Speaker– Felipe Calderón Hinojosa, ex-president of México
Regional integration and Mexican energy market opening and its impact in Latin America (See Presentation)
1. Mexican energy market opening
In December 2013, Mexico approved a constitutional reform by which it was decided to liberalize its energy industry, allowing the entry of private investors to a sector that for decades had been reserved for the State. Given this reform, Felipe Calderón spoke about the characteristics and main burdens that the Mexican energy sector was dragging up to the reform, later he made a contrast of the forseen panorama considering the current circumstances.
He started his presentation by saying that Mexico has positive figures, such as being the seventh major crude oil producer of the world and the third major exporting country of such product to USA. However, the Mexican energy industry has several problems which seriously affected its competitiveness: financial insufficiency, technological backwardness, operational inefficiency, low execution capacity and low production.
In 2008 (during Calderón’s government), a budding reform in the sector was approved which allowed the energy business public sector to enter into performance-based payment agreements, improve its corporate governance through independent advisors and create the National Commission of Hydrocarbons. By 2012, these changes had brought to positive the restitution rate of proven reserves, increased gas production and made flexible and stimulated procurement.
However, two major elements of the reform were not approved in 2008 and they had to wait until 2013: Petroleos Mexicanos (PEMEX)’s authorization to create strategic associations in national territory and the opening to private investment in exploration, exploitation, refining, petro-chemistry, transport and commercialization of hydrocarbons. So, with the recent reform, the market was revolutionized, allowing the entry of private sector to all value chain through different legal schemes (assigneells, contractors and concessionaires).
In this regard, the reform has also represented a gradual opening in gas, diesel and liquefied petroleum gas markets, where prices will become from being regulated to be free and the import will become from being PEMEX’s monopoly to be also free.
Finally, the reform has also impacted the Mexican electricity market, because it has guaranteed the possibility that private investors invest in generation and commercialization phases (keeping the State monopoly in transmission and distribution).
2. Reform potential and regional implications
After the recent revolution of shale gas and shale oil in USA, the gas and oil production in said country has increased substantially in less than ten years, which has led to anticipate that in the near future, USA will become in an energy self-sufficient country. The geological evidence proves that Mexico has an enormous hydrocarbon potential similar to the USA, but today the development of this potential in the South of the border has been considerably low (verbi gracia, in 2010, 36.6 times more wells were drilled in USA than in Mexico), which is mainly due to evident differences; for example, regarding the land ownership and natural resources regimens, technological assimilation potential, regulatory weight and investment guarantees.
However, another issue related to shale revolution is that the increase in supply has led to a dramatic reduction of gas prices, altering the commercial dynamic of the product around the world. In such circumstances, it is imperative that Latin American nations make efforts to integrate their energy potential in regional markets that ensure price reduction and the volatility of prices for the benefit of consumers, as well as the quality improvement of services. If one thing is clear, there is a long way to go.
3. New frontier in the energy generation
In this part of his presentation, the Ex-President Calderón said that, historically, we are in the best moment to expand clean energies, since their costs have been reduced thanks to the technological progress. For example, by 2020 it is expected that the cost for Megawatt-hour of solar energy (photovoltaic) would be less than gas, meanwhile the cost of wind energy would be even less than the carbon.
Calderón pointed out that given the existing installed electric power generation capacity of 63,745 MW in Mexico, the country has potential to install 71,000 MW more of wind generation. Similarly, zones with geothermal potential to install up to 40,000 MW abound in the Mexican territory. In other words, it might be even possible for Mexico to cover all the electric demand with wind or geothermal energy more and more unexpensive and clean.
4. Better growth, better climate
Finally, Calderón mentioned the recent “New Climate Economy Report” of the Global Commission on the Economy and Climate; drafting led by him. The report concludes that it is possible to grow economically and at the same time tackle the climate change.
The report concludes that the key is to innovate to increase resource productivity. How can this objective be achieved? Among the recommendations, he stands out the integration of the strategy of developing a low carbon economy in the fundamental economic decision-making; eliminating gradually subsidies for fossil fuels, agricultural inputs and incentives for territorial expansion of cities; reducing costs of capital for low carbon infrastructure; investing in cleaner technology research and innovation; implementing principles of urban planning that give rise to more compact and coordinated cities; dissociating the electricity generation and the pollution from use of carbon; and reversing deforestation by 2030.
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