The time has come to put to the test our Energy Reform. The constitutional reform, the secondary laws and the regulation of the sector at last have come out of the lab and are facing reality. In the hydrocarbons sector, the awaited amendments to the legal and constitutional framework seem to arrive late.
The first actions to bring
to life the new legislation
is occurring at a moment
in which hydrocarbons
are more expensive, difficult
to extract and compete against
environmentally friendly alternatives.
Moreover, the global
economic context could not be
more adverse.
On the contrary, the start of
the new electricity market, although
subject to complex rules
not yet completely understood,
has attracted a much more
greater interest than expected.
The first steps: bid rounds
for oil contracts
The National Hydrocarbons Commission (CNH) was
in charge of carrying out the bid process andawarding
the new oil exploration and production contracts:
the bidding process through the “Rounds”.
The first Round, Round Zero, was an exclusive
selection process for Petróleos Mexicanos
(PEMEX), in which approximately 83% of the
proved and probable hydrocarbon total reserves
and 21% of prospective resources, were granted
in diverse assignments. The rest of the “oil inventory”
of the Country remains “available” to
be offered to the best bidder.
The Rounds were carried out in the middle of
an unexpected and brutal fall of oil barrel prices,
which has been a consequence of the “perfect
storm”: overproduction of Organization of the
Petroleum Exporting Countries (OPEC), incorporation
of Iran to the market, the deceleration of
China´s economy, non-foreseeable oil exports by
the “tea cup producers”, small Chinese producers
that stopped marketing their product in China
and had to sell it in international markets. With
such prices, a lot of the companies of the sector
did not have the necessary resources to take the
plunge into the available Mexican oilfields.
The first bid process resulted disappointing:
only two areas were awarded; the second
one improved and three areas were awarded. In
the third bid process, rules were clearer and license
contracts were granted (licenses provided
greater benefits - as developers took higher risks
- than the models used in previous bids.) 100% of
the bidding areas were granted.
The fourth bid process is for deep-water
blocks (offshore) and increased bidder’s interest
has been shown. It looks like we are learning.
An energy industry without clarity, without transparency, with impunity, will not prosper.
The electricity
market auctions
In parallel, the creation of the new electricity
market has brought new players to engage in the
different activities of the productive chain in the
electricity industry. Moving from a state monopoly
to a market model represents a monumental
challenge, not only from a regulatory perspective,
but also from a cultural standpoint.
And although the new rules are extensive, complex,
and the doubts have not yet been entirely resolved,
we had to start with something: the first auction
was organized for a single purchaser, the new
Federal Electricity Commission (CFE), now under a
more “commercial” mandate then when it provided
“public services”. CFE submitted
a purchase offer to acquire power
capacity, electricity and clean
energy certificates “CELs”.
The interest to participate
in the auction has been overwhelming,
more than a hundred
bidders with more than four
hundred and fifty offers that
cover various times and volume
required by CFE. The proposals
include solar, wind, hydro,
combined cycle, and cogeneration.
The bidders that “prequalify”
(i.e. that satisfy the bid
requirements) can submit their
price offers in late March*. It
looks like a good start, but we
will have to wait and see the
first results. An then, put the
system in operation.
Changes
are in process
It is not the first time that Mexico
embarks in an innovative and ground-breaking process of regulation in an industry.
We have already modernized the rules of the
automotive, telecommunications and banking
sectors, among many others. These experiences
always imply a learning process for the Government
and for all the new participants.
As bidding processes have been taking place,
rules have been clarified in certain cases and become
more flexible in others, seeking to avoid contradictions.
Authorities and bidders have initiated a direct
dialogue that has brought appropriate solutions.
Transparency has been privileged, which has
increased trust in both parties. It is clear that we
must be patient and take the necessary time to
understand, test and improve the rules.
Besides, the cultural change that we envision
is not going to be easy. We are moving away from
a monopoly scheme we had for many decades.
The process of taking decisions, the reasons
behind them, the commercial practices, the objectives,
the personalities of public officials are
very different in a state-driven industry than in
a market-based economy.
The ideology that was created around PEMEX
and CFE during decades generated deep roots. The
expected ideological and practical change will not
occur magically, just because new rules were issued.
And more importantly, the legality of the process
should be respected. A few days ago, former
president Ernesto Zedillo declared that Mexico
needs three things to grow steadily: “the rule of
law, the rule of law and the rule of law”. An energy
industry without clarity, without transparency,
with impunity, will not prosper.
Particularly, in the oil industry, the challenges
are colossal. The global environment is almost
catastrophic. Oil is seen as a resource that is just
about to be obsolete: electricity is now generated
from renewable sources; laws are looking
for clean generation; internet has reduced the
people’s mobility needs, thus, reducing the use
of fuels. Massive production of electric cars advances.
Oil is increasingly more complex, expensive
and harmful to the environment.
It seems like we spend too much time debating
what to do. Our decision-making processes
have not moved according to reality. We have to
think better and act faster. We cannot continue
watching solutions being made “on the other
side” to later import or copy them.
We don’t want to end like the tough, but indecisive
boxer that, as a commentator narrates:
“when he could, he didn´t want to; and then…
when he wanted… he couldn’t”.