REVIEW

Fields of Promise

As oil production stabilizes, developments in rich natural gas and renewable sources step into the spotlight as channels for diversifying the country’s energy portfolio and boosting the economy.

In the four years since the 2008 Energy Reform was implemented, Mexico has demonstrated its ability to develop a wide range of natural resources and begin accepting private and international companies into what has historically been a state-dominated industry. The two giants of the energy sector are now working with private companies in an effort to incorporate much-needed innovations and know-how into their operations, as well as connect to a wider range of resources in deep water, shale gas, and alternative energy.

With estimated crude oil reserves of 43.1 billion barrels and natural gas potential reaching almost 700 trillion cubic feet, hydrocarbon resources are bound to drive the energy sector in the coming years. In terms of electricity, the country relies on geothermal and hydraulic power stations, boasting some of the largest facilities worldwide. However, as the nation with the fourth-largest potential in solar power capacity and an estimated 71,000 MW to be generated from wind, renewable resources are getting in on the action.

REFORMS

The 2008 Energy Reform is focused on building up sources of potential funding for the country’s green agenda. The objective of the reform is to boost applied scientific research, including the adoption, innovation, assimilation, and technological development of hydrocarbon reserves, renewable energy sources, energy efficiency, clean technology, and the diversification of primary energy sources. This has led to greater budget flexibility for national oil company PEMEX, which can now allocate resources to the improvement of technology as well as seek private contractors, such as Geo Estratos, a company focused on R&D in the oil and gas sector. Moreover, the legislation operates and enforces control mechanisms such as the Transparency and Accountability Committee. “The reform included important changes to the legal framework of the industry and strengthened PEMEX’s corporate governance, granting it greater flexibility to determine its internal structure, and provide a specific contractual scheme to face upcoming challenges,” Juan José Suárez Coppel, Director General of PEMEX, told TBY in an interview. As a result of the reform, the year 2011 marked the third consecutive year that oil and gas reserves were restored at almost 100% of total consumption; PEMEX was able to replace nine of every 10 barrels sold on the market.

OIL & GAS

A historical state-owned monopoly has not prevented the oil and gas industry from expanding in Mexico, and as the company branches out to deeper waters, PEMEX has piqued the interest of potential partners and international enterprises. The Mexican Institute for Competitiveness (IMCO) has calculated that opening up the oil sector to private investment could help boost the country’s economic growth rate by 2.5%.

Mexico’s oil sector contributes crucial government funding and comprises a large share of the country’s overall economy. On a yearly basis, PEMEX’s revenues comprise a total of 30%-40% of the government’s budget, and oil revenues constitute 10% of Mexico’s export earnings.

With 10.4 billion barrels of proven oil reserves in 2011, Mexico boasts a variety of heavy crude oil resources, the largest of which are located offshore toward the southern parts of the country, such as Campeche Basin. Onshore fields represent 25% of Mexico’s total crude oil production, 80% of which is based in the southern regions of the nation.

The most important offshore field is the Ku Maloob Zaap Field (KMZ), located in the Gulf of Mexico and operated by PEMEX. The field produces around 850,000 bbl/d, with no signs of slowing. In addition to KMZ, PEMEX also operates nearby Cantarell, a declining oil field that was once supplying upwards of 60% of Mexico’s oil consumption. A third important source of crude oil was discovered at the Chicontepec Field, which is expected to be very lucrative in the near future. “We are confident that we will be able to continue to improve production at the Chicontepec Field, so that in the short term we’ll be able to extract around 80,000 bbl/d,” Suárez told TBY. PEMEX has also built new platforms offshore, such as the Centenario and Bicentenario, and the company continues to develop and upgrade its onshore assets, such as the Minatitlán Refinery. “We have invested more than ever before. As a result, we have achieved the stabilization of our oil production at around 2.6 million bbl/d,” Suárez said. In 2012, PEMEX will invest $19.84 billion in the exploration, production, and development of hydrocarbon fields, including four in deepwater locations, where international expertise is necessary and private contractors have been invited to submit tenders. With annual revenues of about $100 billion, PEMEX is expecting to turn another successful page of its history in 2012.

Although traditionally dependent on oil, a number of regions in Mexico are already shifting to natural gas options. As the price of natural gas falls in comparison to that of petroleum, and pipeline networks become increasingly accessible, the country has outlined plans to increase the exploration and extraction of natural gas. The government invested $90 million to strengthen the sub-sectors of hydrocarbon production in 2011, including shale gas exploration and extraction, a process that requires the innovative process of fracking.

Mexico ranks fourth worldwide for prospective shale gas reserves, with the government confident that there are 681 trillion cubic feet technically retrievable. Germain Manchon, Country Manager of GDF SUEZ, told TBY that natural gas boasts “availability, sustainability, secure and competitive transportation methods, and uses in the chemical or agricultural sectors.” He also added that the country can easily “convert old power plants from heavy fuel to natural gas,” to meet the demand for the resource.

PEMEX operates an extensive pipeline network that links the largest production centers to a host of domestic refineries and export terminals. With over 500 pipelines spanning almost 5,000 kilometers, the majority of the pipelines stretch along the southern parts of the country. PEMEX operates 12 natural gas processing centers with liquid extraction capacity of 5.9 billion cubic feet per day, which supply products to the domestic market. Exports generally leave the country from the seaports of Cayo Arcas, Dos Bocas, and Coatzacoalcos.

ELECTRICITY

The Federal Electricity Commission (CFE) supplies 89% of the country’s domestic electricity supply, and acquires the surplus of external energy producers to distribute throughout the states. Although largely a state-run organization, external energy producers supply 32.1% of CFE’s total generating capacity. These percentages reflect the development of efficient mechanisms for electricity production and the use of combined-cycle technology. “The main advantages of private participation in power generation is cost reduction…this participation also translates into better technology, which increases operational efficiency while reducing risk.” Secretary Herrera told TBY.

In February 2012, the CFE announced its goal to increase power capacity by 37,000 MW, which represents 70% growth over the next 15 years. In light of changing energy infrastructure and cost expectations, the CFE has decided to source 60% of the fuel mix used in generation from natural gas.

In addition to hydrocarbon resources, the electricity sector relies heavily on thermal sources, which comprise 75% of total installed capacity, and hydropower generation, which contributes 19%. Although the exploitation of solar, wind, and biomass resources has huge potential, geothermal and hydropower energy are the only alternative resources significantly contributing to the energy mix.

In addition to rich wind and solar resources being developed and produced across the country, Mexico boasts the third-largest geothermal energy production sector in the world. In total, Mexico’s plants offer an installed capacity of 720 MW and represent 3.24% of the total electricity generated in the country. Mexico is also home to the largest geothermal power station in the world, the Cerro Prieto Geothermal Power Station.

Mexico operates one nuclear power plant, the Laguna Verde reactor in Veracruz. Although operated by the CFE, the state-owned company awarded a contract to an international consortium headed by Alstom to modernize the plant in 2007. This project boosted the generating capacity from 1,400 MW to 1,640 MW in 2011.

Hydroelectricity supplied about 5% of Mexico’s electricity generation in 2011. The largest hydropower plant in the country is the 2,400 MW Manuel Moreno Torres in Chiapas. Other important hydroelectric dams include El Cajón, which obtained the largest credit for an electricity project in the history of Mexico, Infiernillo, with the capacity to hold 9 million cubic meters of water, and La Yesca, a project set to be completed in June 2012 and create 10,000 jobs directly and indirectly. These resources combined are offering electricity to nearly 100% of the population.

As the industry shifts from dependence on fossil resources to cleaner alternatives, government and private investment is sure to play a significant role, according to Jordy Hernán Herrera Flores, Mexico’s Secretary of Energy. As he put it, “This is a great combination because fossil resources contribute to the financing of the energy transition toward cleaner production and more efficient energy consumption.”