Argus David Givens Morningstar Oct 2015

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Market Reporting

Consulting

Events

Mexican gas grid and market changes

David GivensArgus-Morningstar Lunch and LearnOctober 29, 2015

• Energy sector reform is wide-ranging

• Gas imports spurred by need for clean power

• Pipeline projects to and in Mexico abound

• Pemex has been selling gas at Henry discount

• Continued control by government entities

Summary: Await transparency for grid access

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Market Reporting

Consulting

Events

Reform focused on role of state institutions

• Sweeping changes to Hydrocarbons Act passed in 2013

• PEMEX lacked technology to develop deepwater plays

• Most focus is on the upstream business and bids for leases

• Dirty power plants fired by oil products are being replaced

• PEMEX broken up and re-regulated in complex ways

• New government bodies have been created, but slowly

Mexican reforms in context


• SENER: powerful Energy Ministry

• CFE: state-owned power utility that is driving gas use

• Cenagas: new gas pipeline grid operator and overseer

• CRE: Energy Regulatory Commission; kind of like FERC

• CNH: National Hydrocarbons Commission; independent, support body for SENER

• PEMEX: already has many subsidiaries, with more coming

Know your agencies


• PEMEX, CFE will have a “new character as Productive Public Enterprises” that maximize profit

• They will have greater autonomy and will be taken out of the federal budget

• They will be able to associate with other enterprises, both in Mexico and abroad

Changes to PEMEX, CFE


• CFE put out bids to build five natural gas pipelines in northern Mexico for power generation

• CFE will be the biggest gas consumer, followed by PEMEX itself, then the industrial sector

• Pemex Cogeneración y Servicios wants to become second largest generator over the next four years by converting its own oil-fired power facilities to natural gas and making investments in new cogen plants

source: Beatriz Camarena-Maney, OFSCAP

“Productive Public Enterprises” get out of silos


Creation of 7 Productive Subsidiaries Enterprises (PSEs)

• Exploration & Production

• Transformation Industrial: transports NGLs, natural gas, gasoline, petrochemicals from refining or processing stage to end-users

• Oilfield services

• Transportation Logistics

• Cogeneration, getting PEMEX into power generation business, which previously was soley CFE

• Fertilizers

• “Etileno,” described as methane, ethane, propylene

PEMEX is broken up


Market Reporting

Consulting

Events

Fundamentals favor infrastructure investors

• Natural gas reserves estimated at 555 Tcf

• Shale formations in the eastern half of the country

• Exploratory wells have been drilled in the Eagle Ford

• “Domestic shale gas resources may take longer to realise

than official schedules, especially as pipeline gas

imports from the United States remain inexpensive.”

-- Juan Roberto Lozano-Maya, Asia Pacific Energy Research Centre

Mexico has no lack of natural gas


• Robust economy

◦ 3.3pc average GDP growth 2010-2014

◦ vs US 2.2pc average

• Planned economy

◦ Less sensitive to oil prices

• Gas was 40pc of all energy consumption in 2014

◦ 75pc of gas imported

‐ 2/3 US gas (2 Bcf/d)

‐ 1/3 LNG

• By mid-2015, exports were up 32pc YoY to 3.3 Bcf/d

Recent track record encouraging for sellers


• EIA

◦ Exports could exceed 5 Bcf/d by 2020

• SENER

• Gas demand to reach 10 Bcf/d by 2027

• Consultant ICF

• US exports increase 1.5x over 20 years

No shortage of optimistic forecasts


• Nearly three-quarters of natural gas demand growth should occur in the power sector

• Power plant consumption should rise from 1.6 Bcf/d in 2012 to 4.9 Bcf/d in 2027

Demand growth is in power sector

• The growth comes largely from new combined-cycle plants

• Growth sharply accelerates in the near term and continues through 2027


• DOE approves many export permits

• Very few of the same companies have open access permits authorized by CRE

• Sales are to:◦ CFE

◦ PEMEX

◦ Private pipelines

◦ Industrials

• Small market exists for trucked LNG

US has seven major points of export


Puntos de internación y de exportación

Ensenada (ECA)

Nogales

Naco Cd. Juárez

Gloria a Dios Acuña

Argüelles

Terminal de Altamira

Terminal de Almacenamiento GNL

Punto de importación y exportación

Punto de importación

OtayLos

AlgodonesMexicali

Agua Prieta

PiedrasNegras

Cd. Mier-Monterrey

Punto de exportación

Fuente: CRE, con base en información de importadores y exportadores

Reynosa (Tennessee)

Río Bravo

Reynosa (Tetco)

Market Reporting

Consulting

Events

Pipelines, power plants proliferate in Mexico

• Maximum quantities authorized by CRE each month in mn cfd

• Some cross-regional flows

• Intent is to incentivize efficiencies, minimize costs

• Based on modeling; new projects will get factored in

• Reynosa, Ciudad Pemex are VPM pricing locations

Energy regulator authorizes system capacities


• Sasabe, Arizona, to Sonora state

• Waha to El Encino in Durango state

• Los Ramones, a landmarkproject, fed by Net Mexico

• Los Ramones Phase II southbound to follow

Almost 5 Bcf/d new capacity completed or expected


• Waha to San Elizario, 1.3 Bcf/d

• Waha to Presidio, 1.3 Bcf/d

• El Encino to La Laguna, 1.3 Bcf/d

• Sonora-Sinaloa (from AZ), 700 mn cf/d

• 13 major new pipelines expected by 2027

More major capacity additions foreseen in 2017


• Mexico gets 700 mn cf/d - 1 Bcf/d from LNG• Manzanillo in Colima (Pacific)

• Altamira in Tamaulipas (Gulf)

• Costa Azul in Baja unused

• Consensus: cost pressures push LNG imports to zero

• Eagle Ford LNG exports to Mexico?

LNG


Market Reporting

Consulting

Events

What will open access look like?

• CRE daily hydrocarbons report at http://www.cre.gob.mx/articulo.aspx?id=394

• VPM means Venta de Primera Mano, or “first hand sales” by PEMEX and subsidiaries

• US prices change with demand:

◦ TGP south Texas in second week October at 9¢/mmBtu discount to

Henry Hub, widening 2¢/mmBtu from prior week

◦ Exports to Mexico dropped by 5.8pc from the previous week’s level

Some transparency already exists


http://www.cre.gob.mx/articulo.aspx?id=394

Key takeaway: VPM is discounted to Henry Hub


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2 Jun 15 26 Jun 15 20 Jul 15 13 Aug 15 6 Sep 15 30 Sep 15

$/m

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Mexico first hand sales vs Henry Hub cash

Henry Hub cash Reynosa Ciudad Pemex

• CRE wants new pipelines to minimize costs

◦ Different from certification, just and reasonable

• Balance private, public sector needs

◦ Industrial v power plant

• Energy Reform

• Crude tenders at low prices. Self-funding

• Pricing

• Correlate US forward curves to Mexican demand shifts

• Basis risk for gas from various plays imported from US

• How will transport costs and tariffs affect Mexican buyers?

Challenges and considerations


• Former PEMEX gas pipeline assets being transferred to CENAGAS

• Focus now is on the legalities of the transfer

• CENAGAS will be responsible for managing excess pipeline capacity

• Integration: create “Portal de Transparencia” (EBB) using Scada data from diverse sources

Now being discussed at CENAGAS


• PSEs may be involved in what is called “VPM,” or first hand sales

• These are sales made at production centers, import pipelines or on behalf of the state

Role of Productive State Enterprises remains substantive


• CRE is approving open access pipeline tariffs

◦ Commodity, capacity charges in pesos/gj

◦ Specificity in total amount invested

◦ Sophisticated environmental impact statements

• Midstream, downstream sales by PEMEX will be

limited to favor the development of efficient and competitive markets

• Will it be similar to FERC order 436 experience?

“Asymmetric regulation” promised


• Few gas transportation permit holders now

• Varied filings at http://www.cre.gob.mx/permisos.aspx

• Permit holders with idle capacity must make available on EBBs

• Unused capacity should be marketed in secondary markets or placed in the disposition of “gestores” *

• Gestores could mean marketers, but is interpreted by some to refer to Cenagas

* Source: White & Case

HA Article 70 seems a precursor to released capacity


http://www.cre.gob.mx/permisos.aspx

• SENER: http://www.energia.gob.mx/

• CFE: http://www.cfe.gob.mx/paginas/home.aspx

• Cenagas: http://cenagas.gob.mx/

• CRE: http://www.cre.gob.mx/

• CNH: http://www.cnh.gob.mx/

• PEMEX Gas: http://www.gas.pemex.com/portalpublico/

For frequent consultation


http://www.energia.gob.mx/

http://www.cfe.gob.mx/paginas/home.aspx

http://cenagas.gob.mx/

http://www.cre.gob.mx/

http://www.cnh.gob.mx/

http://www.gas.pemex.com/portalpublico/

• US exports are increasing rapidly

• Pipeline assets are highly valued

• Reforms occur in a planned economy

• Government competition will persist

• Cenagas takes on the open access challenge

Summary: Mexican demand is fed by US surplus


Any Questions?


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David GivensHead of gas, power services for North America

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Argus David Givens Morningstar Oct 2015

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