On February 17, 2017, The Huffington Post quoted Professor Melinda Taylor, the executive director of the KBH Center, in a story about the environmental cost of Trump’s border wall. According to the story, “Environmentalists say they are particularly concerned that Trump, thanks to a legal loophole, may be able to push through his plans for the wall with little or no environmental oversight,” which Taylor said Trump could exploit to devastating effect. “The new administration has a wild card they can pull and it’s in this law,” Taylor told CNN last month. “The language in this law allows them to waive all federal laws that would be an impediment to building any type of physical barrier along the border, including a wall.” If Trump does use this “wild card” to duck environmental protections, “it will be particularly tragic,” said Taylor. “If they really try to build a wall, without regard for environmental laws and without environmental impact statements, the effect of a border wall would be more catastrophic than a border fence.”
News Types: Media Coverage
On February 2, 2017, Civil Eats quoted Professor Thomas O. McGarity in a story about how EPA’s regulation of 5 major pesticides has serious implications for the environment and public health. According to the Professor McGarity, President Trump’s recent executive order instructing agencies to repeal two regulations for every new one enacted could affect pesticide rules. When the EPA set pesticide “tolerances” or residue levels, those are rules that could fall victim to the order, he explained.
MEXICO CITY—Mexican Undersecretary of Energy for Electricity César Hernández Ochoa says the intersection of rising demand for electricity and a change in Mexico’s constitution paving a path to energy reform represents a substantial upside opportunity for foreign investors. In an interview at SENER, the Spanish acronym for Mexico’s Ministry of Energy, Hernández said the first item he highlights for foreign investors considering entering his nation’s newly-deregulated electricity markets under Mexican energy reform is the projected population growth over the course of the next quarter century.
“We are now 120 million people and the population will stabilize at 150 million people in Mexico,” he said. “Forecasts for demand growth are very positive whereas developed countries tend to have a diminishing demand because they are becoming more efficient, especially in Europe, the U.S. and Canada. In Mexico, you have continued growth and demand (and) that means there’s a lot of space for new generation, for companies who want to invest.”
Hernández was appointed as Undersecretary of Electricity of the Ministry of Energy by President Enrique Peña Nieto in 2014. Previously he served as the Head of Legal Affairs at SENER. He is also a member of the governing board of CFE, Mexico’s Comisión Federal de Electricidad (Federal Electricity Commission).
“When we decided to create an electricity market in Mexico in 2013 and in 2014, we published the Electricity Industry Act. We tried to incorporate in the design of the market what we saw as best international practices,” he continued.
“If you look at the new Mexican market rules, they are really based on the best practices of U.S. markets and all the markets in the world.,” he said. “For international investors, and particularly American investors, you will see that the environment we are creating has many factors that make it resemble some of the markets where they are used to operating in.”
The Undersecretary, a Fulbright Scholar and author, does not portray Mexican energy reform as either easy or quick. But he said he remains bullish.
“We are opening a new market, so there’s lots of low hanging fruit for people willing to take the risks and to go and grab them,” he said.
CFE has conducted two auctions since reform was introduced with participation by companies based in Canada, Italy, Spain, France and China.
“It was a big success for us because we managed to attract investments with the first auction of around $2.6 billion dollars and for the second auction $4 billion,” he continued. “It attracted top companies from around the world. Curiously, American companies were important but were not dominant in those auctions. We had Mexican companies as well.”
In addition to electricity, CFE is considering bids for the construction of transmission lines.
“We started the auction in November and we should get offers in February (2017). It will be worth between one and two billion U.S. dollars,” he continued. “It’s a big transmission line that goes (through) the center of the country, from a windy region to a large consumption area in the center of Mexico. It’s also attracted top interest from large international companies. Large Chinese, Swiss, German, American, Canadian companies will participate. So we hope for a competitive process.”
One of the changes to Mexico’s electricity landscape is the spinoff by CFE of six generation companies, or GENCOS, designed to inject competition into the domestic electricity market. However, the newly GENCOS will still report to CFE. The Undersecretary was asked how true competition is served by that arrangement.
“They (the GENCOS) cannot collude amongst themselves. They have to have a different CEO. And at the board level they have to have independent decisions. They have independent directors. At the start of 2017, (energy reform) mandates them to operate independently.”
“We will be monitoring that. We’ll make sure that they have the right incentives to compete and not to collude,” he concluded.
Hernández has written a book that’s a playbook of sorts for Mexican energy reform in its electricity market, entitled “The Captive Reform: Investment, Work and Entrepreneurship in the Mexican Electric Sector.” The work was published in 2007, two years before former Mexican President Felipe Calderón attempted to introduce reform at Pemex, (Petróleos Mexicanos) Mexico’s state-owned energy agency.
“When I wrote that book it was 2007, I was frustrated, he said. “Most of the developed countries in the world, the highly developed countries, had chosen market structures, whereas we remained a state–owned monopoly, which behaved as if we were in the 1950s or ‘60s. I said well, ‘ We have tried to reform it.’ There had been at least two presidents who had tried to reform the system and nobody wanted to advance.”
“In many countries basically when they do not go for an open market organization, they go for limited ways of private participation, such as IPPs (Independent Power Producer). The magic about IPPs is that it is very compatible in a monopoly system because they basically generate electricity for one buyer. It’s also called the single buyer system in many places, so a company such as Iberdrola and InterGen can sell electricity in a long–term contract to CFE,” he explained. “So the most efficient plants that CFE had before the reform were basically the IPP plants.”
Hernández and other proponents of energy reform in Mexico nurture a vision of integration in the electricity market that stretches from northern Canada through the United States and on to to Mexico’s southern border with Guatemala on the Rio Suchiate.
“When you have more integration among electricity systems, and European countries for instance have that characteristic, you can have many more efficiencies in the system,” Hernández explained.
We discussed two cross-border electricity exchanges between the U.S. and Mexico. Currently the Blackstone-owned Frontera Plant in Mission, Texas is sending electricity to Mexico, while San Diego-based Sempra Energy’s Mexican subsidiary, IEnova, is sending wind-generated electricity from Baja California to the grid in California.
“The Frontera plant was the first participant in the short–term electricity market and also they were one of the winners of one of the second electricity auctions. It won a long–term contract for supplying the capacity to the Mexican system, and they did that with Frontera,” he continued. “When you go to the other side of the country, when you go to Baja California, there you have a wind farm, which was built by Sempra and which is connected to the CAISO.” (California Independent System Operator System.)
“So there you have a Mexican plant, which is basically supplying the California market. In a more efficient world, we would see that happening all across the border. This year we are starting to build a stronger interconnection between Nogales, Sonora and Nogales, Arizona.”
“I think that is a good news story for both countries,” he said.
“That infrastructure is also good for security, for reliability,” he continued. “In electricity grids, sometimes you have a line that falls down and you have some technical problems. Every country has had it. India has had some major catastrophes because of problems in transmission lines. Even the U.S. And it’s very good when you have other interconnections that allow you to solve the problem. ”
Hernández said expansion of the electricity sector in Mexico is dependent on the import of U.S. natural gas. In the next three years, U.S. pipeline capacity into Mexico is slated to nearly double.
“It’s good for the region because when you look at some of the major regions in the world, the expansion of generation, for instance in China or in India, which are really huge markets, is basically based on coal. China or India, if they moved away from coal, they would really have to pay a huge financial penalty because it’s abundant. But we are somehow blessed by geography and having abundant gas reserves as U.S. reserves are now available.”
MEXICO CITY—Despite challenges that include low prices for crude oil, the increasing reliance on the United States for natural gas, insecurity along the path of Pemex oil pipelines and allegations of corruption within the powerful oil workers union, a senior manager at Pemex (Petróleos Mexicanos) portrays Mexican energy reform as a process that represents both a challenge and an opportunity.
“It’s not certainly the best time to go and put your fields up for grabs. However, having said that, Mexican fields have extraordinary potential,” said economist José Manuel Carrera who began his career at Pemex in 1991 when he joined the staff of the agency’s CFO. In 2015 he was appointed as the Chief of New Business Ventures at Pemex. He came to the state-owned energy agency from Mexico’s Central Bank (Banco de México) where he was a currency analyst and Manager of International Exchange.
In an interview at his office at Torre Ejecutiva Pemex, the agency’s Mexico City headquarters, Carrera amplified on the challenge Pemex faces as it adjusts to a domestic oil and has market that has been opened to foreign participation for the first time since 1938. That year, Mexican President Lázaro Cárdenas nationalized and expropriated the assets of nearly all of the foreign oil companies operating in Mexico. He later created Pemex, a state-owned firm that held a monopoly over the Mexican oil industry until 2013 when Mexican lawmakers changed the country’s constitution to lift the ban on foreign energy companies from operating in the country.
Carrera was asked about the difficulty of trying to accelerate energy reform in a low-price environment. Hope for Mexico’s energy reform and its potential to improve social development in the country were high when the plan was launched. In June 2014 crude oil peaked at 112 dollars per barrel. Planning and anticipated profits for Pemex and the foreign companies it wanted to partner with were predicated on 70-90 dollars per barrel. Today crude makes news if it cracks 50.
Adding to woes at Pemex, Moody’s in 2016 issued a downgrade and Fitch said Pemex faces insolvency. Pemex owns numerous non energy-related assets such as hospitals and hotels. It has slashed jobs but still has a workforce that analysts suggest is two to three times the labor force it needs.
Any profits it does make have historically been taken by Mexico’s federal and state governments. They have used Pemex as a piggy bank, taking 30 or 40 per cent or more of its earnings to build schools, hospitals, and in one case, a world class baseball stadium. That means profits aren’t used to upgrade equipment or train workers. That was not an issue when oil prices were high, when there was no urgency to reform Pemex and to invite foreign expertise investment and expertise to rescue it and Mexico’s under performing energy sector.
Carrera was asked about the difficulty of trying to accelerate energy reform in a low-price environment and as Mexico begins what is certain to be a contentious election cycle leading up to the selection of a new Mexican president in 2018. The following is a transcript of his comments;
on pitching foreign investors on Mexico’s energy industry
It certainly, in the eyes of a lot of people, (is) more problematic. Why? Because the low prices have actually diminished the capital expenditure of most international oil companies around the world. If you look at the 10 largest IOCs, or international oil companies around the world, they have reduced their capital expenditures between 40 to 55 percent in the last year.
That’s an important cut in investments, and therefore it’s a reflection that under these price scenarios oil companies are being much more prudent with the way they spend and much more discerning on which fields they should actually go for.
So it’s not certainly the best times to go and put your fields up for grabs. However, having said that, Mexican fields have extraordinary potential. The opportunity of research for any oil company is very, very important and the potential for exploration is also so large (and is) of such a scale that it is not easy to find fields with those characteristics.
Therefore even though we are not necessarily in the best timing, in terms of the price, the opportunity is so large that oil companies are discerning enough that they could look at this opportunity and understand that certainly the first barrels that will come out of this field will be not now but in five to seven years.
So therefore they should actually be looking at what is the price expectation on that (duration) of time rather than actually just looking at the current price. However Mexico, and Pemex in particular, will put to the market opportunities in terms of investments, which go not only for the deep waters. Pemex will also bring farm outs and service contracts suited a smaller scale and probably with the lower geological and technological risks associated. That will allow companies of other sizes to come and to reap those opportunities and to try to get into Mexico’s energy resources.
on the continued theft of oil from Pemex pipelines
(It) is a fact, we need to face it and confront it. I think Pemex has been working very hard. It’s certainly not an easy task, but Pemex is working hard in coordination with local authorities, which they being instrumental and with the federal government as well. So I think it’s a job that should be the responsibility of a bigger set of stakeholders, not only of Pemex.
It is mostly refined products. Most of the theft that we have encountered and that we have reported has been in refined products in pipelines. That’s typical because they are assets that they have a more liquid market. It’s more difficult to find markets for oil and certainly for natural gas it is very difficult.
on why Mexico plans to import increasing amounts of natural gas from the United States
The GDP of Mexico has increased dramatically in the last decade, and one of the biggest drivers has been manufacturing and services. Manufacturing and services in the Mexican economy account for 40 percent of GDP, and that’s the driving force behind the Mexican economy.
It’s 40 percent manufacturing, 40 percent services, and 20 percent the rest of the sectors. Oil and gas only represents eight percent of GDP, so the business model that Mexico has adopted has been of a very large factor. Mexico is one of the largest exporters of high technology equipment like mobile phones, televisions and home appliances. We are the sixth largest supplier for the American aerospace industry.
So therefore, the business model is clear. And one of the clear drivers of this sector has been the availability of natural gas. (With) A lot of these industries, the energy fuel, is natural gas. So therefore the imports of natural gas to Mexico will help us develop a very healthy manufacturing sector and service sector, which is the strongest driving force of the Mexican economy.
So Mexico requires to develop itself and that equires more natural gas. So the construction of these pipelines is making more natural gas available, for industr to develop manufacturing but also to use a cleaner fuel to generate electricity and therefore decrease the prices of power in Mexico.
It is critical, the role it (energy) plays. A country without abundant and accurately priced energy will have more troubles in developing itself. What energy reform is bringing to the table is direct impact to consumers but also abundant fuel correctly priced for the development of all the sectors of the economy.
on the significance of the Los Ramones natural gas pipeline projects
I’ll tell you about Los Ramones. Los Ramones is a project that now is basically a joint venture between Pemex and operators and financial investors. So therefore you see this blend of investors, which would not have happened before (Mexican energy reform).
As in the other pipelines that will help us import natural gas, Los Ramones will do exactly the same. It’s future economic development through the availability of more aggressively priced or more conveniently priced natural gas that comes from northern of the border into the Mexican grounds of manufacturing, which is what we call El Bajio or the north-central part of Mexico.
on Pemex’ adjustment to deregulated markets
We recently presented the business plan of Pemex which is the first plan that actually has as the focus of the profitability of the company. So the focus and objective of this business plan is profitability of the company.
And we have laid out a clear set of mandates and initiatives for all the companies of Pemex, which cover the full value chain of oil, and initiatives to partner with investors willing to complement the capabilities of Pemex with theirs in order to develop faster than before.
on relations with an historically corrupt but still powerful Pemex union
I think the union has been extremely supportive of the energy reform, and they have proven it to us. They are one of the key stakeholders and they really are a support to change the way Pemex has been conducting business for the last 80 years. We count on their support.
I think the union is going to be a key stakeholder, and we have never had in the last, I don’t know how many years, a single strike in Pemex; so therefore it gives you the amount of support and leverage that we feel from them. We feel actually very supported. We have never had interruptions, long–term interruptions of operations due to the union, so it has been more than supportive. And they are adapting together with us in this energy reform.
On January 18, 2017, ABC News quoted Professor David Spence in a story about how Trump’s EPA pick has favored state over federal authority on the environment. Spence, a professor of law, politics and regulation at the University of Texas at Austin, told ABC News that Pruitt, as a pro-energy sector lawyer, would most likely attempt to first weaken federal air pollution laws, which he said energy companies believe have become more stringent under the Obama administration. “Rules that have hit the coal industry hardest will likely be tackled first,” Spence said, explaining that’s because the industry has been among the most vocal in objecting to more stringent regulations. Spence said this is likely to be welcome news to the coal industry, which has been hurt not only by the laws, but by changes in the market as a result of a boom in fracking.
On January 13, 2017, CNN quoted Professor Melinda Taylor in a story about President-elect Donald Trump’s transition team’s active discussions with the US Army Corps of Engineers and the Interior Department to begin planning a wall along the Mexican border, including how specific environmental law could get in the way. According to the story, there are local, state and federal laws on the books that would protect endangered species and air and water quality. But one environmental law expert says what the Trump transition team could end up using language in the REAL ID Act that Congress passed in 2005. The law includes a provision that allows the secretary of Homeland Security the power to waive all local, state and federal laws that the secretary determines is an obstacle to building walls and roads along US borders. Taylor, an environmental law professor with the University of Texas, said the George W. Bush-era law is a powerful tool. “The new administration has a wild card they can pull and it’s in this law,” Taylor said. “The language in this law allows them to waive all federal laws that would be an impediment to building any type of physical barrier along the border, including a wall.” Taylor said if the new administration waives all federal laws that are intended to protect the environment and historic preservation “it will be particularly tragic.” “If they really try to build a wall, without regard for environmental laws and without environmental impact statements, the effect of a border wall would be more catastrophic than a border fence,” she said. A wall would prevent water from flowing across the Mexican border, and there is also wildlife that migrates across the border, including the endangered ocelot, also known as a dwarf leopard, located in south Texas and northern Mexico, she said. “US Fish and Wildlife has spent a lot of money to preserve this animal and there are only a couple dozen left,” Taylor added. Taylor is urging the new administration to do the impact studies so that “they have the data about the potential impact of a wall and find ways to minimize the impact.”