Mexico Energy - July 2014

I nves tm en t opportunities in th e ne w e ra

Geothermal Technology

Providing certainty for investors

A Conversation with Congressman

Javier TreviĂąo

Highlighting Mexico’s energy reform and its expected benefits

Secondary Laws

Making changes for greater accountability and transparency

Vol. 1 No. 5 July 2014

Marketing energético

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

Letter from the Editor

I

In

Mexico Energy and Business

mid-July,

Mexican legislators continued to make progress on a set of laws that will lay out the fine print regulating the opening of Mexico’s gas and oil industries to foreign capital and private investments. According to news reports, the legislators passed four bills. Among them was the hydrocarbons law, which presents important energy reform elements including contracts, fines and the ownership of Mexican oil and gas. Lawmakers said the bills and secondary laws, which require approval from the lower house and President Enrique Peña Nieto, could be finalized by late July or early August.

In The Legislative Debate is On, we give our readers a closer look at these bills, as well as the discussion of secondary energy laws. We report how legislators from Mexico’s National Action Party’s (PAN) Parliamentary Group are confident of the progress made in the debate over changes to the initial proposal submitted by the Executive Office on April 30.

For Mexico Energy Talks, presented by Vianovo’s Mexico Energy Strategic Advisory (MESA), practice, Congressman Javier Treviño highlights Mexico’s energy reform and its expected economic and competitive benefits. In this Q&A, Treviño explains the substance behind the reform and the guidelines of the secondary legislation. He also mentions the role of state and local authorities, the national content rules, and the importance of implementing a one-of-a-kind energy model for Mexico.

Renewable energies are an important aspect of the energy reform. In Sailing Toward the Future in Geothermal Power we examine the support for geothermal technology in Mexico — support that, according to experts, could affect the progress of other renewable energies by increasing the stiff competition for financing and incentives.

Even though geothermal energy may be considered a strong, renewable source in the near future, Bloomberg New Energy Finance reports that by 2030 the Americas will have invested close to 1.3 trillion dollars in power capacity for solar and gas energies.

Honestly, I can’t wait until these secondary laws are approved; both editorially and financially speaking, exciting times are just around the corner.

Magazine Volume 5 july 2014 Publishers

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July 2014 Mxe Mexico Energy and Business Magazine

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INDEX JULY 2014

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Cover story

fired capacity falls from 21% to 9%, according to a major report from research company Bloomberg New Energy Finance.

The Legislative Debate is On:

A closer look at the discussion of the secondary energy laws where legislators from Mexico’s National Action Party’s (PAN) Parliamentary Group are confident of the progress made in the debate over changes to the initial proposal submitted by the Executive Office on April 30.

06 Business Updates 10 Gas, Solar to Lead as Americas Invest

$1.3 Trillion to Build 2030 Power Capacity:

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-

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July 2014 Mxe Mexico Energy and Business Magazine

16 A Conversation with Congressman Javier

Treviño: Vianovo’s Mexico Energy Strategic Advisory (MESA) practice is pleased to present the second installment of the Mexico Energy Talks, a conversation with Congressman Javier Treviño highlighting Mexico’s energy reform and its expected benefits to its economy and increased competitiveness.

34 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.

Business Updates

Business updates Mexico Energy and Business

Mexico’s Senate committees approve energy reform bills (Reuters) - Senate committees approved a set of laws to regulate the opening of Mexico’s oil and gas industries to private investment, the centerpiece of President Enrique Pena Nieto’s economic agenda. The committees passed four bills fleshing out a historic overhaul of the state-run energy sector, including the power market. The bills will pass to the floor of the Senate and then the lower house of Congress for approval.

and the hydroelectric center, Chicoasén II. Transparencia Mexicana will supervise both tender processes; the objective is to reap the greatest guarantees of transparency and accountability, as established in the energy reform.

July 2014 Mxe

GE Oil, from the hand of Pemex

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CFE presents two key tenders The Federal Electricity Commission published a few days ago the bidding terms of tender for two important infrastructure projects: the gas duct Ojinaga-El Encino

GE Oil & Gas signed a couple of weeks ago a contract with Petróleos Mexicanos to provide vital surface equipment for its offshore project in the Ayatsil crude oil field, in the Sonda of Campeche. The company detailed that the contract includes the installation of surface wellheads and trees in the new wells that will be drilled by Pemex throughout the duration of the contract.

Business Updates

July 2014 Mxe Mexico Energy and Business Magazine

Mexichem announced investment of $1 billion dollars El Economista

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Santiago de Anaya, Hidalgo Grupo Kaluz, announced the investment of more than $1 billion dollars in two energy projects through its subsidiary Mexichem, which created last year Mexichem Energy, in response to the opportunities for business that will open with the energy reform.

“We are evaluating two energy generation projects: one in the south of Veracruz and the other in Altamira (Tamaulipas),” told Antonio del Valle, the group’s president, without divulging the exact amount that will be invested or the specific areas of the energy subsector in which it will be involved, even though he said that the projects will amount to more than $1billion dollars.

After the inauguration of the Cementos Fortaleza cement plant of the Elemantia Company, one of the participating companies of the Kaluz Group, Del Valle Ruiz said that the current discussion taking place on the secondary laws of the energy reform shows the different viewpoints of the political parties and “that’s fine,” but it is necessary that their approval be forthcoming for the national economy’s benefit.

“Of course they should be approved now because each day that they delay is a day lost of investment and Mexico needs investments now,” he commented.

Pemex awarded Odebrecht for Los Ramones II project El Economista Pemex Gas and Basic Petrochemicals (PGPB), through its affiliate Tag Pipelines North (Tag North), awarded the Los Ramones Phase II-North project to the Odebrecht, Techint and Arendal (OAT) consortium.

In a communique, the parastatal informed the public that the noted company was selected after a very

detailed analysis to guarantee their technical experience as well as their capacity to develop the project in time and in form.

It details that the total investment will be above 1.2 billion dollars, which will become an important job producer for Tamaulipas, Nuevo León, San Luis Potosí, Querétaro and Guanajuato, where the gas pipeline crosses.

The oil and gas company notes that the Ramones II-North involves the construction of a 42-inch pipeline of approximately 450 kilometers of length that will run from Nuevo León to San Luis Potosí.

“This project which forms part of the Natural Gas Transport System will cover more than 1,000 kilometers of length and will have the capacity to transport 2,100 million cubic feet per day (MMPCD),” he said.

Mitsui may invest in oil and gas development in Mexico PennEnergy Japanese oil and gas firm Mitsui is looking to increase investment in Mexico after the country opened up the energy sector to foreign investors last year, The Wall Street Journal reported. Since passing a sweeping energy reform, Mexican officials said it will allow foreign investment to develop oil and gas assets in the country, which may help reverse a 10-year trend of production declines.

Yasuhiro Uchida, general manager of oil and gas development for Mitsui & Co’s Energy Business Unit I, told the Journal the company expressed high interest in doing business in the Mexican oil and gas sector.

“Mexico has good prospects, large energy reserves, easy access to almost anywhere in the world and free trade agreements with major economies,” Uchida told the Journal. “It also has a young population that will boost growth in the future.”

Gas, July 2014 Mxe Mexico Energy and Business Magazine

Solar to Lead as Americas Invest $1.3 Trillion to Build 2030 Power Capacity

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Coal-fired generation to shrink as technology costs move decisively in favor of gas-fired and renewable technologies

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 report, BNEF 2030 Market Outlook, forecasts that North, Central and South America will add 943GW of gross new capacity by 2030, including replacement plants. Some 522GW will be added in the US, 341GW in Latin America and 80GW in Canada.

July 2014 Mxe Mexico Energy and Business Magazine

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This will equate to $1.3 trillion of investment in new power generation capacity,[1] with the largest single slice of that going to gas-fired plants, at $314bn — benefitting from the persistence of low natural gas prices in North America following the shale gas boom. The figures are based on modelling of electricity market supply and demand, technology costs and policy development by country and region.

The other technologies attracting significant investment will be rooftop photovoltaics, at $231bn, and onshore wind, at $200bn.

There will be smaller slices of investment going to nuclear (almost all in the US), hydroelectric (mainly in Latin America), biomass-topower, offshore wind and large-scale solar.

Michel DiCapua, head of Americas analysis for Bloomberg New Energy Finance, said: “Two striking conclusions from our research: first, wind and solar will win bigger and bigger shares of the investment in new capacity as their technology costs go on falling; second, coal will be in rapid retreat, its share of generation in the Americas falling from 26% in 2012 to 17% in 2030.[2]” The research company’s model suggests that energy efficiency gains will mean that US electricity demand rises at just 0.5% per year over 2014-30, much more slowly than GDP. In contrast, electricity demand will increase at 3% a year in Latin America on the back of rapid economic development.

The US will continue to enjoy natural gas prices of less than $5 per MMBtu until 2024, before they start to rise sharply in response to the depletion of some of the main gas plays and to increased demand from power, industry and exports, according to the report. Between 2013 and 2030, the US fleet of gas-fired power stations will increase by a net 134GW.

Coal-fired capacity will meanwhile shrink by 109GW, mainly due to being out-competed by gas and renewables but also partly because of regulatory curbs such as the standards announced in June by the Environmental Protection Agency. Nuclear is expected to see 10GW of net new-build by 2030, after allowing for decommissioning of some older plants, while renewable power capacity increases by 275GW, the largest contributors to that being small-scale solar and onshore wind.

Latin America is predicted to add some 102GW of new solar capacity between 2013 and 2030, most of it small-scale rooftop photovoltaics but also some utility-scale solar farms, particularly in

arid regions. It will also add some 71GW of wind power and 103GW of other renewables such as hydro-electric and biomass-to-power. Fossil-fuel generation will see only around 48GW of net new capacity added in the region, as the cost comparison increasingly favors renewables.

July 2014 Mxe Mexico Energy and Business Magazine

GLOBAL NUMBERS

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Globally, Bloomberg New Energy Finance expects $7.7 trillion to be invested in new generating capacity by 2030, with 66% of that going on renewable technologies including hydro. Out of the $5.1 trillion to be spent on renewables, AsiaPacific will account for $2.5 trillion, the Americas $816bn, Europe $967bn and the rest of the world including Middle East and Africa $818bn.

Fossil fuels will retain the biggest share of power generation by 2030, at 44%, albeit down from 64% in 2013. Some 1,073GW of new coal, gas and oil capacity worldwide will be added over the next 16 years, excluding replacement plants. The vast majority will be in developing countries seeking to meet the increased power demand that comes with industrialization, and also to balance variable generation sources such as wind and solar. Solar PV and wind will increase their combined share of global generation from 3% last year to 16% in 2030.

Michael Liebreich, chairman of the advisory board for Bloomberg New Energy Fi-

nance, commented: “This country-by-country, technology-by-technology forecast of power market investment is more bullish on renewable energy’s future share of total generation than some of the other major forecasts, largely because we have a more bullish view of continuing cost reductions. What we are seeing is global CO2 emissions on track to stop growing by the end of next decade, with the peak only pushed back because of fast-growing developing countries, which continue adding fossil fuel capacity as well as renewables.”

More on the data and the methodology can be found here.

[1] The actual period in which these investment allocations are made will be 2013-26, in order for the equivalent generating capacity to be commissioned by 2030.

[2] Coal’s share of generation in 2030 (17%) will be higher than its share of capacity (9%), because coal plants typically operate for more hours per year than wind or solar plants.

The article was written by Bloomberg New Energy Finance To find out more on the numbers and methodology, please visit the 2030 Market Outlook microsite.

Interview

A conversation with Congressman

July 2014 Mxe Mexico Energy and Business Magazine

Javier Treviño

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Vianovo’s Mexico Energy Strategic Advisory (MESA) practice is pleased to present our second installment of the Mexico Energy Talks, a conversation with Congressman Javier Treviño.

July 2014 Mxe Mexico Energy and Business Magazine

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In our conversation

, Congressman Treviùo highlights Mexico’s energy reform and its expected benefits to its economy and increased competitiveness.

He explains the drivers behind the reform and the guidelines of the secondary legislation. Congressman TreviĂąo also discusses the national content rules, the role of state and local authorities, and the importance of creating a unique energy model for Mexico.

1

If you could list the key elements present in the secondary legislation that international companies and investors should know about, what would they be? Why? Mexico’s energy reform is historic, real, and transformational. We are defining an innovative Mexican model for energy viability in the 21st Century. There are several key elements:

July 2014 Mxe Mexico Energy and Business Magazine

a) Transforming Pemex and CFE (Mexico’s public utility company) into true productive enterprises, not bureaucratic agencies, but efficient and competitive companies.

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b) Opening the energy sector to private domestic and international investment, to benefit the whole Mexican economy and the Mexican people by providing certainty for investors with clear rules for the types of contracts considered: production sharing, profit sharing, licenses, and the existing services contracts. c) Strengthening the regulatory framework of the Mexican government and giving new enforcement responsibilities to the Secretary of Energy, the National Hydrocarbons Commission (CNH), and the Energy Regulatory Commission (CRE) to oversee and manage the energy sector. d) Ensuring the benefits of the reform for present and future generations of Mexicans by creating the Mexican Petroleum Fund for Stabilization and Development, to be managed by the Central Bank

(Banco de México), including a mechanism to channel resources for long-term savings and investments. e) Safeguarding environmental protection, by creating a new Industrial Safety and Environmental Protection Agency, which will design and implement specific public policies. f) A firm commitment to transparency, accountability, and the rule of law.

These are the most important elements of the reform. It isn’t only about oil, gas, and electricity, but also about developing a Mexican model for industrial competitiveness in the 21st century. A model that takes into account the energy revolution we are witnessing in North America and that Mexico will now be able to join. It is about a reindustrialization process that relates to competitiveness and job creation in all of North America and about lowering costs to make Mexico more competitive.

Ultimately, the energy reform is about increasing competitiveness and creating more jobs.

2

Could you elaborate a little about the Mexican model?

In drafting the reform proposal, we studied all models worldwide. We recognized the importance of establishing a model of our own; one that would provide a high degree of legal certainty for private investors, clear rules (because we realize they are essential for company decision-making), and a strong regulatory model with clearly defined responsibilities.

We sought a model that would also allow us to evolve the former system, in order to allow and attract private investments in the energy sector, while aiming at creating public value. The model ultimately is about achieving our goal of strengthening the industrial competitiveness of Mexico and benefiting the whole of Mexican society.

July 2014 Mxe Mexico Energy and Business Magazine

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Some outlets have raised questions about the regulatory framework, specifically about what this newly-created Industrial Safety and Environmental Protection Agency will do and the extent of its powers.

How do you respond to those concerns?

The new agency is going to have full responsibility for defining policies and enforcing environmental protection measures.

It is important to underscore that in this area, as in all other aspects of the reform, we are drafting the secondary laws based on best international practices. We want the reform to be comprehensive, so we are including the best and most advanced practices in every area.

4

The secondary legislation currently being considered in the Congress spells out many of the details investors and analysts were eagerly awaiting; however, there are additional details, which need to

be sorted out through the rule making process. In your opinion, what are the critical rules that require greater definition through federal regulation?

The main point here is that we were able to achieve a transformative constitutional reform in December 2013, which included adjusting three key articles and detailing 21 transitory articles. Now, in order to fully implement the constitutional reform, we are drafting specific secondary legislation in six areas: hydrocarbons, electricity, institutional design, productive enterprises, tax and budget, sustainability, and transparency.

The secondary legislation will be very specific. We are providing clear rules, but also enough administrative flexibility to implement the reform in a way that it fully achieves the goal of strengthening Mexico’s competitiveness and benefiting Mexican society.

Some of this flexibility will be shown in each bidding round and in the different contracts, as fees and royalties will be determined on a case-by-case basis.

5

One component of the energy reform is the need to have a certain percentage of national content. Could you talk to us about that? For example, what is the threshold? And how will this provision be implemented and regulated?

One of our key goals is to foster the growth of Mexican energy companies, while attracting significant international investment. We have to allow for flexibility, so we decided on a gradual approach, with a minimum national content of 25% by the year 2025. The Ministry of Economy (SE) and the CNH will oversee the progress of Mexican energy companies to achieve this percentage, which will be reached gradually over several years.

A public fund will be created to promote the development of local suppliers. There will be flexibility to make sure a growing number of companies enter the energy sector, throughout the entire value chain.

There are some areas where international companies certainly have greater experience. Mexican companies will only be given preference when and IF they offer similar conditions, price, quality, and delivery.

They must achieve the ability to compete with international firms.

The Ministry of Economy will also set a fund to support these companies. SE will have an advisory body to help medium-sized companies join the sector. This advisory board will be formed by officials from departments with direct responsibilities in the energy sector, experts from universities and think tanks, and NGO representatives. The board will assist in developing sound policies that encourage Mexican companies to participate in the sector.

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July 2014 Mxe Mexico Energy and Business Magazine

Energy reform clearly opens many new opportunities and will create demand for industries, services and capabilities that presently are not fully developed in Mexico. Human capital formation will be critical. What are your thoughts about the roles government, universities, and technical colleges should play in ensuring the country has a sufficient supply of graduates and trained professionals?

One of the biggest challenges of the reform has precisely to do with attracting and developing talent. Mexico’s universities are on board and are starting to work on designing new academic programs. They are working to strengthen engineering programs and training programs—jointly with the private sector—to ensure technicians in the field have the required skills and abilities. Pemex is also working on new training initiatives to help increase the number of technicians. It is a shared priority, a shared commitment, and a joint effort by public and private universities and companies.

Funding will come through collaborative efforts. There may be some short-term requirements for greater participation of foreign talent, especially in areas like deepwater and shale, so I am sure there will be a good deal of collaboration even as Mexico ramps up its training efforts.

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When President Peña Nieto presented the secondary legislation, he mentioned that Pemex will have a mandatory presence in ‘border projects’. Could you clarify his meaning?

Would there be a difference between deep-sea border and on-shore border projects and, if so, what? Moreover, are there are any other types of projects in which there will be mandatory participation of Pemex in particular or the Mexican State in general?

The idea is that Pemex should participate with at least at 20% in projects involving trans-boundary formations. Again, we are aiming to be flexible, and Pemex could be a “passive partner” in some cases. The CNH will define the conditions of each project.

Decisions will be made on a case-by-case or contract-by-contract basis, within the larger framework of certainty established under the reform.

8

What role do you see state and local governments playing in this new energy world?

Most of the reform will be implemented by the federal government. In the case of shale, there will be more of a role for state governments in terms of logistics and facilitating industrial processes. This is a crucial role, particularly in rural areas where municipal governments will play a supporting role. There will most definitely be increased coordination between the federal, state, and municipal governments to make sure the new energy model is implemented correctly.

July 2014 Mxe Mexico Energy and Business Magazine

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Are states already doing something to prepare for these new activities?

Yes. Several state governments are establishing new departments to focus on energy development. Some are also working through their current economic development departments. For example, the government of the state of Coahuila is creating a cluster to attract investments, while the government of the state of Nuevo Leon is tasking its economic development department with a comprehensive energy development plan.

These and other states are forming specialized offices, so that when business decisions happen, they can be prepared to facilitate investments and supply chain management.

The states will be responsible for roads, housing, railways, and other logistics of the industry.

10

About the security situation in Mexico: are you concerned it will be a deterrent?

I don’t think it will be a significant deterrent, but it is an issue that must be addressed. It will be essential for governments at the federal, state, and municipal levels to continue making public safety a top, coordinated priority.

International oil companies operate in challenging

locations around the world and are aware that there are different degrees of complexity. I think they realize that we are making significant progress, and that we will continue working to effectively address security issues.

11

As you look ahead, say 10 years from now, what does the energy sector in Mexico look like in comparison to other leading sectors of the national economy? Will it be more like the automotive sector, with deep integration within industry and across the NAFTA countries, or will it be more like the telecomm sector, with very few dominant players?

What I see happening is an evolving process to create new energy markets, a much more competitive hydrocarbons and electricity sector, and a strengthened manufacturing sector. I see Monterrey, and the whole state of Nuevo Leon, as the energy capital of Mexico, with strong ties to Houston and Dallas. There will be a faster-growing economy, more job creation, and overall improved industrial competitiveness. Ultimately, we will see a strengthening of North America as an integrated energy region, playing a crucial role in the world economy. ●

The article was written by Shannon O’Neil & James S. Taylor Congressman Treviño (State of Nuevo León, PRI) is one of the key leaders of Mexico’s energy reforms. He currently serves as senior member of the Energy Committee and the Finance Committee in the Federal House of Representatives. Before being elected to the House, he was Secretary of Government (Lieutenant Governor) of Nuevo León and previously held several high-ranking positions in the Federal Government. He also served as Senior Vice President for Corporate Communications and Public Affairs of CEMEX, a global cement company. Congressman Treviño holds a BA in International Relations from El Colegio de México, and a Master’s degree in Public Policy from Harvard University.

Maribel Zavala

July 2014 Mxe Mexico Energy and Business Magazine

the legislative debate is on

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Amidst a discussion of the secondary energy laws, legislators from Mexico’s National Action Party’s (PAN) Parliamentary Group are confident of the progress made in the debate over changes to the initial proposal submitted by the Executive Office on April 30.

The Senate proposes to put in place 50 changes to President Enrique Peña Nieto’s proposal to guarantee reforms to combat corruption, greater accountability, and transparency in the newly created state-owned companies of Petróleos Mexicanos and the Federal Electricity Commission (CFE).

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For the past 10 years, Petróleo&Energía magazine (P&E) has been acknowledged as the leading publication for the energy sector in Mexico. Our clients and readers’ businesses have been strengthening as a result of this recognition. This is why we decided to take that extra step, instead of having eight monthly publications a year we will now have eleven.

Also, during the year we will be increasing our distribution volume, which currently stands at 25,000 copies. This will allow us to expand our coverage. Our readers can also benefit from our web page and our exclusive business community called POTENTIA. Other benefits include: • The 5th luncheon/banquet honoring the 1OO leaders in the energy sector in Mexico. (March 4).

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In San Lázaro - pending issues.

July 2014 Mxe Mexico Energy and Business Magazine

Bueno Torio

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W

e have just released the third draft that contains details on the Productive Companies Law, Pemex, and the CFE. There are still some points to discuss in the commissions, but we have advanced a great deal since the first draft was presented,” says Salvador Vega Casillas, Secretary of the Senate Energy Commission, to Petróleo&Energía.

“Until now no laws have been dictated. As we agreed we have only discussed how we will proceed: open discussions, delay, and later vote on all together.”

Vega Casillas confirmed that “since this entails 14 laws that are interrelated, if we were to vote on each one, each draft, each initiative - afterward it be more difficult to make modifications in the laws that had already passed.”

The Senator explained that they established a method to discuss all and once the packet of laws was complete then any necessary changes would be made at that time.

This packet includes the opinion issued on the Petroleos Mexicanos Law (Pemex), the Federal Electricity Commission (CFE) Law, and reforms to several provisions of the Federal Parastatal Entities Law, and the Law on Procurement, Leases, and Services by the Public Sector, according to the Senate’s Internet page www.senado.gob.mx

In his opinion, Deputy Juan Bueno Torio, the Energy Commission’s Secretary, says: “There have been many modifications to President Peña’s initiative: proposals have been adjusted so that final projects are included. The Senate published some which the National Action Party did not agree upon and we continue to work on them.”

“For example, in the Hydrocarbon Law there are still unresolved details as to how we are going to tender contracts and the mechanisms set up to choose the contracts, either by points or by resources.”

“We also have pending what is called superficial occupation. That is, the rights of land holders to occupy their properties, the development of the chains of production, and the development of national suppliers linked to the petroleum industry,” adds Bueno Torio.

Along these lines, Senator Vega Casillas says, “we are not going to accept expropriation; what we are looking for are mechanisms much more efficient that we can agree upon, but especially those which land holders can receive benefits - not only from the land itself, but from all the rights that exist. Whoever has a water well or this type of right would see themselves benefit from exploitation.”

Vega adds: “What we want is an incentive that property owners will accept, consider, and even seek out land exploration for the benefits that can be obtained.”

Electricity sector, also present Commenting on the Electricity Industry Law, Deputy Bueno Torio affirms that they are in favor of reducing the threshold of the qualified user in a way in which it would actually increase electric energy demand. “We would quickly

have an electric energy market that is more efficient and competitive so that tariffs can be lowered as quickly as possible.”

Also, “we are proposing that who should regulate the electric energy market is the Energy Regulatory Commission because in the initiative it states it is the Ministry of Energy, and we object to this,” he said.

On the topic of Pemex’s fiscal regime, which is in their ballpark, Bueno Torio recognizes that “it is very important because the initial proposal does not change anything; it is the same as it is right now. There is no way that Pemex will be able to capitalize on the new reality with allocations.”

“What we are proposing is that Pemex’s fiscal regime resembles more license agreements than what it has right now and as such it would capitalize bit by bit. It would be able to make new investments, and at the same time create partnerships with others. But if Pemex does not have any capital, how is it going to collaborate?”, says Bueno.

Rubén Camarillo Ortega, Secretary of the Deputy Chamber’s Energy Commission, noted that “we are waiting on the Senate’s packet, which provides structure and will coincide with what we are going to approve in the Chamber. The fiscal part is intimately linked to what will be approved in the Regulatory Law of Article 27 of the Hydrocarbons Law.” Bueno Torio adds that “we are still divided on this issue, just as on whether the budget should be in the Pemex Law, not in the Fiscal Responsibility Budget Law, so that Pemex and the CFE can truly separate from the budget of federal expenditures.”

Camarillo reiterates, “we are working very intensely in PAN’s parliamentary group. We have formed a group of deputies and senators to analyze theme by theme; there are 1,132 articles that are being reviewed and 21 laws. I believe that we have considerable analysis still to do, and that as PAN senators as well as deputies we are concentrated in only one working group, and what will be decided by the group will be assumed by deputies as well as senators.”

Resources and Remunerations, and the Strategy and Investments.

In addition, the legislation creates a commissioner role for each one of the productive companies; they should be independent experts who will present a global evaluation each year, which will include operational and financial details.

The report will be sent to the Chamber of Deputies, which will make pertinent recommendations to the administration boards.

President Peña will ask the Mexican Institute of Finance Executives to provide a shortlist of possible commissioners, who will remain in the role for five years and will be endorsed by the Deputies.

The theme of corruption did not escape the dictum. A few of the tools to combat it will be to make adjustments in the legal framework – currently in force at Pemex and the CFE – for greater transparency with the presentation of reports on their financial, administrative, economic, and legal situations.

In such a way, it is proposed to create a system of denouncements and anonymous complaints so that anyone can call attention to acts or omissions that permit the prosecution of illicit behavior. ●

Vega Casillas

Updates As a matter of fact, before the current edition went to press, information surfaced that if approved by the Senate, Pemex’s and the Federal Electricity Commission’s administration’s boards would have more decision-making power in their new impresario role.

The boards would be able to express opinions and approve operational procedures with other subsidiaries or companies and would also be able to give a green light to several budgeting procedures.

Both Pemex and CFE would have four committees – not three – as proposed by Peña. The dictum promotes the creation of the Acquisitions, Leases, Works and Services Committee; in addition to the Audit, Human

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Emilio Godoy

EFE Agency

oegodoy@yahoo.com

Sailing Toward the Future in

July 2014 Mxe Mexico Energy and Business Magazine

Geothermal Power

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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. The Ministry of Energy will ultimately hand over registrations and permits to the Federal Electricity Commission on reconnaissance projects and targeted areas to explore.

Luís Gutiérrez, president of the Mexican Geothermal Association, recognizes the bidding war that may surface between water vapor and other energy alternatives. “There is a certain market competition, but there are resources for all. The cost of geothermal generation is very competitive.

The geothermal project is not critical, but it does provide certainty for investors,” Gutiérrez tells Petróleo&Energía.

Whereas the Geothermal Energy Law establishes stages of exploration and exploitation of geothermal fields, Mexico’s government proposes a concession of approximately 150 square kilometers (58 square miles) dedicated to exploration with three-year permits and a single permit extension of another three years. In the exploratory phase, it permits one to five wells.

Mexico has an installed capacity of 53,000 megawatts (MW), of which 68 percent are from oil and gas, and the remaining are based on hydroelectric, wind, solar, nuclear, and geothermal power. Currently Mexico generates 839 MW of geothermal power. The Cerro Prieto (Baja California) field produces 570 MW; Los Azufres (Michoacán) contributes 191 MW; Los Humeros (Puebla), 68 MW, and Las Tres Vírgenes (Baja California Sur), 10 MW, according to data from the Mexican Geothermal Association.

The National Energy Strategy 2013-2027 identifies a geothermal potential of 11 gigawatts, located in the richest northern and central zones of Mexico.

But Víctor Rangel, executive director of Mexico’s Renewable Energy Center criticizes the need for a geothermal law, since the Use of Renewable Energy and Energy Transition Financing Law has existed since 2008.

“This law will affect us immensely, mainly because there will be less investment in photovoltaic energy, for example.

It is unnecessary. We need to take advantage of the existing law. It doesn’t make sense to create laws,” Rangel tells Petróleo&Energía.

The evaluation of Mexico’s geothermal power, prepared by the Inter-American Development Bank (IDB) for the Energy Regulatory Commission, identified 20 zones with the potential of 762 MW. The SENER forecasts an installed, additional capacity of 176 MW geothermal by 2026.

Currently, there are three private generation projects being built in Michoacán and Nayarit, with operations beginning next year.

Between 2010 and 2013, photovoltaic was the renewable energy with the highest average annual growth rate – 176 percent – while vapor only reached 6 percent and geothermal power registered negative rates.

Ambitious Goals With financing from the Clean Technology Fund (CTF), Mexico put in place the “Risk Mitigation Program in Geothermal Exploration.”

Based on the CTF recommendations of an investment of $500 million dollars in 2009, Mexico’s government allocated $34 million dollars, originally targeted to wind energy and energy efficiency.

“The initiative seeks to promote private investment in geothermal using financial transfer mechanisms and risk to reduce investment costs, attract private capital to projects, and guarantee sustainable growth in the long term,” cites the document, according to Petróleo&Energía.

The initiative totaling $86 million dollars, including SENER’s investment of $11.5 million dollars, combines debt instruments with risk reduction mechanisms.

With leverage from a financial institution, field operations pay an insurance premium that covers exploration financing.

June 2014 Mxe Mexico Energy and Business Magazine

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If the project mentioned is successful, it will meet its debt obligations; but if it fails, it will be covered by the insurance premium.

Mexico will not cover the field concessions and will assume the risk associated with geothermal exploration. If it is successful, the operation will sell any generated energy.

According to experts, this will reduce risk and promote the industry’s development.

“Mexico’s government can use renewable energy without risking its own resources. It is one of the riskiest investments, because the resource is not always available. It is risk in exchange for resources.

“Change will open interesting opportunities to develop geothermal power,” assured Gutiérrez.

Geothermal power faces stiff barriers such as high investment costs - $5 million dollars per well -, long maturity periods of four and seven years per project (compared to other renewable energies of two to three years), and a high risk of not finding sufficient resources.

The project “seeks to reduce financial barriers. The technology is proven, it is economically viable, efficient and guarantees a secure clean supply. There is an absence of risk mitigation instruments,” justifies María Isabel

Haro, consultant of the Capital Markets and Financial Institutions Division of the IDB. The six-year-old program to generate 300 MW and reduce 1.1 million tons of carbon dioxide will finance about 15 projects, 9 of which will have failed to achieve the commercial phase of electric generation, according to the initiative’s calculations.

The medium levelized costs of a geothermal plant is $93 million dollars/ MWh, but it can drop to $74 million dollars/MWh, depending on how the sector is developed. As such, it can compete with the generation costs of combined cycles and wind power.

Mexico’s government and the IDB estimate a rate of perforation of 67 percent. The estimated potential average of each well is 5 MW. “Even though they are economically viable, geothermal projects are not financially feasible if left to the market. It is estimated that the financial concession to reduce initial investment costs for private developers will trigger the exploitation of this resource, diversifying the energy matrix of the country,” argues the document.

Geothermal power would increase the gross domestic product (GDP) by $95.4 billion pesos – less than 1 percent of the GDP –, create 36,000 jobs, produce an annual fiscal income of $8 billion pesos, reduce CO2 emissions by 8 million tons by 2020, and reduce natural gas imports by 13 percent.

Nacional Financiera will channel funds and disburse loans in 2014 for two or three projects, thanks to the implementation of the energy reform.

In January 2014 the Mexican Center of Geothermal Power Innovation (CeMIE-Geo) began operating with a four-year budget of approximately 1.2 billion pesos from the Sustainable Energy Sector Fund (CONACYTSENER) and plans to develop about 30 projects on themes such as the mapping of national geothermal resources, potential geothermal estimation, and technology for production stages.

Mexico’s government envisions that by 2018 the installed capacity of renewable energy will total 18,000 MW, increase the GDP by $230 billion pesos, generate 70,000 jobs, reduce CO2 by 17 million tons, and increase its share of renewable energy in its energy basket by 29 percent.

In September the CFE will present Ronda 0 (round zero), the portfolio of projects that it has chosen to conserve.