Natural Gas in Mexico: Policy

1
Natural Gas in MexicoPolicy Regulation

• The Future of Natural Gas Markets in North
  America
• The Baker Institute, Rice University
• Francisco Xavier Salazar Diez de Sollano
• Chairman, CRE
• November 16, 2007

2
Legal framework
3
Institutional roles
4
1995 reform
Exploration
Production
Processing
FHS
Transport
Storage
Distribution
Sales
Exploration
Production
Processing
FHS
Transport
Storage
Distribution
Sales
Reserved to State
Regulated by CRE
Open to private investment
5
Number of distribution users
6
Accumulated investment
7
Private open access pipelines
Does not consider PGPB 8,704 Km
8
Investment in transport
9
Pending issues after reform

• Upstream promote more investment competition
• Transport a new model to expand and give
  redundancy to the system
• Institutional changes
• Coherent price framework in the sector
• Strengthening of the regulator

10
Natural gas balance 1995-2005
11
Trade balance 1995-2005
12
Natural gas historic consumption
13
Natural gas demand in 2006

• According to the Ministry of Energy(1), natural
  gas demand was 6.549 bcf/d in 2006 .
• 48 corresponded to the oil sector 35.7 to the
  power sector 14.6 to the industry, and 1.6 to
  residential and other services.
• Natural gas demand is expected to increase at an
  overall annual rate of 3.9 over the next 10
  years.
• (1) Prospectiva del mercado de gas natural
  2006-2015

14
Natural gas integration

• The US and Canada are highly interconnected
  through several pipelines with a 10.89 bcf/d
  cross-border capacity .
• Mexico and the US are also interconnected in 15
  different points along the border with a 3.41
  bcf/d de capacity.

15
North Americas gas picture
16
2007-2015 consumption forecast
17
Natural gas for power plants

• Power forecasts 2007-2015
• 4.8 annual demand growth rate (from 208.3 TWh in
  2007 to 305 TWh in 2015)
• 24 GW of new capacity are required to meet demand
  (approximately 49 of current capacity)
• Combined cycle power plants represent 45.7 of
  the total capacity to be installed during 2008
  2015.
• This implies a 7.3 average annual growth rate of
  natural gas for power over the next decade.

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How to face increasing demand?

• Continue promoting private investment in
• Development of LNG terminals along both the
  Pacific and the Gulf coasts
• Pipeline infrastructure both to strengthen
  cross-interconnections and access to new LNG
  plants.
• Start exploiting coal bed methane reserves.
• Focus Pemexs investment in areas of paramount
  interest such as exploration and production of
  oil and gas.

19
Natural gas balance 2007-2015
20
Natural gas balance 2007-2015
21
National trade balance 2007-15
22
LNG regulation key dates

• 1994, 1995
• The Congress and government open downstream
  activities to private investment.
• 2002
• CRE published NOM-EM-001-SECRE (temporary
  standard).
• CRE received 5 permit applications (Marathon,
  Sempra, Shell Baja, Shell - Altamira and
  Chevron Texaco).
• April 2003
• Marathon was granted the first LNG permit.
• July 2003
• CRE granted 2 LNG permits to Shell (Baja
  California and Altamira).
• Nov 2004
• CRE published NOM-013-SECRE-2004 for LNG.

23
LNG permits granted by CRE
24
Developing LNG terminals

• A predictable and transparent regulation gives
  investors and developers the flexibility to
  structure their projects in a variety of ways
• Terminal Developers (TD) can participate in
  acquisition of LNG through different schemes
• TD can sign long-term contracts with utilities
  and shippers and/or assign all or a fraction of
  the terminal capacity to a marketing function
• Shippers can arrange for their LNG deliveries or
  have the terminal/marketer do it.

25
Mexicos LNG map



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Terminal LNG de Altamira

• Terminal LNG de Altamira (Shell-Total-Mitsui)
  permit was the result of a CFE bid for LNG.
• Investment was around 400MM.
• Plant description
• 2 full containment tanks (300,000 m3 LNG
  capacity)
• Withdrawal capacity 0.5 0.67 bcf/d
• Dock and mooring installations for up to 160,000
  m3 LNG tankers.
• Plant started operations on 09/30/2006.

27
Energía Costa Azul (ECA)

• Located in Ensenada, Baja California, project is
  owned by Sempra LNG.
• Current customers
• Sempra LNG 50
• Shell 50
• Project description
• 2 full containment storage tanks (320,000 m3 LNG
  capacity)
• 1 bcf/d withdrawal capacity
• Mooring platform allows for up to 220,000m3 LNG
  tankers.
• Investment 875MM.
• Start of operations Q1 2008.

28
ECA Expansion

• Project description
• 2 more 160,000 m3 tanks (640,000 m3 total LNG
  storage capacity)
• 2.6 bcf/d withdrawal capacity
• 1 additional mooring platform with capacity for
  up to 250,000 m3 tankers
• Start of construction, 2008
• Start of operation, 2012.

29
Sempras crossborder system
30
CFEs Manzanillo LNG Project

• Drivers
• CFEs growing natural gas demand for new combined
  cycle plants in the region
• Environmental problems with fuel oil power plant
  in Manzanillo
• Uncertainty on regional supply.
• Project separates gas supply from the LNG
  facility.

31
LNG supply by Repsol

• CFEs bid was awarded to Repsol
• Gas will come from Peru
• Pricing formula (USD/mmBTU) for the bid
• P 0.91HH - K
• Repsols K was 0.03
• Contract duration 15 3 more years if agreed by
  both parties.

32
LNG supply schedule
Source IPD Latin America based on CFE data
33
LNG terminal bid

• Description
• 2 tanks (300,000 m3 LNG capacity)
• Regasification capacity 0.5 bcf/d
• Potential expansion for one more tank.
• Port facilities will be a responsibility of CFE.

34
Puerto Libertad Project

• Terminal GNL de Sonora (TGNLS) is a joint venture
  project by El Paso/DKRW (50/50).
• Preliminary engineering has been completed.
• Environmental permits were granted by SEMARNAT in
  November and December of last year.
• In process of applying for other local and
  federal permits.
• Currently in talks and negotiations with
  potential LNG suppliers in the pacific basin.
• Once LNG supplies are secured, TGNLS will apply
  for LNG plant and transport permits with CRE.

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Project location and description

• 3 tanks (540,000 m3 total LNG capacity)
• 1 bcf/d regasification capacity
• Dock and mooring installations for LNG tankers
• Pipeline Approx. 760 km along Sonora
• Future Pipelines
• New EPNG pipeline
• Current pipelines in Mexico
• Existent EPNG pipelines in USA
• Power plant

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Other LNG Projects

• Yucatán
• Project aims to gasify the peninsula and secure
  future supply for CFE
• Estimated capacity would be around 1 bcm/yr or 1
  bcf/d.
• Topolobampo
• Project would be anchored by new CFE gas projects
  in the northwest.
• Off shore projects
• Both are linked to underground storage projects
  and would fit perfect for spot cargoes
• The north one has been proposed by Terranova
  (Cheniere Energy) and could use a new transport
  line from the Tamaulipas coast to Nuevo León and
  Texas
• The south one would use Tuzandeptl salt dome
  storage.

37
Mexicos LNG map



38
Transport development in Mexico

• As a result of the 1995 reform, the private
  sector has built over 2,700 km of gas pipelines,
  mostly anchored by CFE or PEMEX.
• However, a vigorous expansion of the system that
  would either bring redundancy or serve new
  markets not anchored by CFE or PEMEX has faced
  problems because
• Users have forced government interventions and
  regulation override, both on natural gas and
  substitutes (high risk for new investment)
• Under current state of development, the current
  transport model is not the best option (high
  tariffs derived from new investment).

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Problems with current model

• Under the current model any private investment
  has to be paid entirely by the new users of it,
  even if it brings benefits to the existing users.
  
• This makes cost prohibitive any expansion related
  to redundancy or development of new markets.
• Besides these general model inconveniences,
  current PEMEX tariff model has some other
  problems like
• Allows for transport arbitrage and price
  inconsistency derived from several possible
  injection-extraction routes serving the same
  consumption zone
• Complicates discussion on allocation and degree
  of potential rolled-in investments.

40
Towards a new model

• In order to facilitate expansions and redundancy
  to the system, PEMEX, SENER and CRE have been
  working on a model with the following general
  characteristics
• A new National Integrated System (SNI) will be
  created
• This system will comprehend the National Pipeline
  System (SNG) and other interconnected private
  systems that meet certain criteria
• Roll-in will be used to facilitate expansions and
  redundancy.

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General description of the model
Current modelIncremental costs(No Roll-in)
New modelRoll-In through national and zonal
charges
SNG
National Injection Charge
Zonal Extraction or Transit Charge
SNI

All SNI users pay part of the costs derived from
the integration of non SNG systems
Users of the SNI zone where investment is located
pay the other part of the costs derived from the
integration of non SNG systems
Private systems
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Current SNG transport zones
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Changes to PEMEX model
Norte
Ciudad Juárez
Chihuahua Importación
Chihuahua Norte
Anáhuac
Chihuahua
Delicias
Cd. Camargo
Jiménez
Monclova
Laguna del Rey
Chihuahua Sur
Monterrey
Argüelles
Reynosa
Gómez Palacio
Matamoros
Torreón
Los Ramones
Saltillo
Los Indios
Durango
Golfo
Linares
Altamira
Cd. Madero
San Luis Potosí
Pacífico
Guadalajara
Poza Rica
Tlalchinol
Tuxpan
Poza Rica
Salamanca
Punta de Piedra
Tula
Sur
Toluca
Sta. Ana
Morelia
Pachuca
Uruapan
Cempoala
Venta de Carpio
Veracruz
DF
Puebla
La Venta
Centro
L. Cárdenas
Villa Hermosa
T. Blanca
Cd. Pemex
Centro
Matapionche
Cárdenas
Cactus y Nuevo Pemex
Mendoza
Minatitlán
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Price consistency
Norte
LNG
US Imports
Golfo
Where i s for Sur g for Golfo c for Centro r for
Norte o for Occidente
Domestic Production
Centro
Sur
Occidente
45
Norte
Golfo
Centro
Sur
Occidente
46
Integration example
SNG Gasoductos del Bajío (GDB)
Transport charges paid by users
Aguascalientes, gas coming from Sur Zone
Base





13.14 Pesos/Gjoule
Centro
Golfo
Sur
Pacifico
Nacional
GDB
National Injection
Pacifico Extraction






8.84 Pesos/Gjoule
New model
Centro
Golfo
Sur
Pacifico
Nacional
Valtierrilla, gas coming from Sur Zone




Base
8.53 Pesos/Gjoule
Centro
Golfo
Sur
Pacifico
Nacional
National Injection
Pacifico Extraction

8.84 Pesos/Gjoule





New model
Centro
Golfo
Sur
Pacifico
Nacional
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The Permanent Regime

• Besides the new model, a key issue related to the
  transport system is the final implementation of
  the so-called permanent regime.
• Benefits
• It will allow open access to SNG
• It will foster competition
• It will promote an efficient use of the system
  and allow a fair allocation of the capacity
• It will send the proper signals for the expansion
  of the system.

48
Conclusions

• Demand for natural gas in Mexico has been growing
  and will continue to grow faster than local
  production in the following years
• Due to the fact that both Mexico and the US are
  net importers and are interconnected, LNG becomes
  critical for security of supply in both
  countries
• Both already existing and proposed LNG projects
  will help to
• Satisfy existing demand growth in both countries
• Bring natural gas to zones in Mexico where there
  is no supply at the moment
• Avoid large fluctuations in price.
• LNG projects will require new pipelines in the
  zone
• Other measures such as exploiting coal bed
  methane reserves in Mexico would also help in
  satisfying growing demand.

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Challenges

• In order to take full advantage of an integrated
  energy market, Mexico should
• Openly discuss legislative bills that would allow
  for more investment and competition in the
  upstream sector
• Stick to policies that allow prices to reflect
  market conditions and avoid price controls
  (strengthening the regulator)
• In the absence of constitutional autonomy granted
  to the regulator, support regulatory measures
  aimed to promote an efficient use of
  infrastructure and secure new investments (e.g.
  natural gas transport permanent regime)
• Implement administrative measures addressed to
  unbundling of monopolistic activities and
  competition within the state owned companies.

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Thanks!

• www.cre.gob.mx