Mexico Energy - December 2014/January 2015

Investment opportunities in the new era

The Year in Review 2014 Plus Indra, A Stable and Solid Company Vol. 1 No. 10 December 2014 - January 2015

Letter from the Editor

I

I am proud to report that in 2014 nine editions of Mexico

Energy and Business Magazine were successfully published and our readership increased considerably. Mexico Energy is considered the first digital magazine in English, specializing in providing investors and industry leaders wishing to do business in Mexico’s energy sector with relevant sector-specific information. Our content is backed by the expertise of Mexico’s top oil and energy magazine: Petróleo &Energía (P&E), considered for the past 12 years the point of reference for the industry.

I would like to extend my most sincere gratitude to the editorial and sales staff of P&E, especially to Milton Méndez, editor in chief, for his motivation and leadership. Muchas gracias Milton!

For the December issue, we present “The Year in Review 2014”, a compilation of the most informative and fascinating stories of each issue. I hope this section provides our readers a small glimpse of the quality, timeliness and relevance of editorial content presented in Mexico Energy.

For our feature profile “Aeromexico – The Sky is the Limit”, we take a closer look at Mexico’s global airline, which is on its way to provide an excellent service to hundreds of investors, both in the private and foreign sectors ready to capitalize on Mexico’s oil and energy industry. On a side note, Aeromexico was a proud sponsor of the 1st Mexico Energy and Business Forum held last November in Dallas, Texas. The forum was a grand success, attracting more than 200 potential investors.

Throughout the year we have presented profiles of international companies that have established themselves in Mexico and are currently consolidating a prosperous future. For this issue we present Indra, a Spanish company that concentrates its efforts on market innovation to compete in the technological inventions and process automation fields. In an interview with Leonardo Cuneo, director of the energy and utilities division of Indra México, Cuneo states that in the last three years, the company has invested close to 500 million euros in Mexico related to research and development projects, and in improving services and products to its clients. Don’t miss this noteworthy interview.

Also, it has been a pleasure presenting editorial columns written by former US Ambassador to Mexico, Antonio Garza. His professional experience is greatly appreciated and valued. In “Looking Ahead to 2015”, Garza presents a prognosis of what the Energy Reform could bring to Mexico, and addresses some of the country’s most pressing challenges. Garza affirms that despite sluggish GDP growth across the hemisphere, economic integration continues to evolve in dynamic ways.

Mexico looks forward to opening its energy sector to private and foreign investment which will bring opportunities, competitive open markets, the rise of a stronger middle class, and higher levels of employment. All these add up to exciting financial and editorial times ahead.

Wishing you all happy holidays and the best in 2015!

Sincerely,

Mexico Energy and Business Magazine Volume 8 december 2014 / january 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

Hugo Hernández Ramos

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

December 2014 / January 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

12 Aeromexico – The Sky is the Limit For 2015 the Mexican Energy Reform will begin its implementation process. This will surely mean an increase in air traffic to and from international destinations and Mexico.

This is why Aeromexico is poised to provide a friendly and excellent service to tens of thousands of investors pursuing business opportunities in Mexico.

14 Solid Growth The arrival of new stakeholders in Mexico’s energy industry opens business opportunities for diverse suppliers of products and services, and in the case of Indra emphasizes that what matters is not only the company’s experience, but also market innovation to compete in technological inventions and process automation fields.

24 The Year in Review Mexico Energy and Business magazine proudly presents a compendium of the most informative and compelling stories from each issue in 2014.

30 Looking Ahead to 2015 Former US Ambassador to Mexico, Antonio Garza, presents his thoughts about what the Energy Reform will bring to Mexico next year, as well as addressing some of Mexico’s most pressing challenges. Garza says that despite sluggish GDP growth across the hemisphere, economic integration continues to evolve in dynamic ways.

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December 2014 - January 2015 Mxe Mexico Energy and Business Magazine

INDEX DECEMBER 2014 JANUARY 2015

06 Business Updates

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Business Updates

Business updates Mexico Energy and Business

Mexican Petroleum Fund to operate in January

Petroleum Panorama, negative for public finances

The Fund will receive, manage, and channel petroleum income.

The Technical Committee of the Mexican Petroleum Fund called a meeting for the second time this month. Committee members approved the general guidelines for the opening and the management of accounts in the Banco de México and other financial institutions.

These accounts will serve the purpose of receiving, managing, and distributing income from assignments and contracts.

At the same time, the Committee gave the fiduciary institution the capacity to conduct ordinary transfers to the Stabilization Fund, to other specific destinations, and to the Treasury of the Federation in order to cover the Federal Expenditures Budget, according to established law.

These approvals guarantee that the Mexican Petroleum Fund has the necessary tools to perform its functions on January 1, 2015.

In line with the above, a budget was presented on the Fund’s internet site, which will launch on January 1, 2015.

On this site, any interested party can consult the actual activities that took place in the last trimester and the principal financial results, the amount of the transfers to the Expenditures Budget, and the diverse Funds of Stabilization, among other operations.

Public finances are safe for next year, but Mexico’s government is now working on an income schedule to depend less on oil revenues, commented BBVA Research.

Carlos Serrano Herrera, the chief economist at BBVA Research on Mexico, emphasized that despite the decline in oil hedges, the federal government guarantees such resources and does not expect shifts in the international oil market to cause budget cuts.

“In public financing a sharp decline is not projected in 2015 because of the coverage of petroleum and the resources of the Mexican Petroleum Fund,” he stated during a presentation of his research study, “Mexico Situation.”

He warned that if oil prices remain low through 2016, the federal government’s earnings could fall below what was originally budgeted to about 0.6 percent of GDP, resources that could be covered without significant risks to the public deficit given the moderate level of public debt.

Carlos Serrano considers that there is still time for Mexico to work on reinforcing its public finances to the extent that they would depend less on oil revenue.

SunGard provides technology in Los Ramones Phase I The platform Aligne, developed by SunGard, will be used by Gasoductos de Chihuahua, the company responsible for the Los Ramones Phase I natural gas project, an infrastructure project to supply natural gas from the northern border of Tamaulipas to Ramones municipality in Nuevo León.

The technology aims to optimize internal business

Business Updates

processes in pipeline administration while assuring the profitability of gas programming by reducing operational risks and guaranteeing safety, productivity, and efficiency.

Leticia Ortega, general director of SunGard in Mexico, noted that for the company it has been an honor to play a major part in Mexico’s energy infrastructure during the last 30 years, and that once completed will provide close to 20 percent of the demand of natural gas, which represents a strategic action and a top priority for Mexico.

Acciona Microenergía lights up Oaxaca Acciona Microenergía México signed an agreement with the Oaxaca government, the Spanish Agency for International Development Cooperation (AECID), and the Mexican Agency for International Development Cooperation to provide basic electricity to 3,000 families using solar energy.

The objective of the Luz en Casa (Light at Home) Oaxaca 2014 project is to facilitate the access through Small Home Photovoltaic Systems (PSFD) to persons living in population centers with less than 100 inhabitants, according to a company statement.

“The project is part of the Luz en Casa Oaxaca program and convened by Oaxaca’s state government in partnership with Acciona Microenergía México to facilitate basic electricity access to inhabitants of 800 population centers with less than 100 inhabitants during 2012-2016,” the statement noted.

The project Luz en Casa Oaxaca 2014 has an investment of almost 17 million pesos and has been developed through cost-share subsidies to supply PSFDs in which the government provides- 50 percent and the consumer the remaining 50 percent.

Pemex reorganizes its operations Petróleos Mexicanos’s administrative board will reorganize its operations and transform its current four subsidiary organisms into two productive subsidiary companies and create five productive subsidiary companies outside of its core functions.

At the same time, it approved the centralization of procurement, human resources, legal, finances and planning, 8

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

among other functions, as well as formal alliances and new business and the integration of research with technology development.

According to Pemex’s general director, Emilio Lozoya Austin, the changes will better prepare the enterprise to confront the challenges of a global energy revolution. He indicated that the reorganization responds to the Energy Reform’s planned objectives for Pemex.

Finished Pipeline NET Midstream The U.S. company NET Midstream announced that its subsidiary NET México Pipeline Partners finished building a 200-kilometer pipeline to transport gas from the Eagle Ford Shale region in Texas to the Texas-Mexico border.

Business Updates

NET Midstream indicated in a news release that the pipeline was finished before its scheduled due date, all of the mechanical work was completed last October, and has prepared all of its activities to start. The project is now ready to deliver natural gas to Mexico.

“We are very happy to be able to be in service before the due date,” said Jerry Dearing, co-president of NET Midstream. “Our team was very successful in implementing our innovative project design and accomplished every goal and challenge,” he indicated.

The pipeline extends from the hub at Agua Dulce in Nueces County, in southwest Texas, to a location close to the border community of Rio Grande City in Starr County.

The new pipeline will feed into an existing pipeline at Los Ramones, built on the Mexican side of the border and extending 1,120 kilometers, from the U.S. border to the State of Aguascalientes.

Natural Gas Control (CENEGAS), announced the construction of 15 pipeline projects to increase the energy supply, primarily in Mexico’s central and western zones.

“The cost to build a pipeline can change very quickly, but for a small project one pipeline can cost around 800 million pesos and the large ones, 1,500 million pesos,” he indicated.

He emphasized that “we are talking about more than 15 projects that are already being built, all are already functioning well, the 15 projects are throughout the Mexican Republic, and form part of the National Plan of Infrastructure.”

David Madero indicated that the pipelines are “to increase imports - we are importing more than 1,500 million (cubic feet) and we are going to import another 2,000 million when Ramones I and II are ready,” in Nuevo León.

El Cenegas will be completely functional in February 2015 but it is already part of project development of the Ministry of Energy, the Energy Regulatory Commission Projected 15 new pipelines in Mexico David Madero Suárez, the head of the National Center for (CRE), and the Federal Electricity Commission (CFE).

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December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

Aeromexico The Sky is the Limit Source: www.aeromexico.com | For more information e mail: aeromexicogroups@aeromexico.com.mx

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

In 2015 the Mexican Energy Reform will begin its implementation process in Mexico and the private and foreign sectors are ready to capitalize on this historic referendum. The Energy Reform will set the stage for an increase in flights to and from the US and Mexico. For this reason, Aeromexico is poised to provide a friendly and excellent service to investors pursuing business opportunities.

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History and emblem of Aeromexico What began as a dream in 1934 has become a reality. Aeromexico is a leader in Latin America, a symbol of Mexican modernity. Thanks to a global vision focused on service and efficiency, the sky is the only limit. At Aeromexico, dreams know no bounds.

•Antonio Diaz Lombardo created Aeronaves de Mexico. Julio Zinser made the inaugural flight from Mexico City to Acapulco on September 14, 1934, in the airline’s first plane, a Stinson SR. The Eagle Knight – Emblem of Aeromexico.

For the ancient cultures of Mexico, wings, or the human ability to fly, have three truly significant forms of expression. First, the feathered man-god Quetzalcoatl appears impetuous and startled, as if he had just landed.

Second, there is the ritual ceremony of the Voladores de Papantla (Fliers of Papantla). Equally fascinating for those who perform the ritual as it is for those who watch, it offers a practical and obvious solution to the human desire to ride the wind.

Finally, the Aztecs established a military organization of privileged Eagle Knights (Caballeros Águilas), warriors who were chosen because they had proven their courage, fearlessness and heroism in battle. For major public events, as well as for ritual sacrifices, the Aztecs organized spectacular ceremonies that included military parades featuring the dance of the Eagle Knights, who leapt as if they were birds ready to take flight.

Flights Aeromexico, Mexico’s global airline is proud to support Mexico’s economic growth by connecting the country to important international destinations.

Today Aeromexico flies to 17 US destinations: Atlanta, Chicago, Dallas Ft. Worth, Denver(seasonal), Fresno, Houston, Las Vegas, Los Angeles, Miami, New York, Ontario, Orlando, Phoenix, San Antonio, San Francisco, Sacramento &Washington D.C. Dallas, Texas The carrier operates 2 daily direct flights from Dallas/Fort Worth to Mexico City with Embraer 190 airliners for 99 passengers, 11 in Clase Premier – Aeromexico’s First Class.

The air company serves these routes from the Terminal D at Dallas/Fort Worth International Airport, considered the biggest airport in the United States.

In 2013, Aeromexico incorporated to its fleet the first three Boeing 787 Dreamliners, considered the 21st century airplane. The aircraft will operate flights from Mexico City to New York, Paris, Tokyo, Madrid and London.

New routes in 2014 Houston – Monterrey, New York - Monterrey.

Destinations for 2015 Boston – Mexico, Toronto - Mexico.

Aeromexico by numbers: Daily Flights: More than 600.

In 2013, 15.5 million passengers.

Main operating hubs in Mexico: Mexico City (Terminal 2), Monterrey (Terminal B), Guadalajara & Hermosillo.

•13,000 employees in Mexico and internationally.

•More than 80 destinations - national and international.

•More than 3 million Club Premier Members.

•11 Salones Premier (VIP Lounge) in Mexico.

•530 VIP lounges in the world (includes SkyTeam partner airlines lounges).

Fleet: Aeromexico fleet has been renovated to offer the passenger the most modern technology. The fleet consists of more than 115 airplanes with an average age of 9 years.

Nowadays, it operates a fleet of Boeing 787, 777, 767, 737 jet airliners and next generation Embraer 145, 170 and 190 models. Adding in June 2013 the new Embraer 175.

Benefits as large as the traveling group.

Aeromexico offers a wide variety of benefits for wedding planners and for those who organize study groups, sporting events and leisure trips and have a group of 10 or more passangers. For more information e mail aeromexicogroups@aeromexico.com.mx or visit www.aeromexico.com Aeromexico MICE This program offers you the greatest benefits to fly to the best destinations in Mexico for an event, meeting or convention. Minimum 9 passengers, flying from two or more origins in the US to one same destination within Mexico and flexibility to fly five days before/after the event date. Every 30 passengers in one same Aeromexico event offers you one ―Tour Conductor‖.

Aeropass program Travel more with greater flexibility and at the best price. This program is designed specifically for small businesses and families.

Maintenance Aeromexico has one of the best maintenance reliability records in the world, with an overall technical dispatch reliability of over 98.5%.

Outstanding On-Time Performance “Mañana, mañana”? At Aeromexico is pretty much the opposite of that stereotype. In fact, compared to U.S. airlines as measured by the U.S. Dept. of Transportation, Aeromexico actually beats them all on on-time performance.

Awards and Recognition The track record of Aeromexico and its policy of service and quality have not only earned the airline the loyalty of millions of users, but also awards and prices throughout the years.

2014 Aeromexico scored as the ―Best in-flight Technology airline in the Latin Trade annual selection of the best experiences for the business travelers in Latin America.

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

Aeromexico operates out of Terminal 2 (T2) in the Mexico City International Airport, which has been rated the most modern air terminal in Latin America.

The carrier operates to and from three major cities in Texas: •Houston – Mexico City: 4 daily frequencies •Dallas / Fort Worth – Mexico City: 2 daily frequencies •San Antonio – Mexico City: 1 daily frequency •San Antonio – Monterrey: 1 daily frequency •San Antonio – Guadalajara: 1 daily frequency (stop in Monterrey)

SkyTeam: Aeromexico is a founding member of SkyTeam, the global airline alliance partnering 20 airlines.

SkyTeam offers all partner airline passengers a large global network with more destinations and frequencies, and improved connectivity.

SkyTeam offers its 552 million annual passengers more than 15,000 daily flights covering 1,000 destinations in 187 countries across the globe. www.skyteam.com.

In order to provide a most excellent service, Aeromexico offers the following: Aeromexco introduces its all inclusive flights features; first checked bag, entertainment, headsets, pillow and blanket, wine & beer, soft drinks, meals and snacks.

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Indra

Leonardo Cuneo Director of the energy and utilities division of Indra México.

Solid Growth 14 December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

investment opportunities in the new era

Hugo Hernández Ramos

Óscar Agis

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

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The arrival of new stakeholders in Mexico’s energy industry opens business opportunities for diverse suppliers of products and services, and in the case of Indra emphasizes that what matters is not only the company’s experience, but also market innovation to compete.

S

ince its arrival in Mexico 15 years ago, the Spanish consulting and technology company has been securing its place in industry, and now with the influx of new companies and investors in the energy sector new business alternatives abound for Indra.

Leonardo Cuneo, director of the energy and utilities division of Indra México, confirms that for 2015 the group will grow alongside the support of its largest clients based on its leadership in technological innovation, process automation, and in defining improved strategies. For the next year the expectations of this global enterprise with a presence on five continents will increase considerably.

“In the last three years, Indra has invested in Mexico close to 500 million euros in research and development projects in order to improve services and products to our clients, something that we integrate into our business value proposition,” Cuneo comments.

For Indra, the Mexican market is a growing opportunity and considered a priority in North America for offering its technology, products and services to different types of industries.

“One of these is Energy and Utilities, Finance and Insurance, Telecommunications and Media; we work in another area called Public Administration and Healthcare, another called Transport and Traffic, Defense and Security, and the last is Industry and Consumer,” explains the executive.

Leonardo Cuneo explains that Indra has an important presence in global defense and military institutions and has developed from combat aircraft simulators to helicopters, radars for military and civil use, as well as border vigilance, “this is one of our areas with

investment opportunities in the new era

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

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considerable specialization and product development which makes us competitive at a global level.”

Indra forecasts that another objective set to impulse its growth next year is its Transport and Traffic unit, offering air traffic control systems, intelligent transport systems, train control, and maritime transport. “Mexico is a vital geographic strategy for us. Today

it represents an important part of the company’s total income (3 million euros in annual sales), and thus we continue our goal to continue growing and also developing local talent. For us, what the country is experiencing is crucial,” Cuneo says.

According to company reports, the Transport and Traffic sector experienced a 9 percent increase during the first ten months of the year, but the first place in growth was Public Administration and Health which grew 12 percent.

Currently, Indra has a workforce of just over 2,000 employees located in Mexico City, Querétaro, Monterrey, Guadalajara, and the State of Mexico.

Key Moment in Mexico Derived from the approved Energy Reform and coupled with the differential value that Indra offers, potential business opportunities for next year are enormous and it is ready to offer its services to established companies in Mexico and to new ones arriving to the industry.

“We believe we are in a special position. Having experienced similar processes of opening energy sectors in the petroleum and electricity industries in other countries - we know the great potential that

investment opportunities in the new era

exists and the growth in all of these areas in Mexico. Not only in the exploration of new oil fields but also another important part is the establishment of the electricity market that is now operated by CENACE,” Cuneo says.

This is a key moment in sector development, and the Spanish company is now ready to share its experiences and has announced that it is about to release a commercial program for companies needing to solicit its services in the process.

“We are headed in the right direction and prepared to offer the best technologies, products, and services that will serve to evolve Mexico’s energy industry,” emphasizes the executive.

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Compulsory Terms

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According to the Mexican government’s predictions for implementing the Energy Reform, the process could take five years or more; however, for Indra’s Director of Energy and Utilities, changes will begin at the start of next year.

“Within a year, the power market will already be in place with wholesale transactions conducted between electricity sellers and CENACE and the definition of the spot market,” Cuneo says.

He explains that once the power market is defined, the rules should already be clear and the sector will be completely defined so that any new electricity generators or enterprises that already have an installed capacity can compete for a chance to be energy distributors.

Regarding the petroleum industry, by next year’s first and second trimester Round One will determine the concrete interest on the part of foreign companies to explore and work in those fields identified

by Pemex. “Next year we will actually see who is going to invest and who is really interested in Mexico’s hydrocarbon and petroleum sectors,” he adds.

Innovation and Technology With the arrival of new players in the energy industry, suppliers of products and services are now obligated to further develop the sector’s technology use.

investment opportunities in the new era

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Indra is not the exception and now has a strategy. Together with Repsol, it developed the only warning system in the world to detect early oil leaks from the seabed which will lead to maximize safety in offshore operations.

“We are interested in offering the best services to our clients. With the development of technologies, such as our system called HEADS (Hydrocarbon Early and Automatic Detection System), we are searching for the early detection of hydrocarbons on the seabed.”

Indra has reached its growth expectations for 2014, and in 2015 plans to at least double it. “The idea is to continue maintaining growth at a reasonable rate. In the context of the current energy sector, next year will be a very positive year of growth and because of it we are planning to bring new technologies,” Cuneo says.

The Price, an obstacle The boom in oil and gas sales in the United States has generated an important drop in the price of a barrel of oil in November, a situation that could retard the positive effects of the implementation of Mexico’s Energy Reform.

According to Indra’s management, this has also generated an oversupply of crude oil in the United States, subsequently extending to Canada, and the effects are already being felt in Mexico. “Obviously the prices have tended to drop 30 percent in the last months,” explains Leonardo.

He noted that in this context the energy industry is very tied to the geopolitics and predicted that the decline will continue, although not as aggressive.

“Basically it is a question of supply and demand and of the political strategies behind governments, each one with its own production capacity.”

Leonardo Cuneo adds that the effect will also extend to companies arriving to invest in Mexico’s energy sector. The return on investment of their business plans will take more time. “Thus these companies will be even more cautious because to have 30 percent less for barrel may influence those plans,” he points out.

investment opportunities in the new era

The Year in Review 2014

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

Launched in March 2014, Mexico Energy and Business Magazine has presented you with the most informative and appealing stories on Mexico’s dynamic energy sector - aimed at private and foreign investors who would like to do business there. Mexico Energy is powered by Petroleo&Energia, Mexico’s most credible source of information for the oil and energy industry. Here we present the stories that captivated our readers both nationally and abroad.

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March

April

May

Interview with Lourdes Melgar Palacios

Lessons from Spain

changes for Pemex procurement

Undersecretary of hydrocarbons for the Secretariat of Energy focuses her career in the energy sector and explains the new changes taking place in the industry and the opportunities and challenges these may bring.

High hopes

The chief executive officers of Gauss Energy, GE, Mexichem and Philips share their views on the benefits the energy reform can bring to Mexico and how these have already taken effect. Investment opportunities are just around the corner.

Exclusive interview with Ángel Larraga Palacios, country manager of Gas Natural Fenosa México, shares how Mexico can learn from the 1998 Hydrocarbons Law approved by the Spanish government that paved the ground for an open market, where today over a dozen companies supply natural gas.

Revitalizing Mexico’s electricity sector Mexican legislators and business experts agree the regulatory structure must adjust in order to increase the supply of electric energy to meet increasing demand, reduce costs, among others.

Arturo Henríquez Autrey, Pemex’s chief procurement officer gave a presentation during the OTC about how the implications of reforms to Pemex’s procurement practices could be significant both for the energy industry and for Mexico.

A new beginning The Federal Electricity Commission is about to be transformed. Enrique Ochoa Reza, chief executive for the CFE shares his views on how the construction of 4,100 kilometers of pipelines will represent a 34% increase to the national gas pipeline system.

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

The Year in Review 2014

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June

July

August

Closing the gaps in Mexico’s energy

Gas, solar to lead as Americas invest $1.3 trillion to build 2030 power capacity

Keeping it simple

Mexico’s National Infrastructure Plan (PNI) for 2014-2018 is a good sign for the economy and for the private sector. Of the 7.7 billion pesos, 3.9 billion pesos are set aside for the energy sector. An historic amount of investment that would expand the Gross Domestic Product (GDP) between 1.3 percent and 1.5 percent, experts point out that these investments have yet to materialize.

The next decade and a half will see renewable energy raise its share of electricity generation capacity in the Americas from 7% in 2012, to 28% in 2030 (excluding the contribution of hydroelectric power), while the share of coal-fired capacity falls from 21% to 9%, according to a major report from research company Bloomberg New Energy Finance.

The French connection For the past 16 years, Alstom has had an important role in several energy projects in Mexico and now that the Energy Reform has opened the doors to more revenue, the company is looking forward to take part in investments to increase the country’s capacity to generate electric energy, says Alstom president, Patrick Kron.

Sailing toward the future in geothermal power The support for geothermal technology, under consideration by the Senate as part of Mexico’s Geothermal Law and by the Ministry of Energy could affect the progress of other renewable energies by increasing the stiff competition for financing and incentives, according to experts.

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.

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.

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The Year in Review 2014

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September

October

November

Mexico counting on huge private investment in energy

The Energy Reform’s financial arm

Special Section: Mexico Energy and Business Forum

The Financial Reform emerges as the strong arm that can consolidate the benefits of a successful Energy Reform. Here we take a closer look at how the Financial Reform can open the door to investments within the power generation industry. Information, consumer advice and protection, as well as services that facilitate the rapid and transparent access to financial resources are fundamental concepts that define the Financial Reform of 2013.

In this section we present a collage of pictures that were taken on November 10 during the official launching of Mexico Energy and Business Magazine, where keynote speakers, panelists, oil and gas businessmen gathered to network and explore investment opportunities in Mexico’s energy sector. The event gathered over 200 people from Texas, Oklahoma and Mexico.

Mexico’s energy reform is all about boosting investment and thus production. But the million-dollar question is: just how much investment will flood in, and to what type of resource, when fields are put on the block starting from next year?

According to industry leaders total private investment in energy may reach $161bn between 2014 and 2020.

Behind the scenes The work of the Ministry of Energy would not be the same without the support of three leaders who labored tirelessly during the legislative process of the Energy Reform on projects that would symbolize millions of investments for Mexico.

Here we present their stories, (Melgar, Hernandez and Beltran) and the arduous work that took place behind the stage.

Economic profitability of blocks and fields of Round One in mexico Ainda Consultores and CBM Ingeniería gathered a team of experts in the industry: geoscientists, engineers, economists, attorneys, among others, to conduct an evaluation of the preliminary value creation potential of representative blocks and fields of the areas considered in Round One.

The 36 most influential leaders in Mexico’s energy sector (These 36 leaders will help and provide orientation to private and foreign investors doing business in Mexico’s energy sector). In alphabetical order, we present the movers and shakers you must know who are changing Mexico’s energy industry, both in the private and public sectors.

Looking Ahead to December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

2015

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As we count down to 2015, I want to wish you all the very best for the upcoming holiday season. It also seems like a good time to take a moment to reflect on some of the events in Mexico over the past twelve months. In this newsletter, I’ve outlined three takeaways from what has been a dramatic year.

1. Mexico’s reform agenda kept rolling through 2014, but turbulence could lie ahead.

2014 opened with much anticipation in the wake of President Peña Nieto’s ambitious 2013 reform agenda. By August, Mexico had passed eleven new structural reforms, with sweeping changes across the education, political, financial, fiscal, and telecommunication sectors. Some of these changes were widely viewed as necessary—such as opening up television and Internet networks to competition or allowing reelection for members of Congress—while others including mandatory teacher evaluations or higher taxes for border manufacturing sparked fierce debate.

But the most anticipated and contentious of all was the energy reform, which we have focused on quite a bit here at White & Case.

The reform opened the country’s oil and gas sector to private investment for the first time in seventy years and the secondary legislation—passed in August 2014—outlined the details on everything from new energy regulators to domestic content requirements.

Recently, the National Hydrocarbons Commission approved and made public the details of the first-round bids in shallow water blocks to take place next year. For more, see JP Morgan’s December 10th report, “Mexico In Brief: Preliminary bidding rules for oil investment now approved.”

For energy reform, as well as for all the other reforms, the big challenge in 2015 will be implementation. While less exciting than the political negotiations, getting it right will be critical. For the oil and gas sector, proper implementation will mean first hammering out the nuts and bolts of the contracts and then making sure everything is in line for the first auction early next year.

As we look toward 2015, another challenge could come from plummeting oil prices, which reached the mid $60s for a barrel of crude last month (compared to over $105 in June and July). While many of you may breathe a sigh of relief when it comes time to fill up your tank, for energy companies and oil exporting countries, this isn’t such good news. The low prices will dampen investment enthusiasm—also hurting workers and communities that rely on the industry—and mean less revenue for many governments across the region that rely on these revenues to fund their budgets.

2. While President Peña Nieto’s ambitious reform agenda was comprehensive in many ways, it has yet to address some of Mexico’s most pressing challenges.

This year’s reform agenda certainly covered a lot of ground, but it is now clear that it didn’t address some of Mexico’s most glaring weak spots. Most prominently, it did not include any serious push to address the country’s perennial challenge: rule of law. This oversight could threaten many of the reform’s gains—as investors lack confidence that their contracts or investments will be respected—but even more importantly, it threatens Mexicans’ security.

On September 26, the horrific disappearance of 43 students in Iguala, Guerrero shocked the nation to its core, pushing tens of thousands to the streets across the country to demand a safer and more just future. The outrage only grew in November as news outlets began reporting that the first lady owned a $7 million house, registered to a company whose owner had just won a high-speed train concession from Mexico City to Querétaro. The train contract was canceled and the first lady quickly announced that she would sell the house, but just the hint of corruption was enough for Mexico’s public—beating down Peña Nieto’s approval ratings to slightly under 40 percent.

To address the violence, the government announced its new ten-point security plan, including a focus on strengthening the police and judicial systems and investing more in impoverished areas of the country. While a muchneeded step, the reaction from many Mexicans was that it all amounted to too little too late.

Giving these rule of law initiatives the same attention as the earlier economic reforms will be critical to ensuring their full implementation and success. If this doesn’t happen, the consequences will be steep—undermining the foundation for a safer and more prosperous Mexico and complicating the PRI’s path forward in next year’s midterm elections.

Recently, in an article published in the New York Times, Enrique Krauze offers up timely and thought-provoking perspective on what President Peña Nieto must do to address these concerns head on.

December 2014 / January 2015 Mxe Mexico Energy and Business Magazine

3. Despite sluggish GDP growth across

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the hemisphere, economic integration continues to evolve in dynamic ways.

Throughout 2014, Mexico—like many countries around the hemisphere—struggled to spur its economy into high gear. Part of this was due to weak economic activity globally, but it also reflects the fact that many of the country’s reforms will take a few years to be fully realized. The result has been disappointing growth, projected to reach just above 2 percent for the year.

But measuring what’s going on in Mexico and its neighbors’ economies by this one indicator misses some of the most interesting developments across the region. North American supply chains are now deepening their roots from Toronto through Querétaro, entrepreneurial ecosystems are increasingly spilling over borders, and innovation continues to change the ways we think about and conduct business throughout the region.

Trade agreements are also evolving across the hemisphere. To the south, the Pacific Alliance—a free trade agreement between Mexico, Colombia, Peru, and Chile—has now eliminated tariffs on 90 percent of members’ trade, begun sharing embassies, removed visa requirements for residents, and combined stock markets to total over $1 trillion in capitalization when Mexico officially joins. Things may expand even further in 2015, as the Pacific Alliance announced its plans to work more closely with Mercosur and expand its market power across the region.

Similarly to the north, the United States is working to negotiate new innovative trade agreements—pushing forward on the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP). While these agreements would transform the global trade landscape, they hinge on Congress’ willingness to grant the president trade promotion authority.

While this looks increasingly unlikely, it is one of the many things to watch in the coming year.

Even with so much underway, we should be thinking creatively about new ways to harness our region’s potential—something that I wrote about here and that is outlined in the CFR Task Force on North America. Our countries have much to gain from working together, not only for crafting more efficient and effective policy at home but also for strengthening our competitiveness abroad.

As this year comes to a close, I want to wish you all a very happy holiday season. I’ve enjoyed connecting with so many of you on Twitter, Facebook, and LinkedIn, and look forward to staying in touch through 2015.

Sincerely, 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.