counselors for Pemex and the CFE, and the technical committee of the Mexican Petroleum Fund.

Auguts 2014 Mxe

The Mexican Petroleum Fund will be created and provide decrees to create the public fund, the SenerNafinsa fund, and universal electric service.

6. 7.

In September the strategic program for workforce training in areas of hydrocarbons will be presented. In October all regulations of the secondary legislation of the energy reform will be published.

President Peña Nieto accompanied by board presidents of the Senate and Congress, Raúl Cervantes Andrade and José González Morfín.

In October a decree will be presented for the restructuring and modernization of the Mexican Petroleum Institute.

9. 10.

In October the guidelines for issuing clean energy certificates will be published.

Within the next 90 days, the regulations will be issued for the Industrial Sector and Protection of the Environment Agency in the hydrocarbons sector. Published by Milenio Photo: Reuters