Mexico Natural Gas

Red McCombs Business School

Enegy Law (LEB 380)

MEMORANDUM

To: Dr. David Spence

From: Miguel Baca

Date: March 2, 2009

Subject: Mexico and Bolivia’s Natural Gas current situation: reserves, economic barriers, and possible strategies to overcome future obstacles.

In recent years there has been an increase in global demand for Natural Gas. This can be used for many purposes such as home heating and electrify generation among other things. Due to its chemical composition it represents a relative cleaner energy than the regular oil which is used extensively in the world. Countries with strategic Natural Gas reserves could benefit from this increase in demand and boost their economies in the medium and long term period. Mexico and Bolivia are two developing countries with potential Natural Gas Reserves. Their current political and legal situation restricts their growth in this industry and frustrates any effort to exploit the benefits from this natural gas fever of demand. The following Memo will try to answer the following questions: How can Bolivia and Mexico make better use of their considerable natural gas reserves? What are the political, legal and economic barriers to development in each country? How can those barriers be overcome, if at all?

Mexico

First, Mexico is a country with an important amount of natural gas and oil reserves. The petroleum industry is owned and managed by the government.

In brief, Mexico as a country got its independence from Spain in 1820. Later on, around 1860s’ the first discoveries of petroleum were made. This attracted foreign capital that invested in the petroleum industry and materialized a fortune out of it. By 1910 Mexico went to a Revolution derivated from a multi-sided civil war. During this period, society demanded better working conditions and wanted to restate the Constitution to a more comprehensive and well written set of rules. By this time there was a growing anti-American resentment since many of the industries were owned and managed by U.S. companies. 90% of the Mexican Petroleum industry was owned by American Companies. This encouraged the government into a series of expropriations and nationalizations of industries including the petroleum industry and PEMEX (national oil company) was born.

After 1940s’ a series of 4 periods can be identified. The first period (1973-1982) constitutes a series of discoveries of giant and super giant fields of oil and natural gas. The second period (1983-1995) considers a production stability stage for the country. The third period (1996-2003) represents the discovery of the super-giant field of Cantrell which gave to Mexico an important turning point to become a net exporter of oil and satisfy its internal demand. The fourth period (2004-present) could be represented as a declining stage for Mexico where Cantarell and the rest of the oil fields are declining in production as well as the total oil and natural gas reserves. This current situation can be overcome if more research and technology are applied to enhance the recovery of the existing fields and explore other areas (Lajous, 2006).

Today, in Mexico, the national gas industry operates under a different scheme different than the oil industry. Back in 1995, Mexican legislators foresaw the increase in electricity demand with consumes over 40% of natural gas. At that time with the oil production declining the future energy demand was at risk. In order to meet the government expectations, a drastic reform was needed to open the natural gas industry to private capitals.

The 1995 reform take into account the 1917 Constitution statue that gives the Mexican government a permanent and inalienable right to all subsoil resources. This reform to Mexico kept the Natural Gas Up-stream production under the control of PEMEX. The up-stream production considers: Exploration, Production, and first hand sales. On the other hand, the natural gas down-stream considers: transport, storage, and distribution. This allows private participation through direct investment, open access to national pipelines system, commercialization, exports, and imports. The Natural Gas in Mexico is regulated by:

- 1997 Constitution

- Oil and Natural Gas Act

- PEMEX Act

- Natural Gas Regulations

- Energy Regulatory Commission (created in 1995 to oversee and regulate Energy in Mexico)

Natural Gas Reserves in Mexico

Mexico ranks as the 41th country with more natural gas reserves in the world. It has an estimated amount of 13.1 Trillion cubic feet at the end of 2007. This represents the .2% of the global share (Figure 1, BP Statistical Review of World Energy, 2008). As shown in figure 2 (PEMEX, 2007), the main natural gas reserves are located in the southeast and northeast part of Mexico. There is also important natural gas reservoirs off the coast of the Gulf of Mexico but have not been fully explored yet. Figure 3 (PEMEX, 2007) shows the pipeline system of natural gas that covers the main central part of the country where most of the people live and the north part where most of the industries are located and generate their own electricity.

Numbers show that with the current legal framework PEMEX cannot compete in the international market by itself, it requires private capitals in order to have a wider operation range. As an example, Northern part of Mexico and south part of Texas share proportionally the same natural gas basin. Both countries started its exploitation around the same time (1940s’). Up to 2003, cumulative output from the Mexican side was 8,100 BCFd whereas the American side accounted for 67,651 BCFd. The number of drilled wells for the Mexican part were 4,843 whereas for the counterpart were 83,336. The current production in the Burgos Basin up to 2003 was 1BFCd for Mexico and 3.8 BCFd for the U.S.A. (Figure 4, PEMEX, 2007).

Supply

With the 1995 Energy Reform act, the Multi Service Contracts (MSC) were incorporated. Under the MSC scheme, one or more companies could be contracted to explore, drill and explore for natural gas for a limited amount of time (20 years) only when there is a proven reserve. This allows PEMEX to reduce bureaucracy and give the company the freedom to choose how it wishes to find and extract the fuel.

Figure 5 (PEMEX, 2009) shows that for the last 5 years much of the production increase of non-associated gas was due to the MSC contracts that allowed PEMEX to focus on other oil fields to extract associated gas. At the same times the MSC contracts brought new exploration techniques that boosted non-associated gas production by enhancing recovery and adding new technologies. In 2001 the natural gas production was 4,511 MCFd, in contrast, by 2007 the production increased to 6,058 MCFd. This represented a 34% increase in total production where non-associated gas production, alone, increased 105% and associated gas production alone was only 6%.

Demand

In the last decade Mexico’s GDP per capita grew from $8,700usd in 1998 to $13,100usd in 2008. This represented an increment of 50%. This extraordinary growth was directly correlated to an increase in energy demand by the Industry, residential, services, and transportation. It is estimated that by 2012 the National consumption of natural gas will reach 8BCFd (Figure 6, PEMEX, 2007). The main sector that will report an increase will be the electricity sector which will consume up to 40% of the total supply. Currently the difference between production and consumption is supplied by gas imports from U.S.A.

The following remarks on Mexico’s Natural Gas summarize the current obstacle that is facing today:

n Mexico will need increasing amounts of energy in order to fully develop its economy.

n Mexico is currently a net importer of natural gas with exposure to price volatility.

n Mexico has great natural gas potential; however, large investments are needed.

n Despite recent privatization initiatives, current policies are not enough to solve this issue.

n Reforms are needed to allow PEMEX to form private partnerships to allow access to untapped resources.

Bolivia

In recent years, Bolivia has attracted the massive media attention due to its new and renovated strategic role in South America that comes from its natural resources. It is ranked as the 29^th country with more natural gas reserves with about 26.3 trillion of cubic feet underneath its soils. It is considered as one of the poorest countries in the region with a GDP per capita of $1,510, but yet, has raised his voice by nationalizing many of its natural resources industries.

Bolivia history shows a past of economic instability where nationalization and privatization of diverse industries have taken place in short periods of time. In 1995 an important discovery of Natural Gas was made. Due to the Bolivian legislation on natural reserves, foreign capital were favored and entered in the market to exploit it. In addition, Latin-American governments experienced a shift towards a radical socialist vision lead by Hugo Chavez president of Venezuela. Bolivian society seemed to be attracted by this type of vision by creating political instability where two presidents resigned in less than two years. In 2004, Bolivia proposed a Referendum to nationalize the oil and gas industry which was passed with 92% voters in favor. By 2006, Evo Morales, as a president nationalized natural gas resources. This unanticipated action impacted the political relations with Brazil, Spain and France who had important investment and ownership in the natural gas system in Bolivia. The nationalization forced these private companies to turn over production to Yacimientos Petroliferos Fiscales Bolivianos (YPFB). In addition, it raised the royalties to 82% for those who decided to stay. This forced many companies to stop investing in Bolivia due to a funded fear of a future series of nationalization followed by instability.

Production- Consumption

Today, Bolivia produces about 455 BCF a year of natural gas, but consumes only 58 BCF per year. This shows the important opportunity to benefit from the selling f its natural resources in the international markets and, at the same time, increase its national economy. If they take advantage of this situation, the country could invest in better education, infrastructure and social programs for the Bolivian society.

The country has a small domestic natural gas market that is incapable of absorbing much of the country's output. The rest of it ( about 50%)is either flare, re-injected, or vented. Forecasts for the next 20 years show that Bolivia will only be able to absorb 20% of the country's gas reserves. Potential export markets for Bolivian natural gas include Brazil, Argentina, Chile, Paraguay, Uruguay and the United States. Brazil imports 25.8 million cubic meters a day (mcm/d) of gas from Bolivia, which is almost as much as Brazil’s domestic gas production of

27.2 mcm/d. In second place, Argentina is also a net importer of the Bolivian gas.

As mentioned previously, Bolivia faces a little internal demand for natural gas, and also, has limited potential markets. The price that Bolivia charges to its major consumers is around $3.4usd.In contrast, the price on natural gas in the US has been around $5-$8usd. This reflects a little incentive to invest in further exploration. This could prove detrimental to the country’s long-term energy future since it would go back to be a poor state again.

Conclusion

Mexico and Bolivia are two examples of countries with a natural gas industry owned by the government. There are similar constraints in the two cases. Both need money and technology to increase their production and exploit untapped reserves in ordr to boost their economy and national development. In the case of Mexico a partial privatization of the downstream industry seems to start helping to overcome some obstacles. It has given PEMEX a relief to save money and invests it in other key tasks. Bolivia faces a relatively small demand for its natural gas and in the near future its major consumer, Brazil, could start increasing its gas production and, therefore, stop buying gas from Bolivia. In addition, for both countries petroleum industry (including natural gas) is a symbol of national pride. A potential solution for these two countries is to open up to private investments, work and legislate on what the countries really need and put away old long-held nationalistic ideas. They can replicate the Petrobras or PetroChina models. For these models, partial privatization has lead to huge discoveries, modernization, and growth.

Work Consulted:

- Lajous, Adrian, México: Producción y reservas de petróleo y gas natural, COLMEX, 2006, Mexico.

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- PEMEX, Procesamiento, almacenamiento y transporte de gas, Petróleos Mexicanos. , 2007, Portal de internet http://www.pemex.com/index.cfm

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- BP Statistical Review of World Energy 2008.(http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622) last consulted March 2009

- CRE. Comisión Reguladora de Energía. Portal de internet (http://www.cre.gob.mx/) last consulted March 2009

- SENER. Prospectiva de gas natural 2007-2016.

- PEMEX, Balance Nacional de Energia, Petroleos Mexicanos, 2009. Portal de internet: http://www.pemex.com/index.cfm

- Anonimous, Petroleum and Natural Gas: Bolivia, Country studies, unknown. http://countrystudies.us/bolivia/60.htm

Figure 1: World Rank of Natural Gas Reserves by Country

Source: Figure 1, BP Statistical Review of World Energy, 2008

Figure 2 Mexico’s Natural Gas Reserves Map

Source: PEMEX, 2007

Figure 3: Mexico’s Pipeline system

Source: PEMEX, 2007

Figure 4: Burgos Basin development contrast.

Source: PEMEX, 2007

Figure 5: Production of associated + non-associated gas in Mexico

Source: PEMEX, 2009

Figure 6: National Consumption of Natural Gas average growth.

Source: PEMEX, 2007

Sunday, February 8, 2009
Cow/Butterfly effect???

Probably many of us have heard about the “butterfly effect”. In sum, the butterfly effect is represented by “Small variations of the initial condition of a dynamical system may produce large variations in the long term behavior of the system” (Wikipedia). It seems that recently the Environmental Protection Agency was considering a tax on methane emanated from cows. This makes me wonder if methane emanated from a living animal like a Cow would contribute to, let’s say, Global Warming?

This week Kate Galbraith who writes for the NYTimes Blog on Energy brought up this interesting news. According to the E.P.A., due to their slow digestive system, cows’ methane is emitted when they burp and waste, and is 20 times more potent as a heat-trapping greenhouse gas than carbon dioxide. In the state of New York, this “Cow Tax” caused nonconformity among ranchers and farmers who pointed out that their cows do not contribute significantly to greenhouse gases. In round numbers the New York Farm Bureau (NYFB) calculated the tax for dairy cows could be $175 per cow, and $87.50 per head of beef cattle. The tax on hogs would upwards of $20 per hog. Any operation with more than 25 dairy cows, 50 beef cattle or 200 hogs would have to obtain permits (NYFB -Pdf Document).

“Farm animals simply don’t contribute greenhouse gases into the atmosphere at a higher rate than any other living thing. However, in this case, farmers would be forced to gain a permit,” said NYFB President Lincoln. He also mentioned “If you place these requirements on New York farmers, you will make it virtually impossible to run a viable farm operation. Then, unregulated, large agriculture from China and other countries will step in to fill the void. Regulating New York farms without addressing equal emissions in China and other nations will do little to address the global issue, and only penalize the New York producer.” concluded.

At the same time, farmers from the states of Texas and Alabama raised their concerns concluding that this “Cow tax” is not acceptable for the sake of the national agriculture.

I found another interesting article from Katie Zezima in the NYTimes who talks about how people who see cow-waste as a source of bio-energy denominated Cow-power. As an example, Green Mountain Dairy Farm (GMDF) is a farm in Vermont who is part of a growing alternative energy program that converts the methane gas from cow manure into electricity that is sold to the power utility’s grid. Four Vermont dairy farms are producing electricity for the utility, and two more are expected to be online by year’s end. The utility hopes to add six more farms by 2010. According to Katie “Residents and businesses that get their electricity from the program pay a premium of 4 cents a kilowatt hour above the typical rate of 12.5 cents. Most of that money goes to the farmers, who must purchase their own equipment, which can run up to $2 million per farm. Most farmers expect to make back their investment in 7 to 10 years.”.

The way it works is simple: The GMDF cows live in a “barn where a mechanical scraper sweeps the animals’ waste into a large drain. The waste is then pumped into a huge sealed concrete tank known as a digester, which holds 21 days’ worth of waste and is kept at a temperature of 101 degrees Fahrenheit. Anaerobic bacteria break down the organic matter in the waste, producing a mix of methane and other gases, known as bio-gas. The gas is burned in an engine that runs an electrical generator. “(Katie Zezima)

The cow waste produces 250 to 300 kilowatts of electricity daily, enough to power 300 to 350 homes, according to the utility. In addition, the farm processes about 500,000 gallons of waste and outdated ice cream from Ben & Jerry’s each year and puts it in the digester. The free ice cream, which the company drops off, helps the GMDF generate more electricity and saves Ben & Jerry’s the cost of disposing of it. “We’re improving our processes, and they’re improving theirs,” Mr. Rowell said. (Katie Zezima)

As shown previously, there are new technologies that cattle farmers are incorporating into their production. They have discovered that methane produced from their cows could possibly generate a good revenue for them and at the same time contribute with the reduction of greenhouse gas.

Sources:

NY TIMES:

http://greeninc.blogs.nytimes.com/author/kate-galbraith/

http://greeninc.blogs.nytimes.com/2009/02/06/farmers-relax-a-little-after-cow-tax-scare/#more-1033

http://www.nytimes.com/2008/09/24/business/businessspecial2/24farmers.html?_r=1

Wikipedia:

http://en.wikipedia.org/wiki/Butterfly_effect

NYFB

http://www.nyfb.org/Press%20Releases08/PR-FB-EPA-11-26-08.pdf

GMDF

http://www.cvps.com/cowpower/Our%20Farms%20Green%20Mountain%20Dairy.html