IN THE MATRIX
TBY talks to Jordy Hernán Herrera Flores, Secretary of Energy, on long-term investment strategies for the oil and gas sector, as well as growth in electricity generation and distribution.
What initiatives has the Secretariat of Energy undertaken to increase long-term investment in deepwater exploration operations?
With the objective of increasing long-term investment to take full advantage of deepwater reserves, there has been a push in our hydrocarbon exploration policy. In the last few years, investment in the exploration and production of Mexican oil has reached historic levels. Investment in PEMEX's exploration decreased more than 3% from 1990 to 2000, whilst between 2001 and 2012 it had a real growth of almost 5.4 fold. Additionally, the 2008 Energy Reform opened the door to new contracts, which together with the integral services on offer, are a fundamental part of the federal government's strategy to promote investment. PEMEX and its subsidiary organisms' business plan for the 2012-2016 period defines in detail the strategies and objectives of exploration and exploitation. Regarding deepwater reserves, the plan foresees an increase in investment of approximately 9% per year over the 2012-2026 period. Amongst the main initiatives that are being contemplated are projects in the south of the Mexican Gulf. We are looking to conclude exploration activity and start developing the Holok Poniente gas basin. We are also looking to acquire and process 3D seismic information in areas where there is a lack of data of the right quality.
In your opinion, what are the strengths of the Mexican energy sector?
Mexico is blessed with abundant natural resources. We have important hydrocarbon reserves to the equivalent of 43.1 billion barrels of crude oil and great potential in renewable energy. For example, our country stands out as having one of the highest averages for solar radiation annually—approximately 5.2 kWh per hour per square meter every day. This is a great combination because fossil resources contribute to the financing of the energy transition toward cleaner production and more efficient energy consumption. In addition, referring to so-called transition fuel, or natural gas, Mexico has important potential resources, since, according to the US Department of Energy, the country ranks fourth worldwide for prospective shale gas reserves, with 681 trillion cubic feet technically retrievable. These natural resources, together with the responsible strategy and long-term vision that the federal government has implemented, makes the Mexican energy sector not only strong, but an engine for the development of the country. In terms of strategy, our approach is comprehensive and covers each of the sub-sectors so we can maximize their potential. For instance, we have invested Ps1.2 billion to strengthen the hydrocarbon subsector. Also, during the current administration, there has been a drive without precedence in the development of clean energy sources. This has been achieved through the participation of both the public and private sector due to regulations that give more certainty and transparency to investors. It is worth mentioning that the use of renewable energy sources translates into important economic benefits. Additionally, their use allows for the diversification of the energy mix while reducing greenhouse emissions. Another contribution of the 2008 Energy Reform was the implementation of three funds to drive the green agenda. The objective of the funds is to boost applied scientific research, such as the adoption, innovation, assimilation, and technological development of hydrocarbon reserves, renewable energy sources, energy efficiency, clean technology, and the diversification of primary energy sources.
How is the private sector contributing to Mexico's energy generation capacity?
Since the inauguration of Mérida III, the first generation plant under the independent power producer (IPP) scheme, the benefits of private participation have become obvious. Since then, the energy sector's structure has revamped so that the country can benefit from its hydrocarbon reserves without compromising its interests. The main advantages of private participation in power generation is cost reduction, because the official agents compete through Federal Electricity Commission (CFE) public tenders and then compete for energy clearance. This participation also translates into better technologies, which, increase operational efficiency while reducing risk. It is important not to forget that when building power generation plants for renewable energy sources, the energy mix diversifies and the energy security of the country increases. Also, the introduction of better technologies in the country arouses innovation, diffusion, and technology adoption throughout the productive chain. This, without a doubt, generates economic benefits for the country.
What impact has the 2008 Energy Reform had on the energy sector, and what measures should be taken to improve competitiveness in the sector?
The collection of reforms and new laws that constitute the energy reform plan were the first step in a process that has the objective of transforming the hydrocarbon sector, strengthening PEMEX, and promoting energy security in a sustainable way. The reform has had a significant impact on the energy sector's structure with relevant results, such as the strengthening of PEMEX's corporate governance through the inclusion of four board members who will be ratified by congress. Other positive results for PEMEX include the reinforcement of control mechanisms and vigilance, as well as the creation of the Transparency and Accountability Committee. PEMEX's new fiscal regime also allows it to carry out exploration—the most complex and costly of its operations—with profitability both onshore and offshore. Furthermore, the 2008 reform allows more budget flexibility. Today, there are a series of far-reaching measures to incorporate national providers and contractors into PEMEX's operations. Also, the creation of work and service contracts allows us to go for more complex and long-term projects, maintaining our commitment to the nation over hydrocarbons. The reform has resulted in clear growth in the hydrocarbon sector. For the third consecutive year, in 2011, we restored more than 100% of the total proven reserves, for which we are replacing nine of every 10 barrels. On the other hand, the first integral contracts of services for exploration and production (E&P) have been put to tender in three mature fields in the southern region: Santuario, Carrizo, and Magallanes. Also, in the Gulf of Mexico, PEMEX has incorporated three times more reserves than Exxon over the last year. However, there are still important challenges, since the implementation of these reforms requires the strengthening of institutions and organisms.
Shale gas is gaining greater attention in North America and Europe. What opportunities does Mexico have in this regard?
Shale gas has the potential to transform the energy landscape of the country. PEMEX has estimated that shale gas resources could potentially reach 459 trillion cubic feet. It is estimated that national natural gas production, without including shale gas, will increase by an average of 0.5% annually for the next 15 years, whilst demand will increase around 2.5% per year. If we develop an integral strategy for shale gas, imports could be reduced, strengthening energy security in our country and reducing exterior energy dependence. Additionally, the exploitation of shale gas could attract between $7 billion and $10 billion of annual investment while generating around 1.3 million jobs directly and indirectly.
In what ways is the Secretariat of Energy working to minimize the negative effects that operations in the oil sector could cause in the environment?
During this administration the Secretariat of Energy has put special emphasis on projects and activities that promote the reduction of CO2 emissions, energy efficiency, and the use of clean development mechanisms. Also, incentives for activities that protect the environment, like the best use of water in industrial processes, are on offer. As a result of mitigation efforts between 2009 and 2010, PEMEX reduced its CO2 emissions from 50.2 million tons to 45.5 million tons. For 2011 it is expected to achieve an additional reduction of 3.8 million tons of CO2. It worth pointing out that PEMEX lies within a comprehensive management system that looks at industrial security and environmental protection as the main drivers in its activities.
The CFE is currently producing 89% of the country's domestic electricity supply. How do you see the sector evolving?
The Mexican power generation sector has a unique buying model in which the CFE acquires the surplus of external energy producers. Article 27 of the Constitution establishes that only the state can generate, drive, transform, distribute, and supply electricity for public use. In this sense, the CFE is the only entity that can carry out this service. However, following reforms to the public electricity service law in 1992, the participation of individuals in the electricity generation sector is allowed for self consumption as an independent energy producer, or for activities that are deemed for self-sufficiency, cogeneration, and small production, as well as import and export. As of November 2011, the external energy producers supplied 32.1% of total CFE generation. These percentages reflect the development of efficient mechanisms of electricity production, giving way to combined-cycle technology.
© The Business Year - July 2012