WHAT IS MEXICO ENERGY REFORM? - Kansas City …

1 MEXICO ENERGY reform marketresearchteammarketresearchteammark etresearchteamRRRRRRTTTTTTMMMMMMKANSAS CITY SOUTHERN RAILWAYWHAT IS MEXICO ENERGY reform ? Since 1938, MEXICO s ENERGY market has been operated as state reserved industry. Until recently, MEXICO reaped the benefits of this structure. In 2013, the constitution was amended to open the MEXICO ENERGY market to private investors and end the state reserved ENERGY industry. This change was done to drive economic stability by maximizing ENERGY revenues through increased and sustained ENERGY commodities production.

2 1As of April 1, 2016, companies (other than Pemex) were allowed to buy gasoline and diesel from overseas markets for the first time since the industry was nationalized in 1938. The intention was to lure investment and push down prices for Mexican consumers. 1 MEXICO ENERGY reform marketresearchteammarketresearchteammark etresearchteamRRRRRRTTTTTTMMMMMMKANSAS CITY SOUTHERN RAILWAY2 WHY WAS ENERGY reform NEEDED? There are two major reasons why ENERGY reform was needed for MEXICO : SUPPLY AND DEMAND AND EVOLUTION OF ENERGY NEEDS.

3 1. SUPPLY/DEMAND: MEXICO s ENERGY consumption is increasing and its production is As an example, the market for refined products, such as gasoline, diesel and jet fuel in MEXICO is expected to continue to rise through 2027 however, MEXICO s production, reflected in the yellow line below, will not be able to meet the demand represented by the red line. WHY WAS ENERGY reform NEEDED? There are two major reasons why ENERGY reform was needed for MEXICO : SUPPLY AND DEMAND AND EVOLUTION OF ENERGY NEEDS. 1. SUPPLY/DEMAND: MEXICO s ENERGY consumption is increasing and its production is As an example, the market for refined products, such as gasoline, diesel and jet fuel in MEXICO is expected to continue to rise through 2027 however, MEXICO s production, reflected in the yellow line below, will not be able to meet the demand represented by the red line.

4 MEXICO MARKET GASOLINE, DIESEL AND JET Production2008200720062005200420032002 DemandImportsExportsTHOUSANDS BARRELS PER DAYSOURCE: ORO NEGRO External sources are needed to help fill the gap between the demand and supply production for these items. Additionally, MEXICO s opportunities do not stop at refined products but extends to other petroleum products and gas, as well. MEXICO has billion barrels of proven oil reserves and 17 trillion cubic feet (Tcf) of proven natural gas. While reserves are critical in times of need, excessive reserves can hinder growth.

5 With examples of both demand exceeding supply as in the case of refined products and supply exceeding demand as in the case of the oil and natural gas, MEXICO had to look for ways to course correct. Two options to alleviate these imbalances were identified: enact reforms to allow private investment in the ENERGY sector to help meet the demand or continue to import petroleum products and natural gas despite its huge ENERGY MEXICO ENERGY reform marketresearchteammarketresearchteammark etresearchteamRRRRRRTTTTTTMMMMMMKANSAS CITY SOUTHERN RAILWAY2.

6 EVOLUTION OF ENERGY NEEDS: The heavy crude MEXICO currently produces hurts the efficiency of its refineries, leaving it with high levels of residual fuel oil that is difficult to place on the international market at a good price. However, modern refineries create petroleum coke or asphalt from fuel oil. Mexican refineries are not engineered to process the heavy fuel oils, so they need light, sweeter crudes to stay efficient. Significant capital investments would be needed to evolve MEXICO s refineries to be able to process heavy crudes efficiently.

7 While it is recognized that the ENERGY reform will not change the capability of MEXICO s refineries, it does provide a better, cheaper and more consistent supply of light, sweeter crude to process, resulting in better efficiency and better profit. Therefore, in absence of significant capital investment, MEXICO has the ability to stay efficient through imports permitted by the ENERGY reform . 3 MEXICO ENERGY reform marketresearchteammarketresearchteammark etresearchteamRRRRRRTTTTTTMMMMMMKANSAS CITY SOUTHERN RAILWAYCURRENT SITUATION In October 2015, Pemex received a license from the United States to import light crude in exchange for exports of MEXICO s heavier crude oil.

8 The terms of the year-long license will allow Pemex s subsidiary, PMI, to import light crude to process in its refineries with the limit capped at 75,000 barrels per day (bpd).4 MEXICO is among the highest per-capita residential-commercial consumers of liquefied petroleum gas (LPG) in the world with about 8 out of 10 homes using LPG. With the 4 This includes US refineries which need more heavy crude that can be found in the Chicontepec basin (contiguous portions of Veracruz, Hidalgo, Tlaxcala, and Puebla). With modern fracking technologies, which will come with the ENERGY reform through private investment, MEXICO is breathing new life into older mature wells in the Chicontepec basin.

9 Growing population within MEXICO jumping from 81 million (1990) to 112 million in 2013, the demand for LPG followed suit. The ENERGY reform will allow private investors to bring more product to the market to fulfill demand by building terminals in the densely populated regions for easy distribution. LPG MEXICO MARKETMEXICO ENERGY reform marketresearchteammarketresearchteammark etresearchteamRRRRRRTTTTTTMMMMMMKANSAS CITY SOUTHERN RAILWAYLOOKING TO THE FUTUREThe EIA ( ENERGY Information Administration) estimates that MEXICO s oil production could stabilize through 2020 and then rise by 2040, assuming success in the implementation of the new Should the Reforms be successful, it is estimated that MEXICO s long-term GDP could increase by 1% to as a result of the The reform could also increase MEXICO s foreign direct investment inflows by $20bn to $30bn per However, for the reform to be a success, infrastructure improvements will be The current pipeline is not sufficient and, as such.

10 The Mexican government has plans to increase the country s pipeline infrastructure by 75 percent by Until this time, pipelines continue to be unbalanced in their usage. Some areas are underutilized where approximately 40% of others run at maximum capacity. The unbalanced usage continues to challenge pipelines as the single source for the future of ENERGY reform and has created gaps. These gaps will be filled by rail. The railroads within MEXICO have access to all six of the Pemex refineries as show in the map below and will be able to help transport the oil to facilitate the expected successes for ENERGY 11 12 1351 MEXICO Allows Fuel Imports to Lure Investment, Cut Prices, Bloomberg, , (Feb.)