Developing Natural Gas Infrastructure in the Americas: the Mexican case

1. Developing Natural Gas Infrastructure in the Americas: the Mexican case NARUC Committee on Gas Francisco Salazar Diez de Sollano Chairman, CRE July 17, 2007

2. Introduction: CRE • CRE (Comisión Reguladora de Energía) was created in 1992 as a consulting body to the Secretary of Energy. Its objective was to prepare the rules that would regulate the relationship between the State’s utilities and the private investors in the power sector. • In 1995, the Congress passed a reform opening the downstream activities in the natural gas sector. Then, CRE was also constituted as the formal regulator of the energy sector and was given operational and technical autonomy. • CRE’s mandate is to promote the efficient development of the activities it regulates. In doing so, CRE looks for a balance between the interest of the consumers and that of the investors.

3. PMX Sales Natural Gas Exploration Production Transport Processing. Storage Distribution Marketing Bottle Distribution Surface transport. PMX Sales LPG Storage Processing Production Pipeline Distribution Pipeline Marketing CFE & LFC National Transmission Generation Transmission Power Grid Distribution Generation Transmission Third Parties Others Imports / Exports Imports Open to private investment Reserved to the State Regulated by CRE CRE’s regulation powers

4. Natural gas demand • According to the Ministry of Energy(1), natural gas demand was 6.549 bcfd in 2006 . • 48% corresponded to the oil sector; 35.7% to the power sector; 14.6% to the industry (including Pemex Petrochemicals), 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

5. Natural gas forecast 2005-2015 3.9 % 2.8 % Source: SENER 2006 – 2015 Prospectiva del Mercado de Gas Natural

6. Gross NG Balance 2005-2015 9.49 9.11 8.69 8.28 7.90 7.58 7.05 6.65 6.61 6.11 5.72

7. Natural gas for power plants • Power forecasts 2005-2015 • 4.8% annual demand growth rate from 191 TWh in 2005 to 305 TWh in 2015 • 24 GW of new capacity required to meet demand (approx. 49% of current capacity) • CFE will install 23,545 MW during the next decade • Combined cycle power plants will grow from 33% to 51% of the total capacity by 2015 • 7.3% average annual natural gasgrowth over the next decade (for power)

8. Natural gas imports 2005-2015 Imports will peak by 2015 at 2.2 BCFD Source: SENER 2006 – 2015 Prospectiva del Mercado de Gas Natural

9. 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 Pemex’s investment in areas of paramount interest such as exploration and production of oil and gas

10. CRE’s regulation objective CRE’s regulation must: • Ensure technical engineering excellence through modern standards and third-party auditing procedures • Approve general terms of service that satisfy user’s needs and reflect current practice in industry • Approve rates that are competitive and allow fair rates of return to investors • Lead to predictable and stable regulatory conditions with adequate flexibility

11. Permits granted by CRE Capital Length Type Licenses Investment (MM USD) (km) Transport 12,354 155 1,979 Open 1,744 11,501 20 Access Non-Open 853 235 135 Access 1,669 Distribution 22 35,494 5 n.a.* LNG terminals 2,000 TOTAL 182 47,848 5,648 * LNG total storage capacity of 1,250,000 cubic metres

12. Mexico’s natural gas transport network Mexicali 9 S.L. Río Colorado Imports Imports 11 15 Cd. Juárez 2 10 PRIVATE PIPELINES 14 NACO Nogales Agua Prieta Kinder Morgan Gasoductos de Chihuahua Igasamex Bajío Energía Mayakán Tejas Gas de Toluca FINSA Energéticos Transportadora de Gas Zapata Gasoductos del Bajío Transportadora de Gas Natural de Baja California Ductos de Nogales Gasoducto BajaNorte San Fernando Gasoductos del Río Agua Prieta Conceptos Energéticos Mexicanos Transportadora La Huasteca Tejas Gas de la Península Terranova Energía 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Santa Ana Cananea LIBERTAD Imports Chihuahua Hermosillo Anahuac Delicias Piedras Negras Guaymas Cd. Camargo Nuevo Laredo Monclova Química del Rey Jiménez Imports Pandura Escalón Miguel Alemán Camargo Hidalgo Castaños 13 1 6 Gómez P. Matamoros Reynosa Parras Cd. Lerdo TOPOLOBAMPO 12 18 Torreón Monterrey Saltillo Cadereyta Sn. Fernando Durango MAZATLAN C.F.E. Colinas ALTAMIRA PACIFIC OCEAN SAN LUIS POTOSI Campo Tam. Zacatecas Cd. Madero TAMAZUNCHALE Tampico Cancún AGUASCALIENTES 17 16 3 8 ISLAS MARIAS Poza Rica Mérida GULF OF MEXICO Guadalajara Tlalchinol Valladolid LEGEND Salamanca Qro. C.P.Q. Poza R. Tula C.F.E. El Verde PEMEX transmission system Private open access Project under evaluation at CRE Feasible project Feasible LNG terminal City Natural gas injection point Petrochemical plant Sn Juan del Río Sta. Ana 4 230 km Morelia Pachuca Campeche 5 Veracruz Jalapa Toluca C.P.Q. Matapionchi 7 C.P.Q. Pajaritos Uruapan Cuernavaca CARIBBEAN SEA C.P.Q. La Venta Puebla Cd. Mendoza Atasta MANZANILLO T. Blanca C.P.Q. Cd. Pemex Minatitlán Nvo. Teapa Villahermosa L. Cárdenas Cactus y Nuevo Pemex

13. Developing LNG terminals • LNG project solutions are varied • Having 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. • CRE has resolved all LNG applications in approximately 12 – 18 months

14. Developing LNG Terminals • Leading times are currently very long for LNG projects • Construction time is typically 3 years • There is an increasing demand of LNG terminals, especially in North America • Costs of steel and concrete have increased significantly • Additionally, liquefaction plants have been delayed in several countries

15. Tijuana Mexicali Naco Cd Juarez Chihuahua Reynosa Monterrey Cd Madero PR Toluca D.F. Cd. Pemex LNG regasification plants • Six applications submitted, 5 permits granted • Commercial operation: Sep 30th, 2006 (Altamira) • ECA (Sempra): operation in March 2008 Libertad • Altamira • Shell-Total • CFE bid • 140,000 m3 x 2 • 0.5 - 1.1 BCFD • Baja California • 1. ECA (Sempra) • 160,000 m3 x 2 • 1.0 – 1.3 BCFD • 2. Shell Baja • 170,000 m3 x 2 • 1.0 – 1.3 BCFD Topolobampo Manzanillo

16. Problems… • Private projects associated to private industry and LDC’s have had limited success • Large consumers are reluctant to sign long term contracts • Pemex’ supply and services are preferred • Competing fuels are priced with non-market criteria • As a result, most transport and LNG infrastructure is tied to CFE’s need for CC generators and Pemex’ requirements • Most of the new combined cycle power plants are located near Pemex’ transmission system or LNG terminals • Both companies dominate the gas market

17. Towards a new transport model • CRE is currently reviewing PEMEX SNG (national pipeline system) rates, the methodology to calculate them and the corresponding tariffs. • The idea is prepare SNG to be the main part of a National Integrated Transport System (SNI) • Issues being discussed include using a postage stamp instead of a mcf mile methodology, desired levels of central planning and expansion of the system, roll-in criteria, desired degree of competition, etc. • Although SENER is responsible for energy policy and planning, CRE’s opinion is central in this issue.

18. Conclusions • Natural gas foreseen demand’s growth in Mexico will require infrastructure to secure supply. • So far, CRE has developed a predictable, transparent regulation that can accommodate flexibility to investors. • Current infrastructure in Mexico has been mainly linked to CFE and PEMEX through long term contracts. • New infrastructure to allow regional growth and active private participation in new projects poses regulatory challenges to the CRE.