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Mexico's energy reform makes progress, but challenges remain: executives

Mexico City — Mexico's energy reform is real and bearing fruit, but the country must do more in terms of supply adequacy, infrastructure and transparency to maximize its benefits and meet future demand, industry executives said Tuesday at Energy Day 2017, an event hosted by the British Chamber of Commerce.

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"Mexico needs security of supply," a senior oil executive said. Mexico's population rose from 103 million in 2001 to 123 million in 2013 and is expected to reach 133 million by 2020, the executive said.

The gathering was conducted under Chatham House Rules, under which speakers cannot be identified in media reports on the event.

The country's energy production, however, has been on a steady decline for years. Gas production, which peaked in 2010 at 5.1 Bcf/d, is projected to total 3.2 Bcf/d in 2017 against demand just shy of 8 Bcf/d, according to Platts Analytics.

Oil production, which peaked at 3.4 million b/d in 2004, did not even manage to top 2.5 million b/d in 2016 against consumption of 1.87 million b/d, the executive said.

Mexico's energy reform, which began in 2013, has ended a 75-year monopoly on oil and gas by state-owned Pemex and is intended to reverse the country's declining hydrocarbon production while helping boost renewables in the power sector and curb carbon emissions.

The reform has so far resulted in 66 private companies and consortia investing in the upstream and in 35 midstream companies being able to access more than 15% of gas pipeline capacity. Mexico also has granted 230 gasoline and 334 import permits, according to data from SENER, Mexico's energy ministry.

Competitiveness is also a must for Mexico's ambitions, the executive said.

"If contracts are not competitive, capital goes elsewhere," the oil executive said. "When capital goes elsewhere, there is no competition."

Cost reduction, particularly in exploration and production, is key, particularly in times of $50/b oil, the oil executive said.

"People say deepwater cannot survive at $50/b," he said. "It's not true. What's true is that only the best projects survive."

Infrastructure is another key issue that also needs to be addressed, with limitations in gas and refined products storage capacity a major threat to security of supply, a second industry executive said.

"We have maybe three or so days of storage capacity; it needs to be 30 days," said the second source, adding that Mexico requires a massive amount of storage investment.

Pemex's 13 million b/d of storage capacity for refined products is insufficient, a second industry source said.

Steps are being taken to address the storage problem, sources said. Among them is a plan by Mexico's state power company, Comision Federal de Electricidad, to retrofit former fuel oil storage capacity for gasoline and diesel storage.

Between 2012 and 2015, CFE reduced fuel oil consumption by 48% as it switched several plants to natural gas, and has said it expects to phase out fuel oil use by 2021.

Mexico's refined products storage policy aims to increase capacity to five days by 2020 and 10-13 days by 2025, a third executive said.

Mexico must also strive to move toward free-market pricing, as liberalizing its energy industry is key to the country's long-term economic growth, the oil executive said.

"It's moving that way, but not there yet," he said.

More industry transparency and additional efforts to combat violence and corruption are also needed, sources said, noting that the latter two will have to be dealt with effectively or risk scaring away investment.

--Bernardo Fallas,
--Edited by Lisa Miller,