Mexico has the fifth largest oil reserves of any non-OPEC nation, the fourth-largest shale gas reserves, and some of the best wind and solar energy in the world. Two government-owned monopolies dominate the energy sector in Mexico: PEMEX for oil and gas, and the Federal Electricity Commission (CFE) for electricity. The fact that PEMEX and CFE are state owned has not stopped a 3P reserve find of up to 10 billion barrels in 2012, and a nearly 7 GW increase in generating capacity over the past decade.
PEMEX, Latin America's second largest company, has provided the Mexican government with over a third of its revenues and has represented over 10% of its national GDP for many years. It is responsible for the extraction, refinement, and transportation of all hydrocarbons in the country's territory, as well as for the production of petrochemical products from those resources. Although long-lived and very successful, PEMEX is suffering from underinvestment and several consecutive directors have supported overhauls of its structure that political realities have not allowed them to achieve.
The CFE holds exclusive rights to generate, transform, manage, and distribute electricity as a public service. Private energy companies can sell electricity directly to corporate consumers, or as independent producers (IPPs) for sale to the CFE, and the CFE contracts private companies for various roles, such as pumping and distributing natural gas for electricity generation.
OIL & REFORM
The new administration of President Peña Nieto, who was elected in July 2012, has been remarkably successful at bringing Mexico's top parties, the Institutional Revolution Party (PRI), Democratic Revolution Party (PRD), and the National Action Party (PAN), together to work for reforms in nearly every sector of the economy. Proposed energy reforms have yet to be presented, but momentum in their favor is strong at a time when the world has finally recognized Mexico's economy as a dynamic, high-opportunity market that is one of the strongest in Latin America. Reforms would allow foreign money and expertise into Mexico's energy sector, and could help push the nation's GDP growth rate from just under 4% to 6% a year.
PEMEX and CFE's flexibility in providing for the nation's energy needs has improved since 2008, when Mexico opened up some parts of its energy sector to foreign firms and investment. Although former president Felipe Calderón's 2008 reforms stopped short of the sweeping ones called for by the industry, they allowed companies to work for PEMEX on a contractual basis. If further reforms are passed later in President Peña Nieto's six-year term, this kind of partnership, and more extensive ones, will become much more common.
Many politicians and businesspeople that TBY spoke with are calling for change, and cite the fact that PEMEX earns over $100 billion a year ($129 billion in 2012), and yet pays billions of dollars annually ($30 billion in 2009) due to high government taxes and union pensions and contracts. Production of oil also continues to fall. According to PEMEX, in 2008 production stood at 3.96 million of barrels of crude oil equivalent per day (boe/d), which dropped to 3.7 boe/d by 2012.
In 4Q2012, PEMEX found three deep-water deposits near the US border in the Gulf of Mexico, the total reserves of which could amount to 10 billion barrels of oil. However, it lacks the expertise and the additional $20 billion to $30 billion in investment required to take advantage of them. Mexico remains the world's seventh largest producer of oil, and its oil and gas sector is poised to increase output, make new discoveries, and fuel the nation's economy into its next decade of growth.
Mexico has come to rely increasingly on natural gas for power generation and industry. As the shale gas revolution in the US pushes prices down in a trend that is expected to be sustained over the medium term, Mexico is building 10 new gas-fired power plants and two new gas pipelines, as well as decreasing its use of fuel oil and re-equipping its refineries to use cleaner, more efficient gas. The nation imports billions of cubic feet a year, although, according to the US Energy Information Administration, Mexico possesses as much as 681 trillion cubic feet (tcf) of natural gas in untapped reserves. Mexico's gas usage has risen 70% in the last decade, making it the 11th largest consumer of natural gas in the world, while its production has risen only 46% in the same period.
The low price of gas originating in the US has caused demand to surge in Mexico while disincentivizing the further exploitation of Mexican natural gas reserves. Two new pipelines are under construction, but will not be completed until 2014, and Mexico diversifies its gas supply with liquid natural gas (LNG) shipped from Qatar, Peru, Nigeria, Yemen, and Indonesia, among others. Two degasification facilities have been constructed in the past five years, and five more are being considered. Mexico has a strong base of gas supply and is working to rectify supply instabilities caused by the shale gas glut across the border.
PEMEX began producing at its first shale gas well in April of 2013. It is located on the Eagle Ford formation, a complex underlying much of south Texas, which holds 20.8 tcf and 3.35 billion barrels of oil on the US side. The head of PEMEX Exploration and Production, Carlos Morelos Gil, has said that as gas prices rise PEMEX will explore more wells on Mexican soil and correct the nation's import deficit. Mexico has plenty of gas to fuel its economic growth, and its gas infrastructure projects ensure that within the next year it will have a steady supply.
ELECTRICITY & RENEWABLES
Mexico's electricity sector was nationalized in 1960, and the CFE was established as a company with its own patrimony and legal status. In 2009, it had 59.3 GW of installed generation capacity, a figure expected to grow another 10 GW by 2017. Industry uses 60% of this capacity, and residential use accounts for approximately 25%, according to the Ministry of Energy. Fossil fuels provide 78.7% of Mexico's generation capacity, while hydro provides 14.2%, nuclear 4.2%, and renewables 2.9%. Mexico's electricity is generated from a diverse array of sources, and as renewables and natural gas use grows in the coming years, so will the strength and stability of the electricity sector.
The Comisión Reguladora de Energía (CRE) is the regulatory body overseeing the electrical industry in Mexico, and since 1992, when amendments allowing private participation were passed, it also oversees corporate players as well as the CFE. Private entities with permits from the CFE have a limited scope of participation in the sector. They can produce electricity for self-supply, cogeneration, import and export, or as IPPs. The final arrangement, producing as an IPP, is attractive as it allows the sale of electricity directly to the CFE at a fixed rate that guarantees a return on investment. Some firms, especially wind energy producers, prefer a self-supply arrangement involving large, private off-takers.
Mexico has a strong, diverse energy market and a modernizing legal and regulatory framework. Its politicians are committed to reform and many are keen to allow private investment into the nation's state-run energy industry. New investments and regulations would revolutionize Mexico's prospects for oil and gas production and propel its economy into the 21st century. The nation is on the brink of self-sufficiency, rapid growth, and lucrative hydrocarbon exports.