Mexico’s Energy Model

Summary: Analyzing the Mexican energy sector without looking at our country’s modern history might lead to erroneous conclusions regarding the bases on which it is designed.

Jordy Herrera Flores
Jordy Herrera

Invited Contributor: Jordy Herrera Flores authored this piece exclusively for The Review.  Jordy was Secretary of Energy of Mexico under President Calderon, and one of the intellectual authors of the energy reforms now taking place.

The Mexican Constitution establishes that the national government holds direct control of all natural resources and it has sole authority over their exploitation. Therefore the national government holds a monopoly on the primary production of energy through its state-owned companies. Mexico’s modern history can be situated in the early twentieth century in the post-revolutionary period; upon consolidation of the modern state, a profoundly nationalist culture was established in the following few decades. In the original spirit of the Constitution it is debatable whether the model for the energy sector was as restrictive to non-state ownership of natural resources with the subsequent ban on private and foreign investment — or whether this was modified over time to what we understand today.

Petróleos Mexicanos (PEMEX) is the prevailing operator in fossil fuel exploration and exploitation in Mexico today. With an investment of about $25 billion in 2012 alone, it currently produces 2.5 million barrels of oil a day, and slightly more than 6 billion cubic feet of gas daily. According to the International Energy Agency, this volume of production keeps the country among the ten most important oil producing countries in the world. PEMEX also contributes over a third of the public sector’s total income, making its role in Mexico’s future even more significant.

As a result of the first legal reform in the sector since 2008, PEMEX may subcontract those jobs it deems appropriate, pursuant to current international models of performance contracts.  Along the fossil fuel value chain, private investment is only allowed in the areas of transportation, storage and distribution of natural gas, and in any secondary petrochemical activity. It should be noted that Mexico is the only country in the world to have separated the petrochemical industry in Basic (primary inputs) and Secondary (processed inputs). In terms of proven reserves, production – and therefore public sector income – is guaranteed for the next decade at least, because for the first time the restitution rate of proven reserves has exceeded 100 percent. Only a little over ten years ago that rate was below 25 percent.

Mexico still has great potential. Both in shallow and in deep waters in the Gulf of Mexico as well as in mature wells – and even in a complex field like Chicontepec — the total reserves of hydrocarbons look at a horizon somewhere between 40 and 50 years ahead. In the 21st century, Mexico will undoubtedly have to ratify its natural vocation in oil. The question is whether it will have sufficient public funding to develop it, create wealth, contribute to public spending in key sectors such as infrastructure or renew efforts to reduce dietary poverty indexes in very diverse regions of the country. To increase production and maintain a threshold of three million daily barrels it is estimated that an additional 10 to 20 billion dollars will be required annually for the coming years.

Prior to 2010 PEMEX’s business plan had already defined several areas for development and the challenges we face in logistics, personnel and infrastructure in order to continue providing energy to the Mexican people. But precisely that same year, in the field of unconventional resources, the phenomenon of intense drilling and fracking of shale gas became evident in various sites in the United States, our closest neighbor and main business partner. The drastic change in natural gas prices in a short interval of time had a marked impact. Only five years earlier, Mexico had among the highest relatively priced natural gas in the world. The Mexican government even had to establish hedging mechanisms for the industry in view of such high prices in the early part of the decade. Yet in recent months we have seen a drop in natural gas prices to unforeseen levels, in many cases below gas production costs, both in traditional industry as in the newer unconventional one. The change observed in North America, particularly in the United States, is of such magnitude that they have effected an unprecedented modification of their energy policy establishing that the region would be self-sufficient in terms of energy balance by the year 2020.

The non-conventional hydrocarbon industry is the new engine for regional growth in the areas where this type of resource is found. Mexico has undertaken research to determine the promise of its own resources, which according to international estimates could be of such magnitude as to be considered to be among the five largest specific reserves in the world. The challenge in the Mexican model for developing the fossil fuel industry is having sufficient financial resources to determine the true potential the country still has regarding what we know as conventional industry while simultaneously developing its non-conventional resources. Based on the experience of developers in Texas, the most conservative estimates suggest that an additional 15 to 20 billion dollars annually are needed to incorporate to production all the prospective non-conventional resources estimated to exist in Mexico.

Meanwhile in the electric sector, the 75-year old federal electric company today boasts a generation capacity of over 50 gigawatts (GW) in what is called the National Public Service. Much of our country’s energy generation is still based on fossil fuels. In terms of generation and considering the large hydroelectric projects, almost 80 percent of the power plants use fossil fuels.

Mexico has a huge potential in clean energy, as well as for increasing its nuclear capacity, and developing geothermal, solar, wind, tidal, biomass, etc. There are extremely abundant natural resources for the generation of electricity using renewable and non-contaminating energy. Even taking into account regional prices for natural gas and the difference between combined cycles in plants and other clean technology, it is estimated that we have a potential of 20 GW in developing clean energy, without taking into consideration new stages of the large-scale hydroelectric generation systems.

The new bases of Mexico’s future energy sector must come from improving energy security, in the form of lesser dependency on other countries, as well as the need for a more efficient sector that utilizes the fewest possible public funds and allows competitiveness with established companies together with new investments that will undoubtedly arrive with capacity, quality and lower costs of energy inputs.

Finally, in the past years foundations have been laid for an energy sector with a view to sustainability, that utilizes natural resources without damaging the environment, that utilizes natural wealth to enable growth without sacrificing the supply of resources for future generations and strengthens the nation with a profound sense of environmental care and preservation while allowing significant reduction in greenhouse gas emissions. But above all, the Mexican energy industry must continue to be a lever for development and the creation of wealth.

Mexico’s energy and sustainability future is promising; to develop all this great potential will require substantial financial resources, which appear excessive for a limited public pocket with increased pressure from various areas, and the creation of a new legal framework. The Mexican model must be born from its history, that is to say, resources will continue to belong to the nation, and the state must now seek the best operators and make its public companies shining examples of effectiveness, efficiency and transparency in a competitive atmosphere.

© Latin American Energy Review 2013

About the Author:

Jordy Herrera Flores was Mexico’s Secretary of Energy from September 2011 through the end of President Felipe Calderon’s presidency in December 2012. From 2006 until 2011 he was Undersecretary of Energy Planning and Technological Development at the same Secretary of Energy office. He was concurrently the Director General of Pemex’s gas and Petrochemical Division.

Mr. Herrera received his degree in Economics from the Universidad Iberoamericana as well as additional degrees in Political Science and Political Marketing.

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