http://www.worldenergy.org/documents/p001391.doc

STRATEGIES OF DIVERSIFICATION IN REGULATED ENERGY MARKETS:THE NATURAL GAS AND ELECTRIC POWER INDUSTRIES IN MEXICO1

STRATÉGIES DE DIVERSIFICATION DANS DES MARCHÉS ÉNERGÉTIQUES RÉGLEMENTÉS: LES INDUSTRIES DU GAZ NATUREL ET ÉLECTRIQUE AU

MEXIQUE

Gerardo Bazán González*, Alberto Elizalde Baltierra** and Juan Eibenschutz Hartman**** Advisor, General Director Office, Petróleos Mexicanos

**Analyst, Corporate Direction for Operations, Petróleos Mexicanos*** General Director, National Commission of Nuclear Safety and Safeguards

AbstractThe aim of this work is to show a structured and systematic approach to analyze the strategies of diversification undertaken by the State-owned companies Petróleos Mexicanos and Comisión Federal de Electricidad, during the period 1938-2006, in the Mexican energy market that has been strongly dominated by the State control. Furthermore, we explore the future of these strategies by using a Strengthens, Weaknesses, Opportunities and Threats (SWOT) matrix. This analyze also include changes in regulation that should happen in order to consolidated the proposed strategies.

RésuméL’objectif de ce travail est de montrer une approche structurée e systématique pour analyser les stratégies de diversification suivies par les compagnies publiques Petróleos Mexicanos et Comisión Federal de Electricidad, pendant la période 1938-2006, dans le marché énergétique mexicain qui a été fortement dominé par le control de l’État. De plus, nous explorons l’avenir de ces stratégies en utilisant la matrice de Forces, Faiblesses, Opportunités e Menaces (FFOM). Cette analyse inclut aussi les changements dans la régulation que devraient avoir lieu afin de consolider les stratégies proposées.

1. Introduction

Historically, Mexico’s energy sector has been divided into two specific and well defined segments: hydrocarbons and electricity. Since the nationalization of Mexico’s energy resources (1938 for hydrocarbons and 1960 for electricity) both markets had been dominated and controlled by three decentralized public entities of the Mexican Government: Petróleos Mexicanos (PEMEX) in the oil and gas industries; Comisión Federal de Electricidad (CFE)2

and Luz y Fuerza del Centro (LFC)3 in the electricity market. However, until the early 90’s there had been small exceptions to the State control in the energy markets, such as private investments in natural gas distribution and cogeneration and self-supply power plants. After a set of energy reforms, new private companies have entered the power generation segment since 1992, and the natural gas downstream activities since 1995.

1 Draft/version. Uncompleted English revision.2 For simplification purposes, when we refer to CFE it also considers LFC. 3 LFC’s activities includes power generation, transmission and, the most important, distribution in the central region of the country.

Petróleos Mexicanos is the only legal entity empowered to own property and carry on business in the exploration, exploitation and transformation of hydrocarbons (crude oil and natural gas) within Mexican territory. Operationally, Pemex is divided in one corporate and four decentralized subsidiary entities of technical, industrial and commercial nature, with their own equity and legal personality: Pemex Exploración y Producción (Pemex Exploration and Production), Pemex Refinación (Pemex Refining), Pemex Gas y Petroquímica Básica (Pemex Gas and Basic Petrochemicals) and Pemex Petroquímica (Pemex Petrochemicals). In terms of oil and natural gas production, Pemex is worldwide ranked 3rd and 11th respectively. In the classification of top petroleum companies by sales, PEMEX is situated in the 7th place.

CFE is the electric company entitled for the generation, distribution and commercialization of electricity throughout the country.

Even though that the commercial and operational activities of both companies had been limited to the nature of their business, in many cases the divisor line between their activities is unclear. Furthermore, as final consumers demand centralized energy services and technology allows satisfying energy needs in a centralized form, the limits of the electric and hydrocarbons markets is fuzzy and its necessity to adapt to new strategies becomes greater. In this sense, PEMEX has been participating since the 1940’s in the power generation sector, with the operation of self-supply and cogeneration plants, meanwhile the CFE has operated in the past natural gas distribution systems and more recently, CFE has entered in the liquefied natural gas (LNG) business with Mexico.

Throughout the development of this work, we realized that there is no formal literature, at least for public usage, that approaches the analysis of future energy strategies for diversification in the Mexican energy sector.

The aim of this work is to show a structured and systematic approach to analyze the strategies of diversification to be undertaken by Petróleos Mexicanos and the Comisión Federal de Electricidad during the period 1938-2006, in a energy market dominated by a strong State control. Furthermore, we explore the future of these strategies, and the changes in regulation that should happen in order to consolidate them or to create new ones.

In the first section of this paper (section 2), we review and analyze separately the regulatory framework for the electric power and natural gas industries. In the following section, we study the strategies followed by the two main players of the energy sector in Mexico, PEMEX and CFE, especially when changes in regulation have occurred. Finally, in section 4, we analyze the past, present and future trends of CFE and PEMEX’ strategies of diversification, by developing a strengths, weaknesses, opportunities and threats matrix.

2. Regulatory Framework

In general terms, the Mexican energy sector is regulated by two differentiated regulatory systems; one for the electric power industry and another for natural gas, which in recent years had been differentiated from crude oil and the hydrocarbons industry. These regulations had been developed in Mexico by the Regulatory Energy Commission, who has regulatory attributions in both industries, especially in subjects that take into account private participation.

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As follows we will show the specifics of each industry.

2.1 Electric Power Industry

The first electric power systems for public service appeared in Mexico at the end of the XIX century and its development was undertaken by private companies under a fairly control of the State.

In 1937, the former President Lázaro Cárdenas created the Comisión Federal de Electricidad (CFE) as a state-own company in order to organize and operate a national power grid with generation, transmission and distribution activities. From 1937 to 1960, the CFE operated in the country with two others foreign private companies under the regulation of the Electrical Industry Law enacted in December 1938 (Table 1).

Table 1. History of the Electrical Industry Regulation in Mexico, 1938-Today.

Law or Act Starting date Ending date It considers self-supply

plants

It considers cogeneration

different from self-supply plants

Electrical Industry Law December 1938 December 1975 Yes No

Act of the Electrical Industry Law August 1940 October 1945 Yes No

Act of the Electrical Industry Law October 1945 May 1993 Yes No

Electrical Energy Public Service Law

December 1975 In force Yes Yes*

Act of the Electrical Energy Public Service Law in Self-Supply Matters

May 1991 May 1993 Yes No

Act of the Electrical Energy Public Service Law

May 1993 In force Yes Yes

* From December 1992.Source: Elizalde (1997)

The Electrical Industry Law regulated, among other activities, the concessions and permits to develop self-supply power plants in the industrial sector. The first permit of this kind was granted in 1942. The aim of these plants was to provide more reliability for the electric supply, instead of seeking energy efficiency or productivity purposes. The raising availability of power supplied by grid constrained its initial development.

In 1960, 22 years after the nationalization of the oil and gas industry, the former President Adolfo López Mateos nationalized the electric power supply by means of adding a paragraph to the Article 27 of Mexico’s Political Constitution as follows: “Corresponds exclusively to the Nation generating, transmitting, distributing and supplying electricity for the public service provision…”.

In 1975, the Electrical Energy Public Service Law replaced the Electrical Industry Law (Table 1). Its Article 3rd dictated that the self-supply plants undertaken to satisfy particular interest were not considered as public service supply. While the Article 36 th established as necessary

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condition to grant self-supply permits the impossibility or inconvenience of the CFE grid to provide the service. In 1983, the Congress modified the Electrical Energy Public Service Law and facilitated the development of self-supply projects. The only condition for granting permits to self-supply plants were that this kind of projects should have increased the energy efficiency of the system, for instance by the simultaneous production of electricity and steam (cogeneration) or the utilization of waste gases or fuels generated in an industrial process. Any surplus of electricity production had to be sold to the CFE. These changes encouraged the construction of self-supply projects with cogeneration schemas in different industrial sectors, especially in PEMEX. Between 1984 and 1988 were installed about 1,400 MW in PEMEX’s facilities like refineries, gas processing and petrochemical complexes due to changes in law and also by the high growth experimented by the oil and gas activities during the middle of the 80’s (Figure 1). The electric plants in oil facilities served to give them a more reliable power service that the grid was not able to provide.

0

500

1000

1500

2000

2500

1942 1943 1944 1945 1960 1984 1985 1986 1988 1994 2005

Years

Inst

alle

d ca

paci

ty (M

W)

PEMEX’s Electric Power Installed Capacity, 1942-2005

1983 amendments to the Electrical Energy Public Service Lawand growth of oil and gas activities in the country

Source: Burgos (1995) and PEMEX’s figures.

Figure 1. PEMEX’s Power Electric Installed Capacity, 1942-2005.

The 1992 amendments to the Electrical Energy Public Service Law, and its regulations, created a significant opening of the generation segment to private companies in order to attract the additional investment needed to ensure the availability and supply of electricity. According to 1992 reforms, there are today four kinds of private participation in the electric power generation: 1) self-supply, 2) cogeneration, 3) small-scale production and 4) independent production.

1. Self-supply- Generation of electricity for your own usage, under the following conditions:i. The electricity comes from plants intended to meet the needs of a set of co-owners or partners, and

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ii. The permit holder agrees expressly to use the electric power solely within the perimeters authorized by the Secretariat.

2. Cogeneration is understood to be:i. Production of electric power together with steam or some other type or secondary thermal energy or both;ii. Direct or indirect production of electric power from thermal energy not utilized in the process; oriii. Direct or indirect production of electric power using fuel produced in the processes.

3. Small-scale production is understood to mean the generation of electric power intended for:i. Sale to the CFE of all electric power produced. The project may not have a total capacity of more than 30 MW in an area determined by the Secretariat of Energy.ii. Self-supply for small rural communities or isolated areas lacking in electric power service, in which case the projects may nor exceed 1 MW; andiii. Exports up to a maximum limit of 30 MW.

4. Independent production is the generation of electric power provided by a plant with a capacity of more than 30 MW, intended exclusively for sale to the CFE or for export.

The Energy Regulatory Commission (CRE-Comsión Reguladora de Energía) is charged with granting permits for electric power generation, importation or exportation for an indeterminate period. Permits for independent power producers are granted for a renewable period of 30 years.

In January 2006, the Mexican Administration published, in the Federation Official Gazette, a Decree that modifies the Article 6th of the Regulatory Law of the Article 27th in Oil Matters of Mexico’s Political Constitution, and the Article 3rd of Petróleos Mexicanos and Subsidiary Affiliates’ Organic Law. This Decree establishes new attributions to PEMEX to participate in the power electric generation segment with cogeneration systems in order to achieve its electrical self-sufficiency or to sale power to the grid, as follows:

“Petróleos Mexicanos, its Subsidiary Affiliates and Companies will be able to cogenerate electric power and to sale surplus of production to the Comisión Federal de Electricidad and Luz y Fuerza del Centro, by means of agreements between them.

In the Project of Federation’s Budget, the financial resources and public investment schemas for cogeneration projects in PEMEX will be discussed, analyzed, and approved by the Deputy Chamber. The schemas of electric power sales to CFE and LFC will be also discussed and approved”.

2.2 Natural Gas Industry

In 1938, the former Mexican President Lázaro Cárdenas nationalized the hydrocarbons industry, thus, oil and natural gas production were a responsibility of the State, throughout the State-owned company Petróleos Mexicanos. This scheme of hydrocarbons property of the state continues until these days.

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However, it was until 1957 that the natural gas industry emerged in Mexico due to the development of the petrochemical industry, which differently form other countries, was based on methane, and located within a limited area in the northeast of the country, by the Gulf of Mexico. Before 1957, natural gas was not a relevant product in the energy scene, and it could be said that by that time, natural gas was considered a by-product of crude oil.

A few years latter, during the early sixties, and still with an emerging infrastructure, a few distribution and commercialization projects were held, especially in the north of the country. However, these projects were incipient to the energy market and limited from the very beginning. It is worth mentioning, that one of these natural gas distribution projects was developed by CFE, the State-owned company in charge of the electricity business (Figure 2).

Number of Customers

570,841

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5,201

7,982

12,994

13,406

15,933

141,000

49,933

350

321,000

20

Total

Fracc. Ind. Norte

Cía. Gas cananea

Dist. Gas Saltillo

Juerez Gas Co.

Cía. Nal. de Gas

Repsol

Diganamex and Digaqro (Pemex)

Gas. Nat. de Juarez

Cía. Mex. De Gas

CFE

GIMSA

Source: IEA, 1998.

Figure 2. Natural Gas Distribution in Mexico, 1994

With the growth of the petrochemical industry, the natural gas industry developed rapidly and became an important part of the energy industry in the country. However, despite of its importance of the natural gas in the energy scene of the country, its development and its regulation was still directly related to the crude oil industry until the early nineties.

It was not until 1995 that the activities related to natural gas were differentiated from the crude oil industry. During that time, the Mexican government adopted an energy policy that encouraged the use of natural gas, following environmental and geopolitical trends. In general terms, the energy policy aim was to promote a change in the pattern of use of industrial fuels through a reduction in the use of fuel oil, substituting it with natural gas.

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In 1995, in order to cope with the growing demand of natural gas and the limited resources of the Mexican government, the natural gas sector was reformed, allowing the participation of new players into the business. The developed reforms were built under three main factors:

The May 1995 amendment to the Regulatory Law of Constitutional Article 27 on Petroleum, restricting PEMEX’s monopoly to natural gas exploration and production, gathering first-hand sales and basic petrochemicals.

The October 1995 enactment of the Regulating Energy Commission (CRE) enabling legislation which strengthened the CRE and extended its remit to include natural gas; and

The November 1995 basic legislation on natural gas regulation, under which the CRE is assigned responsibility for implementation.

Previous to the amendments to the Regulatory Law of Constitutional Article 27 on Petroleum, all the exploitation, processing, development and operation of natural gas pipelines, including natural gas storage and commercialization, were activities reserved to the State. Thus, the new regulation promoted the entrance of new participants in front end activities such as storage, transportation, distribution and commercialization (Table 2).

Table 2. History of the Natural Gas Regulation in Mexico, 1938-Today

Law or Act Dates Exploration, production and processing activities

Storage, transportation and commercialization activities

Distribution activities

Regulatory Law of Constitutional Article 27 on Petroleum

1938 State State State / Private Investment

Act of the Natural Gas Industry Law

1995 State State / Private Investment State / Private Investment

Act of Prices and Tariffs of transport, storage and distribution on natural gas

1996 State State / Private Investment State / Private Investment

3. Changes in Regulation and Strategies of the Natural Gas and Electric Power Industry

3.1 Electric Power Industry

The CFE and two foreign private companies expanded the electric power supply from 1937 to 1960. Under a more nationalistic vision, the CFE and LFC supplied, as legal mandate, the rising electric demand for more than 30 years the between the 60’s and the early 90’s (Table 3). PEMEX and other industrials (iron and steel, sugar, paper) have successfully provided the electric power to its own facilities with local power plants. The 1983 changes in the law encouraged a more efficient supply for the industrial sector. New foreign private companies entered into the generation market since the 1992 reforms in order to complement the CFE and LFC’s efforts for expanding the service in the whole country. Because of the existence of a single buyer market in the generation segment and CFE and LFC’s monopoly in transmission, distribution and marketing activities, the competitive forces are not playing into the market.

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Table 3. Regulation, Main Players and its Strategies in the Mexican Electric Sector, 1937-2006.

Period Changes in regulation

Strategies undertaken Main players in the generation

segmentCFE and LFC PEMEX

1937-1960 1937: Creation of the CFE1960: Nationalization of the electric power supply

To expand the electric power service provided by the grid

To install very small power plants for the impossibility or inconvenience of the CFE grid to provide the service

The CFE and two foreign private companies

1960-1983 1960: Nationalization of the electric power supply1983: Changes in the Electrical Energy Public Service Law

To expand the electric power service provided by the grid

To install very small power plants for the impossibility or inconvenience of the CFE grid to provide the service

The CFE and LFC

1983-1992 1983 and 1992: Changes in the Electrical Energy Public Service Law

To expand the electric power service provided by the grid

To install local power plants to ensure the reliable power supply to new oil and gas processing facilities and to increase energy efficiency by means of cogeneration plants like in refineries.

The CFE, LFC, PEMEX and other industrials

1992-2006 1992: Changes in the Electrical Energy Public Service Law2006: Changes in the Petróleos Mexicanos and Subsidiary Affiliates’ Organic Law

To expand the electric power service provided by the grid and to construct only nuclear, hydro and geothermal power plants.

To install local power plants to ensure the reliable power supply to new oil and gas processing facilities and to increase energy efficiency by means of cogeneration plants like in refineries.

The CFE, LFC, Independent Power Producers (Iberdrola, Unión Fenosa, Electricité de France, Transalta, others), PEMEX and other industrials

3.2 Natural Gas Industry

With the nationalization of the hydrocarbons industry in 1938, the only player in the market was PEMEX (Table 4). Until 1995, the private companies only participated in the distribution chain, with the exception of a few small companies (including CFE) who distributed gas, especially in the north of the country. After 1995, a growing number of private companies have been developing transportation and distribution pipelines throughout the country.

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Furthermore, a few private companies have been developing a few LNG regasification terminals in the Gulf of Mexico and in the Pacific Ocean. In this sense, CFE has given the first steps into the natural gas market, by building ventures with some of the LNG developers.

Table 4. Regulation, Main Players and theirs Strategies in the Mexican Natural Gas Industry, 1938-2006.

Period Changes in regulation

Strategies undertaken Main players

PEMEX CFE Production Transportation and

commercialization

Distribution

1938-1995

1938: Nationalization of the hydrocarbons industry1995: Opening of downstream gas activities

Explore, produce, process, transport, commercialize and distribute natural gas

Distribute natural gas in the metropolitan zone of Monterrey

PEMEX PEMEX PEMEX and ten Local Distribution Companies

1995-today

1995: Opening of downstream gas activities

Explore, produce, process, transport, and commercialize natural gas. Abandon gas distribution business.

Abandon gas distribution business. Enter the commercialization segment in alliance with LNG developers.

PEMEX PEMEX, CFE, private pipelines and LNG developers.

More than 20 private Local Distribution Companies

4. Strategies of Diversification

As we have seen, the recent regulatory changes have settled the bases for new strategies of diversification in the energy scene in Mexico, especially for the two state-owned companies, PEMEX and CFE.

On the one hand, CFE has decided to diversify its processes on the upstream, through the incorporation of new suppliers on its production chain, leaving behind an incipient natural gas distribution business. Thus, CFE seeks to end up with the total dependency of PEMEX, and been able to develop new power generation projects, based on new supplies of natural gas (Figure 3 and 4).

On the other hand, PEMEX has decided to diversify its business, in order to reduce costs and use more efficiently the energy involved in its production processes (Figure 3 and 4).

Therefore, both diversification strategies respond to two completely different needs. However, the futures diversification strategies of both companies will remain dependent in its regulation frameworks, rather than on the actual business opportunities.

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Electric Power Generation

Transmission and distribution

Crude oil and natural gas exploration, exploitation,

processing, storage, transport and

commercialization

End Users

Natural gas distribution

Electricity Self-supply and

cogeneration plants

Crude Oil

Wet and associated natural gas

Natural Gas

Oil products and petrochemicals

Electricity

ElectricityOther primary energies

Natural Gas

Fuel oil, natural gas

CFE’s core business activities

PEMEX’s core business activities

Diversification strategies

Electric Power Generation

Transmission and distribution

Crude oil and natural gas exploration, exploitation,

processing, storage, transport and

commercialization

End Users

Natural gas distribution

Electricity Self-supply and

cogeneration plants

Crude Oil

Wet and associated natural gas

Natural Gas

Oil products and petrochemicals

Electricity

ElectricityOther primary energies

Natural Gas

Fuel oil, natural gas

CFE’s core business activities

PEMEX’s core business activities

Diversification strategies

Figure 3. CFE and PEMEX’s strategies of diversification in the past

Electric Power Generation

Transmission and distribution

Crude oil and natural gas exploration, exploitation,

processing, storage, transport and

commercialization

End Users

Electricity Self-supply and

cogeneration plants

Crude Oil

Wet and associated natural gas

Natural Gas

Oil products and petrochemicals

Electricity

ElectricityOther primary energies

Fuel oil, natural gas

CFE’s core business activities

PEMEX’s core business activities

Diversification strategies

LNG regasification

Natural Gas

Natural gas transport

Natural gas commercial

ization

Electric Power Generation

Transmission and distribution

Crude oil and natural gas exploration, exploitation,

processing, storage, transport and

commercialization

End Users

Electricity Self-supply and

cogeneration plants

Crude Oil

Wet and associated natural gas

Natural Gas

Oil products and petrochemicals

Electricity

ElectricityOther primary energies

Fuel oil, natural gas

CFE’s core business activities

PEMEX’s core business activities

Diversification strategies

LNG regasification

Natural Gas

Natural gas transport

Natural gas commercial

ization

Figure 4. CFE and PEMEX’s strategies of diversification in the present (2006)

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4.1 PEMEX in the electric power sector

In order to draw a scenario for PEMEX’s participation in the electric power sector, we used a Strengthens, Weaknesses, Opportunities and Threats (SWOT) matrix.

The analysis of this matrix consists in identifying structurally the main internal and external elements that could affect the decisions in a global system; PEMEX participation in the electric power sector.

As a first step, we identified the internal elements of the system: strengths and weaknesses. Afterwards, we identified the external or environmental elements of the system: opportunities and threats.

Finally, we formulated the strategies by placing all these factors into a SWOT matrix. In this way, the threats and opportunities are compared systematically with the weaknesses and strengths of our system. Thus, we obtained a series of strategies, generally classified into: defensive, survival, adaptative and offensive strategies.

This analysis is based in the facts that an effective strategy maximizes the strengths and opportunities and minimizes its weaknesses and threats. This basic principle has important implications in the design of a successful strategy.

Strengthens

S1 Experience in the construction and operation of cogeneration facilities.

S2 The potential of cogeneration is estimated to be 2,900 MW.

S3 High availability of fuels that can be used by cogeneration plants such as pet oil coke, vacuum residuals, natural gas or heavy fuel oil.

S4 Increasing electric power demand in PEMEX due to new oil and gas processing projects.

S5 Experience in the development of projects with private companies.

S6 PEMEX is permitted by the law to construct cogeneration plants.

Weaknesses

W1 At least 60% of existing electric power generation facilities operates with low energy efficiency (20-30%) and at the end of their lifetime.

W2 General company vision focalized to oil and natural gas business.

W3 Lack of a culture in the company towards the electrical energy administration.

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W4 No coordinated operation of the power plants.

W5 Short-sighted vision towards a unified energy business.

W6 Even if PEMEX has exceeded power generation capacity, it buys electricity to the grid at high rates.

Opportunities

O1 The market offers innovative financing schemas for cogeneration projects such as service contracts or clean development mechanisms.

O2 New power generation technologies are consolidated into the market as cogeneration based on integrated gasification combined cycle.

O3 Foreign private companies are interested to participate with PEMEX in the development of cogeneration projects.

O4 Growing electric power demand in the country.

Threats

T1 The Mexican Administration continues to constraint PEMEX’s budget to develop new projects.

T2 Regulatory framework remains in the current status.

T3 Lack of a Mexican Administration’s long run energy policy.

T4 High and volatile oil and natural gas prices.

T5 CFE and LFC continues to apply high rates to PEMEX’s electric power sales

Having developed the SWOT matrix, the analysis suggests considering the following strategies:

In the short term

Strategy 1. To eliminate CFE and LFC’s electric power purchases by increasing the usage of existing power generators

With the approval of the Decree on cogeneration, PEMEX has at least the possibility of being a self-sufficient company in terms of electricity. In 2006, PEMEX generated 90% of its total demand of electricity, which accounts for almost 1,000 MW, buying the remaining 100 MW to CFE. However, the Mexican government taxes these sales 150% above the regular industry rates, in order to enforce CFE’s provisions. With the purpose of reducing these expenses, PEMEX is trying to substitute them with self-generation by means of sending and carrying power by the CFE grid to different PEMEX facilities. In 2006, out of the 900 MW generated

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by Pemex, only 70 MW were sent to the grid and supplied to others users. Regulatory disposals constrained this way of carrying power by the grid.

The Decree of cogeneration eliminates these regulatory barriers and allows PEMEX to carry power from a generator with permits of cogeneration to any PEMEX’s facility. In this way, PEMEX is seeking to eliminate in 2007-2009 the supply from CFE and LFC by increasing the usage of its own power generators.

For its position in the SWOT Matrix, this strategy is classified as Adaptative (Figure 5).

In the long term

Strategy 2. To construct new cogeneration plants in order to replace existing facilities that are currently at the end of their lifetime or to satisfy additional power requirements associated to new projects in the future.

This strategy seeks to ensure the PEMEX electric power sufficiency in the long run.

Strategy 3. To construct new cogeneration plants in order to sell electric power to the grid, once its own requirements has been satisfied.

The aim of this strategy is to contribute to the future power supply for public service.

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Pemex in the electric power sector: SWOT Matrix

S1 S2 S3 S4 S5 S6 W2 W3 W4 W5

O1

O2

O3

O4

T1

T2

T3

T4

Strengthens Weaknesses

Opp

ortu

nitie

sTh

reat

s E1

E2 and E3

• E1. To eliminate CFE and LFC’s electric power purchases by increasing the usage of existing power generators .

• E2. To construct new cogeneration plants in order to replace existing facilities that are currently at the end of their lifetime or to satisfy additional power requirements associated to new projects in the future.

• E3. To construct new cogeneration plants in order to sell electric power to the grid, once its own requirements has been satisfied.

Strategies

Offensive Strategy Adaptative Strategy

Survivor StrategyDefensive Strategy

W1 W6

T5

Figure 5. PEMEX in the Electric Power Sector: SWOT Matrix

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4.2 CFE in the natural gas industry

In the same way as it was done for PEMEX, we draw a long run scenario for CFE’s participation in the natural gas business, applying the Strengthens, Weaknesses, Opportunities and Threats (SWOT) matrix.

As a first step, we identified the main internal (strengths and weaknesses) and external or environmental (opportunities and threats) elements of the system. Thus, this internal and external elements help to develop the decisions in the global system; CFE stepping into the natural gas business. As it was done in the PEMEX case, we placed all this elements into a SWOT matrix and developed the strategies.

Strengthens

S1 Experience in the commercialization of natural gas with PEMEX

S2 Monopoly in the transmission, commercialization, and distribution of electricity.

S3 Property of electric power plants with ensured demand of natural gas in the long term.

S4 Experience in the development of projects with private companies.

Weaknesses

W1 Short-sighted vision towards unified energy business.

W2 Lack of experience in the upstream business of natural gas.

W3 Dependent on the experience of a third company in the LNG business.

W4 Undefined attributions to participate in the LNG chain.

Opportunities

O1 New LNG liquefaction projects appeared in the Mexican market.

O2 In the near future, PEMEX will not participate in the LNG business.

O3 Foreign private companies are interested in participating with CFE in the development of LNG projects in Mexico and pipelines associated.

O4 Rising natural gas demand in the industrial, commercial and residential sectors.

Threats

T1 The Mexican Administration continues to constraint CFE’s budget to develop new

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projects.

T2 Regulatory framework remains unchanged despite the changing market conditions..

T3 Lack of a Mexican Administration’s long run energy policy.

T4 High and volatile oil and natural gas prices in the market.

T5 PEMEX are not able to satisfy the entire demand of CFE

Having developed the SWOT matrix, the analysis suggests following the next strategies:

In the short term

Strategy 1. To participate more actively in the commercialization of LNG.Strategy 2. To participate in the transport of natural gas and regasification LNG plants in Mexico.

With the modifications in the regulations made at the beginning of the 1990´s, which allows private investors to access the transport and storage of natural gas business, CFE is able to, in a first instance, begin a diversification strategy of its natural gas supply, in order to ensure the sustainability of new power generation projects which are based on natural gas. Furthermore, as CFE develops expertise in regasification projects (including storage, transportation and distribution on natural gas) by starting joint ventures with major oil and gas companies, the future strategies might consider to get involved further back into the natural gas chain. In other words, CFE could get involved in the transportation of even up-stream processes (outside of the Mexican territory as those activities are only entitled to PEMEX) of the business.

Moreover, based on options theory, CFE might even consider to commercialize surpluses of natural gas, depending on the volatility and prices, selling natural gas, instead of injecting all the gas to its production process.

However, it is important to outline that, in order to develop the above possibilities; there are a series of legal and operational drawbacks that would have to be taken care off.

Nowadays CFE generates 170,000 GWh of electricity (CFE, 2006), from which more than 54% comes from the usage of hydrocarbons, more specifically, 25% comes from the usage of natural gas. In this sense, most of the gas used in this transformation processes is provided entirely by PEMEX. However, in recent years, due to the strong demand of natural gas in the electric industry (strongly pushed by a State policy that supports the usage of natural gas) and to the difficulties of PEMEX to satisfy the growing demand, during the last few years, PEMEX had to import great amounts of natural gas, via pipeline, from the USA (in 2004 gas imports exceeded 1,100 million cubic feet per day). Moreover, in recent years, pipeline imports to Mexico have reached its maximum capacity, leading to a difficult position for the development of new electricity generation projects of CFE. Thus, and in order to facilitate project financing, CFE has to break down with the dependency of a unique natural gas supplier.

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Lately, with the purpose of ensure an alternative natural gas supply, CFE has comprised resources to ensure LNG shippings, opening the possibility to participate actively in the natural gas industry, as it is stated in the 2005 Annual Report of CFE.

Long term diversification strategy

Strategy 3. To participate abroad in the LNG chain (commercialization, transport, and gasification facilities) or the natural gas exploration and production activities.

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CFE in the natural gas industry: SWOT Matrix

S1 S2 S3 S4 W2 W3 W4

O1

O2

O3

O4

T1

T2

T3

T4

Strengthens Weaknesses

Opp

ortu

nitie

sTh

reat

s

E1, E2 and E3

• E1. To participate more actively in the commercialization of LNG.

• E2. To participate in the transport of natural gas and regasification LNG plants in Mexico.

• E3. To participate abroad in the LNG chain (commercialization, transport, and gasification facilities) or the natural gas exploration and production activities.

Strategies

Offensive Strategy Adaptative Strategy

Survivor StrategyDefensive Strategy

W1

T5

Figure 6. CFE in the natural gas industry: SWOT Matrix

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4.3 PEMEX & CFE: Energy Sector Strategies

Electric Power Generation

Transmission and distribution

Crude oil and natural gas exploration, exploitation,

processing, storage, transport and

commercialization

End Users

Natural gas distribution

Self-supply cogeneration

Crude Oil

Wet and associated natural gas

Natural Gas

Oil products and petrochemicals

Electricity

ElectricityOther primary energies

Fuel oil, natural gas

CFE’s core business activities

PEMEX’s core business activities

Diversification strategies

Natural gas transport

LNG regasification

Natural Gas

New cogeneration

plants

Cogeneration plants

Electricity

Natural gas commercial

ization

LNG commercialization

Electric Power Generation

Transmission and distribution

Crude oil and natural gas exploration, exploitation,

processing, storage, transport and

commercialization

End Users

Natural gas distribution

Self-supply cogeneration

Crude Oil

Wet and associated natural gas

Natural Gas

Oil products and petrochemicals

Electricity

ElectricityOther primary energies

Fuel oil, natural gas

CFE’s core business activities

PEMEX’s core business activities

Diversification strategies

Natural gas transport

LNG regasification

Natural Gas

New cogeneration

plants

Cogeneration plants

Electricity

Natural gas commercial

ization

LNG commercialization

Figure 7. Future CFE and PEMEX’s strategies of diversification

5. Conclusions

Historically, PEMEX and CFE’strategies of diversification have depended on regulatory frameworks changes. These companies have thus reacted to changes in the regulatory framework, but this has not been modified under pressure of these firms.

PEMEX has participated in the electric power sector since the 40’s pursuing different objectives, such as to supply power for its needs in the case of not having power availability of the grid, to increase the reliability of the service, or to reduce its costs by producing steam and power jointly (increase of energy efficiency). Instead, CFE participated for many years in the distribution of natural gas and more recently in the LNG purchases.

We analyze the future trends of these strategies by using the SWOT Matrix analysis that recommends following the next ones:

For PEMEX:

To eliminate CFE and LFC’s electric power purchases by increasing the usage of existing power generators (survivor).

To construct new cogeneration plants in order to replace existing facilities that are currently at the end of their lifetime or to satisfy additional power requirements associated to new projects in the future (offensive).

To construct new cogeneration plants in order to sell electric power to the grid, once its own requirements has been satisfied (offensive).

For CFE:

To participate more actively in the commercialization of LNG (offensive)

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To participate in the transport of natural gas and regasification LNG plants in Mexico (offensive).

To participate abroad in the LNG chain (commercialization, transport, and gasification facilities) or the natural gas exploration and production activities (offensive).

Some changes into the regulatory framework needed to encourage these strategies include to clarify the prices paid by CFE for the energy given by PEMEX, and to define CFE’s attributions to participate in the upstream gas chain.

The Mexican State, as a responsible of the national energy policy, should define if wants to encourage either competition between its national monopolies or collaboration between them with the jointly construction of energy projects. Thus, the State should define if the firms will abandon or follow its offensive strategies, or to be focalized only to the survivor ones. The strategies of diversification should thus be elaborated and implemented in a national level, under a unified vision of the business and developing jointly opportunities with strengthens of each one.

The main objective seek by these companies should be to ensure the energy supply with high standards of quality and efficiency, and at affordable prices. This would be reached under a national energy policy with a clear and integral vision of the sector. Planifying the future of two national energy companies that operate in domestic markets with intersections, in an interdependent world, should be a continuous task of the State.

REFERENCES

CFE (2006). “Informe Annual 2005”, Comisión Federal de Electricidad, 2006. Burgos R. and Elizalde A. (1995). “La Contribución de la Cogeneración a la Preservación del Medio

Ambiente”. Bachelor Degree Thesis in Electrical and Mechanical Engineering, National Autonomous University of Mexico, 1995.

Elizalde A., García J., M. Bauer and Quintanilla J. (1997). “Cogeneración en México”. Revista de Ingeniería, UNAM, tercer semester, pp. 40-51.

IEA (1998). “Reforms in the Mexican Natural Gas Sector”, International Energy Agency, OCDE, 1998.

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