progress of biomedical innovation and research. the mexican ambassador to the u.s. jut lined the decision to allow private sector companies into the emergency market during a discussion today. he was among several speakers talking about mexico's efforts to increase gas and oil production, which in the last 75 years has only been controllinged by a state-run company. this is an hour and a half. >> okay, everybody.

welcome to csis. happy everybody could get here on such a hot day. this is washington. it's this time of the year, but hopefully the air-conditioning will hold out. delighted to have everyone here. and delighted to have an opportunity to explore this topic. talking with the ambassador just a few minutes ago, he said you used to have a mexico program. we did. and that was back when she was with us. she did a terrific job of creating a mexico program. we have not really caught our balance since then. we are making up for it today by taking pieces of mexico. we need to get together to talk about how we do all of mexico. i'm glad we could do this part. we have all been anxious to hear how mexico is going to deal with

the reform agenda. it is coming. we applaud our timing to let us talk about the details, but we know it's going to be coming. it's an exciting thing for us. as part of this, we want our neighbor to do well. we think energy is a big part of doing well. we're going to listen and talk more about it today about what it could mean for all of us. i'd like to thank all of you for joining us today. welcome the ambassador who is really going to kick this off for you. thank you. [ applause ] >> thank you very much. delighted to be here. it's really important to have csis to restart program. and we were just coming through lunch that we take each other for granted and we shouldn't.

actually mexico is the second largest customer of the u.s. just after canada. you are our number one customers. and there's no accident in this and i'm excited to be here and listen to the experts and understand their points of view on mexico's development on the energy front and where energy in north america is headed. just last month i was invited to a conference in new york organized by goldman sachs on the north america energy summit. and there we had the opportunity to listen to different perspectives on the considerable economic impact of these

revolution. there's a growing consensus that great potential and become an energy self-sufficient region in the next 20 years. but there are very important challenges that we need to address to turn this potential into a reality including infrastructure, regulatory issues and the skilled workers in the industry. we have to start thinking as a region about how we are going to address these challenges together in order to facilitate this transformation, which is within our grasp. as a matter of fact, it is already here because our energy sector is very much integrated already in north america. and one of the beauties of these successful integration in terms of how we trade with each other and what we produce together is that it's not coming from a

political statement, which would have been sort of difficult to manage. but for market realities and it just makes sense and it happens. it gives the basis for companies and business people to actually go after the opportunities and make decisions and make things happen. one of the main conclusions in this conference summit in new york was the importance of having a regulatory framework that is up to date. and at the same time, can be effective in the decades to come. mexico, with a long overdue package of reforms, has dramatically updated its framework with a series of far-reaching and transform mative reforms which will conclude legislative -- well, congressional terms with the

approval of the secondary legislation in energy some time this summer. there is no doubt in our minds that reforms will be approved and, of course, there are many challenges in how these are actually structured in the fine print. these are structural reforms in education, telecommunications, financial services, competition policy, fiscal policy and the energy sector that will transform our economy in the years ahead, provided that implementation is successful. the energy reform in mexico is suddenly important, but even before it takes place, the seng tor remains a central component of u.s./mexico trade. let me give you a couple examples. in 2013 the united states was an estimation of 72% of crude oil exports from mexico, which

arrive via tanker. the value of crude oil export from mexico to the u.s. is more than two times the value of all our exports, which were roughly $18 million. 44% of u.s. exports of gasoline in 2013, 600,000 barrels a day of oil products. mexico is the third largest oil supplier to the u.s. after canada and saudi arabia. we have benefitted from the lower natural gas prices in the u.s. and pipeline exports rose by 6%, a record level. most likely natural gas demand will continue to grow, mainly in industry and power generation. but there's great potential to use it as a transportation fuel. natural gas exports from the u.s. to mexico through pipelines will continue to increase in the

years to come. we are expanding the national gas pipeline network with two main projects now under construction, which will bring natural gas from the u.s. to mexican territory. three more projects are scheduled to be in operation by 2015-2016. geography has placed the north american region with significant energy rezerserves. according to the latest bp energy outlook, north america will be the only region of the world that moves from being a net energy importer to a net exporter. so while china and europe become more dependent on energy imports, north america is becoming self-sufficient. by 2035, north america will be an oil exporter, accounting for 6% of global energy exports. by 2017 the region will become a net exporter of natural gas. north america has a necessary energy resources to fuel its

economic growth for a long time. and reliable and affordable energy will be a key component in ensuring a very competitive north american manufacturing base. at the end, this is the most important component of competitiveness looking towards the future. through energy reform, mexico will redefine its role in the energy sector while the u.s. is adjusting to a new reality as a potential exporter of oil and gas. increasing its energy efficiency, increasing its consumption and developing technology that has opened new frontiers of energy resources. this is an exciting time to discuss the future of mexico and the region. with our reinvigorated economic engagement with the united states, for the most, the bilateral relationship in terms of trade and investment and

shared production and integrated value for the last 20 years has been driven in automatic pilot. now we are now for the first time in many years addressing these from a public policy perspective and these can be transformational. initiatives launched at the north american leaders summit last february, engagement with latin america through the pacific alliance and with asia via the tpp, mexico is already significant in the world economy. energy reform is a critical part of boosting procesperity and alg with the reforms currently underway in mexico and the changes i just mentioned will be the basis for mexico to achieve more rapid and sustainable economic growth over the next few years and coming decades. i am looking forward to hearing your thoughts so i will just conclude by adding that i'm very optimistic about our region

opening a new chapter of our shared vision for this future. mexico has to address the energy reform in a very smart, intelligent way. thank you very much. [ applause ] >> well, let me add my welcome

to john hamrefor coming out and such a good crowd to welcome our visitors today. we're going to talk about the mexican oil and gas reform and we're very pleased that the energy and national security program to co-sponsor this event with america's program and headed by karl meech um. so for those who haven't met, i'm guy caruso, senior adviser to the energy national security program. and the mexican oil and gas reform has been something that i think has been in the works for a number of years and we're going to hear from three of the, i think, most knowledgeable i can think of to talk about that in the order in which we're going to go, we'll start with

jesus reyes, former secretary of energy, former director general of pemex, and now in the private sector. he's going to start and talk a bit about some of the basic elements of the oil and gas reform and he's been right there on the ground as this has developed. we'll start with him and follow by pedro haas. pedro has had extensive experience, first of all, with pemex as a member of the team that was part of the gas marketing, as i recall, back in the day. and then with the private sector and then he had a number of years in a senior position with

mackenzie and company. so he's very deep insights into how the private sector may respond to these reforms, and i think looking he'll talk about some of the reforms and how the private sector might react and what the implications might be. and finally ed morse, who is a senior -- head of commodity research at citi bank. and ed has been one of the most -- i think i would call it most optimistic analyst, most optimistic among those who looked at the north american energy scene and put it into the global context. i think ed may have been the first person who actually projected that north america

would be a net oil and gas exporter. and this was several years ago. so i'm sure we're going to hear even more about how these new mexican oil and gas reforms feed into that kind of analysis and his latest outlook for north america and its integration into global oil and gas markets. we talked a little bit earlier about, you know, how the unconventional oil and gas successes we have had in both u.s. and canada. certainly our part of this story and then now we're going to hear how the mexican oil and gas reform may fit into that north american picture and certainly we will -- we're going to hear about it from some of the most

knowledgeable people i can think of. we're going to start with jesus and then we'll follow right without delay to pedro and then ed. and then we'll have plenty of time for questions and answers from the audience. >> thank you very much. i would try to sort of lay the ground for the discussion that we will have later on. for some of you, some of the things i may present may be your knowledge, but it's basic for all of hem to know the essence of the reform and proceeded into the exchange of points of view. let me see if -- it's this one?

all right, first in terms of this causing energy issues in north america, really it was very difficult and many friends and i did discuss about this or tried to discuss about this for years. it was really basically an empty discussion. it was diplomatic discussion. there was an impossibility to further interaction in energy because interactions do exist and are very significant. any kind of policy for the future because mexico couldn't. it had no space to discuss in a more market oriented and more from a business perspective the

future of energy relationships in north america. however, the constitutional amendments passed by the president only last december are really a game changer in regard to that. now private investment would be allowed in mexico and it would be possible in the change and further in the electricity sector. and this opening of mexico after a long discussion since 1938, it happens when there is a revolution going on in the u.s. also in terms of energy with all the shale hydrocarbons and also when canada is sort of collecting some of the benefits of the consistent and steady

energy policy over the past decade, i would say. so there's a major change now in the north american scenario. now the mexican energy reform has a logic for itself, for the energy sector, but it is more than that. mexico's energy reform is essential for economic policy. mexico has been growing very slowly over the past 10, 15 years, and it's really a paradox or paradigm because you have a country where inflation is low. you have financial stability for so many years, but the country is not growing and this government knows very well that one of the critical factors is to increase investment in mexico both public and private and both

domestic and foreign. and for that to happen, obviously, the energy sector is critical. it is the energy sector who has the capacity to attract a lot of investment. and also for a higher growth to happen in mexico you need a more efficient energy sector because the rest of the economy. so both because it is essential to increase total investment and both because it has efficiency implications, the energy reform is essential for mexico and for the president's administration. now, what is the essence of the reform? it is a very deep and far-reaching reform. it basically it sounds simple, but it's a complete change

historically speaking. sometimes thought probably we could get some reform, but nobody really dream about this. this is really getting as far as possible. it's opening up to the extreme -- the sector. you will have private parties then concurring with the public sector. pemex will not disappear. that is not the purpose. the purpose is basically saying we want to maximize their resources allocated to the hydrocarbon sector. up to now that had been limited because mexico's framework, constitutional framework basically said only one agent will be responsible of exploiting the hydrocarbons in mexico and that agent is pemex. it was obvious -- even the

constitution went further because it was pemex who had the privilege, but you have to do it all by interests and it can do it in a very flexible way. completely flexible way that is really the -- one of the issues that the reform encompasses.

then these change is so radical that it will obviously shake up the pemex and it will transform it and make it really move much faster because now change is a matter of life or death with pemex. in the past it was impossible because the company was so big. the incentives for the cane and the people in the company to move in a different direction were limited. now in my view, there's a caveat in the reform and something i still don't understand why the government did not include that. and that is they kept pemexwithin the budget. some of us had really pushed forward saying one relatively easy and far-reaching change is

to take pemex out. the problem is not the government tape, but all the red tape and. presence of governmental agencies that intervene in day to day decisions within the company. and the government did not do that. i worked in the treasury for eight years some time back, and i know that the people in the mexican treasury are control freaks and they really have an against underscore that they are still the same way they have been for the past since they were born. the reform in my way, the critical issue is there's too much intervention in many of the decisions that should be have left to pemex by itself. the other thing is the reform also reaches the electricity sector. it allows the participation in

generation for third parts. the private sector is already the electricity sector. you have a lot of other activities done, but now you will basically the change allows private parties to get in contact as providers, suppliers of electricity, with the consumers, big consumers, what they call the qualified consumers, which is basically a matter of size. and they would also allow for other companies for the cfe which is a national utility to outsource several of the things that were limited. they had to do it by themselves. they will be able to do private sector will be able to finance, maintain, manage, operate and expanse transmission by means of contrast with the utility. it sounds like a minor change,

but it's a major change because you'll see a significant increase in the efficiency due to the possibility of relying on private parties. these basically gives you a notion of the speed, the base at which the reform will move forward. and i will not go over time here. the constitutional reform was enacted in december last year. pemex, the first was for pemex to request in what areas where pemex is already working or has intention to do so. they would like to stay. pemex did so last march. then the government sent 21 initiatives to congress to change 21 different laws. to change or even some new laws.

you have then in september the areas will be defined, which areas pemex will keep will be the state of the mexican state, and that will be september 17th. it's mandated in the constitution. and then you will have all the things moving like the creation of mexico's energy reform, but the important thing is that the constitution mandates that the national energy regulatory commission has to define the rules of regulations that will apply to the transportation and warehousing of fuels. those will have to be there for january of next year. so this is an area of a huge need of investments. there are many bottlenecks

because pemex was not allowed to invest in the past in expanding its network of fuel pipelines and facilities, so it's really, i would say, almost an emergency that has to be dealt with very quickly and a lot of investment opportunity will emerge for the private sector as part of that. there are other things -- other important changes will come along over the next few years. and you can even see december of 2025, and that is because it is for then that the domestic content of the energy projects will have to reach 25%, which is pemex was -- long-term relationships with a lot of suppliers because the way the

procurement of mexican public sector entities did not allow for pemex to establish a lot of long-term relationships with its suppliers and companies. now there is this 35% which will be defined -- will be enacted for 2025. it will be enacted gradually. so you have 12 reforms and 9 new laws. now in the very, very short-term, the first priority and that is to basically address mexico's gas deficit that increased very speedily since '08. since 2003 there are many u.s. -- there are many bottlenecks in the capacity for mexico to import from the u.s.

now that the u.s. is gradually becoming a net exporter. bef been importing gas from the u.s. for a long time. but this is the most urgent thing. it's going on because the gas sector was open in 1992 and the first investments were done in 1996, '97. so these are the pipelines that are being now under construction and this is where a lot of activities already going on. you can see on the eastern part of mexico, very important one, it's a big pipeline. it goes to the center. it's 850 kill meters and $3.2

billion project under construction. it's very important. and also in the center and in the west, the national utility is building all these pipelines that you can see there in the map. and there are six more coming up, will be announced over the next two weeks, let's say, in the next weeks, which will really create a network of gas pipelines in mexico because now it's not really a network. what it is is a couple of branches that come from the north, importing gas from the skp u.s. and to the center and to the north where the economic activity and industry is that mexico produces mostly in the southeastern part of the country. now this is a simple as

possible. the investment opportunities have emerge d in mexico with th reform. and you can see the complexity of the projects and the complexity is associated with the time it will take for these projects to be -- to materialize, that you can see that things are happening. and you have the amount of investment of the different projects. so you can see, for example, when we were talking about gas pipelines, it's already there. it's happening. it's not a matter of the future. they are expensive. pipelines are not unexpensive project, so you require that, but in mexico, there's no production of that. it will be possible for private par parties to produce that. the day after the legislation is -- the secondary legislation

is passed and it is expected to happen within the next -- within this month. so the day after that, immediately production will emerge. so i will give you the list in a minute, but you can see in the northeastern quadrant of the graph, you can see obviously 17 is up because it will take more time to see the things happening in terms of the resources. but things -- the purpose of this grass is really seeing what has been triggered with the constitutional reform is a process. it's a process that will show up nirs in some activities and in some other difts depending on their complexity and of the legal reforms themselves. you can see 16 heavy oil exploration and production in

shallow waters. it's further -- it's less expensive and it will be sooner. we didn't put the year in each of those, but you could basically think that each of those panels respond to about a year. it's not exact. but you can see let's say one, two, three, the fourth in the southwest panel. what do they mean? it's here. this is the codes of this. so you can see gas pipelines and you'll see fuel stations until 2017. people think it's too far away. a lot of of congressman want to shorten that period. they already have -- it's quite

clear they have reached an agreement on that and will do it earlier than what was the original proposal of the government. oil pipelines starting in january of 2015 of next year and so you can see step by step when that will occur. it's probably easier to see here. you can see how the reform will evolve and you see january 2015 as a critical date because fuels will be opened up. oil pipelines for logistic terminals and then gas production in 2015 also next year in a new regime next year and so you move along over time

and you can see in january 2018, domestic marketing of hydrocarbons. nobody understands very well why the government proposed it to be so far away towards the end of its administration. it ends up in 2018. so this is being amended by the congress to make sooner rather than later. and then if you move to the left, you can see shale gas production, and heavy oil in shallow waters in 2017. it would be feasible as long as the government doesn't leave that for pemex. and this is what ground zero looks like. what is what pemex requested from the government to keep in terms of exploration of production. you can see it in the top in term os of the research.

what pemex has in blue and what the state will be able to in third parties. 29%, 17% and so on. it's more important in terms of the lower -- the total of those is both. in terms of prospective resources, pemex requested 31%. we don't know if they are going to be granted that or less than that. you want this, but you are not going to keep it. and in prospective resources you have 69% for the state that will be able to actually be contracted with private parties. and in terms of the type of --

let me go to the type of field, you can see the research and the prospective resources that each of those are. the most important one are obviously in shallow waters. deep waters is not bad. that's what is known. and you can see that in terms of on shore, you basically the prospective resources that will be available for the state to grant to private companies is our equivalent to 82% of the noun research. so i'll stop here and then let's see how the conversation evolves. thank you for your attention. >> pedro, thank you very much. i neglected to mention in my introduction that about a year

ago you left mackenzie to join hetco and you're advisory services in new york. >> thank you very much. i'm going to start out by doing something shocking for somebody who spent 14 years at mackenzie and that is that i'm not going to speak off slides. i'm not going to present any slides. so i apologize to my mackenzie educators who spent a lot of time teaching me how to draw slides. i'm not going to use it. i think jesus gave us a very complete, comprehensive overview. i'd like to -- of the mexican energy reform. i'd like to talk very quickly about a few points, and then please stop me if i'm spending too much time.

one is that the energy reform has been , to a large extent, yu know, public attention in mexico and even political attention has been focused on the e and p part of the mexican energy reform. it's entirely natural because it's the most politically contentious part of the reform. it's the part that really required more than any other review of the constitution and that has still to this day gets the juices flowing when you have discussions, political discussions and discussions between analysts. however, the energy reform is quite comprehensive. it spans the entire energy sector. and there is a very interesting symmetry between the attention

that has been spent on exploration and production. i don't want to you to understand by this that the side of this is not difficult, but the rest of the reform is enormously difficult. it has a very large scope. so when you think about domestic fuels, residential fuels like lpg or consumer fuels like gasoline and diesel, you think about the midstream and infrastructu infrastructure. you think about residential power sales and distribution networ networks. all of those things are going to require a very significant overhaul and the creation of that entire regulatory, legal

regulatory and con strak chul fra framework is difficult to fathom. again, i'm not belittling the importance of that side, but just from an execution complexity, the nonenp side is pretty vague. the other issue i'd like to focus on, i think the ambassador mention mentioned it and i think we all agree with him, that the reform is going to happen. yes, it's been slipping by months or weeks and we were told that it was going to be ready at the end of last year and then it slipped into this year and then we were told it was going to be done in june and july and now it's end of july, perhaps the first few days of august. but it's going to happen. i don't think anybody has any doubts about that. the question is the amount of work that remains to be done in

terms o of once the legislation is passed. after that we have to get the regulatory framework in place and we have to get contracts in place. and more importantly than just getting these things done, there's got to be a continuum between the constitutional reform, the secondary legislation, the regulation and the contracts, all of that has to hang together in a way that, you know, kind of makes sense. the fundamental dilemma that i think the government and the regulators are going to find themselves trying to solve once the secondary legislation is passed because i think we're at the point where whatever is going to be -- if you leave the

secondary legislation excessively open and you rely to a large extent on the regulation, which the government can pass without having to go to congress, you are putting a lot of weight on the authority of individual civil servants to take responsibility for decisions. it's going to be hard for them to kind of say, i'm just, you know, executing what the legislation has said. on the other hand, if you create a legislative structure that is excessively detailed, then you know you're not going to get it right because nobody ever does. you're going to have to make revisions. so you don't want to have to go to congress for that. so there's a practicality and a

practicality issue that where you have different -- you have tensions between different kinds of desirable outcomes and it's a difficult balance to find. so this is going to take -- i'm not saying it's not going to be sorted out, but i think it's going to take weeks and months to get this just right. and i know for a fact that even though we have heard that all of those texts are ready, in fact, they are not. thank god they are not because i think they deserve a lot of attention. the other point i want to make is about operating challenges. pemex, and i'm going to focus on pemex because i spent 14 years so it's what i know so i

apologize for not talking about much or not at all about the cfe, but pemex is a self-contained animal, and it's had operating legal regulatory discretionalty. and so it can operate, you know, the assets and it can make decisions to make whatever needs to happen, happen. let me give you an example. if you are producing offshore and you have several assets producing different kinds of crude offshore and you have a pipeline system that is gathering that production and transporting it to shore, whether you shut one pipeline down or open up the valves on one particular field more to compensate for the other that has to go into scheduled

maintenance, all of that can happen instantly and pemex makes it happen to make the production reach 2.5 million barrels a day, which is what it's doing today. the problem is if you take those pipelines and you turn them into open access common carrier pipelines, now you have different producers, you know, that are connecting themselves to those pipelines possibly and then pemex cannot just decide overnight that i have to shut this pipeline down because i need to do unscheduled maintenance on that. all of a sudden that has production consequences on other players. take that example and multiply it across the entire pemex system. they are going to have to transition from a monopoly situation to a situation that is

rule drichb driven. it's not only because it will be competing, but because the authorities, particularly the cna, the two regulatory bodies, are going to create a series of rules. you're not going to be able to have a system where these two regulatory bodies are credible in front of private sector investors when they are able to enforce the rules in front of, you know, enforce the rules for private sector investors and not for pemex. so this is going to create a lot of issues. let me just show an example of this. right now we have an issue, and i have some numbers that i can share as an example. pemex has a plan this year, it's the operating plan, to produce 2.5 million barrels a day. along this production, and i'm not -- these are public figures, i'm not talking about secret

figures of any kind. if you compare production with distribution and distribution means refining plus export, you have differences of anywhere between 100 and 150,000 barrels a day. and that is water. and it's water that comes from the water in several areas of production. in the month of may, that number has reached about 260,000 bathrooms a day. there is a -- it's a net number of about 150,000. and the difference is any significant amount of production that has not been able to be processed either through separation or tankage and has

had to be injected into the salt domes and so that crude is going to be -- the water is going to be eventually -- the water cut is increasing, so i have no idea whether this is a trend that's going to rise or whether it's going to stabilize, but 150,000 barrels a day of water declared as crude is a lot. and apparently pemex is paying taxes on the 150,000 barrels a day of water because it wants to do this in order to consider it crude oil production because it wants to be able to report that it reaches the 2.5 million barrels a day. now this is a number that cannot continue like this. at some point, the government is going to have to recognize that this is water and not crude and

it's going to have to climb down from that number, which is, as i said already, there in the statistics if you care to dig a little bit. so, you know, this in the futur talking about farmout, for example, with psas, if they go ahead with some of these farmouts and some of the lacelines prove not to be correct then the private sector investor is going to litigate because, obviously, the original

data are not correct. so anyway, there's a big issue. all i want to say in this respect is that shifting from a state monopoly to a market solution is a very complex endeavor and the man syria transition in addition to the regulatory transition, the managerial transition is very difficult. and remember some of these issues as was mentioned, the like the budget issue have not been changed and particularly importantly the -- the labor relation ship between pamex and its union has not been changed so i fail to visualize how this transition to a more efficient market driven company is going

to happen i was also asked to mention how the energy reform was visualized by the private sector. let me talk about one thing first which is how it's visualized by the mexican public opinion one key issue is that i think in general the public is not very keen on the energy reform and it's not that it doesn't see the need to modernize pemex, i think the pub slick not stupid and it recognizes that these companies need to improve i think the key problem is that there is a fear of corruption and there is a fear of ineptitude in the management of this transition

and there's a sense that whatever improvement is going to happen is not going to mean anything for me as a citizen. those are the big issues that the government has. this is really important because in my mind the test of the success of the reform is not whether it brings go zillions of dollars flowing into mexico. in fact i disagree with the government vision that this is the thing that is going to bring -- that is going to put the economy into a higher gear but i think the key issue is the durability of the reform and the durability means two things -- first of all, credibility with private sector investors over the long run and secondly legitimacy in the eyes of the

mexican people. and achieving that balance over a long period of time that is what is really complicated. and that's what's, you know, tough to achieve now, the second part of the impact is with private sector investors and there i think you're going to see a wide variety of attitudes. i think deep water offshore companies are pretty comfortable in the sense that they don't have to deal with any of the insecurities on shore. they can -- they understand more or less the geology that goes -- because it's not too distant. particularly at some parts around perdido, et cetera, it's not too december answer the from what they're already looking at on the other side of the border. and so i think the problem there is the actual drafting, the detail of the legislation and

the potential, the long-term potential that these companies can see there. and i think there you're going to have i would guess that unless the regulators -- the regulation and the contractual arrangements are suicidal, i think you're going to see a lot of interest. i think in unconventionals it's going to be very -- it's going to be complicated and depend very much on a company-to-company basis. to me the biggest danger there is that the regulatory -- it's aggression's law kind of problem. it's a situation where the good operators stay away and the not-so-good operators essentially manage the regulatory complexity, the security complexity, the water issues, et cetera. one of the big problems that we

had in previous deregulation like the gas deregulation is the mexican government never really managed to coordinate the federal, the state, and the local level so i can see a situation where you have your federal permit, you've earned your acreage, you show up with a drill rig and the state authorities or the local authorities prevent you from going. and that's a big issue that is going to have to be addressed at some point. there are some mechanisms to do it but i think it's got to be addressed in greater detail. i think the private sector -- there's a little bit of -- and i'll finish on this point. there's a bit of a disconnect. i think there's a disappointment on the part of some people in the mexican government because they feel that they would have

expected a bit more enthusiasm from the private sector and the private sector is now in a wait-and-see attitude. the problem is that if you're the head of business development or exploration for one of these companies, whether small, medium, or large, you have to propose to your investment committee or your executive committee or your board a project that is quantified and that is risk adjusted to the umpteenth level of detail and that level of detail today is not known. so there are people who think that it's going to get done quickly. there's some people who think it's going to take much longer, maybe two or three years to get there. there are some people who are going to be first off the starting line and there are some people who are going to wait to see how it evolves. so i think it's, you know, the

timing is more or less the one that jesus described, but i think the actual implementation and details and translation into investment opportunities and decisions is going to be -- is still to be defined. >> thank you, pedro. [ applause ] >> thank you very much. it's an honor and privilege to be here again with you and thanks for the invitation. i was asked to address the implications for global markets, what might be unfolding in mexico and what's unfolding north of mexico and other parts of north america. and let me first note that so far the unconventional revolution in the u.s. and canada has not been kind to

mexico. it's not as though the u.s. is intentionally or not following a good neighbor policy. it's been a pretty bad neighbor policy in terms of making the gulf of mexico market in the united states extremely competitive and less rewarding financially for pemex and the mexican government where if they were there were a big open global system it could process mexican crude undoubtedly the net back to mexico would be higher if not substantially higher than is currently received on the u.s. government/mexico coast. i will talk about this as i go through the story there. the other thing i might note in terms of timing, and it's the only subject that i plan to raise outside of the implications for the global markets is that timing is pretty exquisite in terms of the potential opening of mexico to foreign invest ment if you are

big international company or more modest sized international company and you're looking far place to invest where there are opportunities for a large-scale reward. they are canada, the united states, the others are russia, iraq, and iran and that doesn't leave much room. so i think given the light of geopolitics recently that companies will find mexico with all of the difficulties of defining on a risk adjustment basis. the opportunities will be moving toward the acceptance of risk for potential reward just in terms of where else one can go. mexican supply is the third leg of a north american energy revolution. i think we can debate and we have to make assumptions on that debate about where mexican output can go, what's used -- kind of government general numbers, an increase in production of a half million

barrels a day by the tomb of president pena's end of term and then maybe a million dollars a day by 2025. so that's a conservative number in terms of the resource base and in terms of what might be possible. just looking across the divide where technically recoverable resources on the mexican side exceed those on the u.s. side and the eagleford would not take much if this were the united states to get on shore conventional -- non-conventional production up to a half million barrels a day let alone whatever might be happening on the conventional side. canadian production is likely to continue. these quasi-official numbers based on the cap. so current production in canada is roughly three and a half million barrels a day. and we can kind of readily project five million barrels a day adjusted for where the price of oil may be but there's going

to be an uplift as canadian oil reaches water borne markets in terms of the net back price to the well head, even if global prices falter. so in addition to the say, half a million or 700,000 barrels a day by 2020 for mexico there's another million and a half for from canada and on the u.s. supply our own view is that there's going to be around 4.3 million barrels a day, more production by 2020 in comparison to the end of last year. three and a half million of that is on shore. 800,000 offshore, mostly deep water. and in addition to that some two million barrels a day in natural gas liquids. so if you add all of those things up we see u.s. production having risen to a total of over 12.5 million barrels a day, maybe close to 19 million barrels a day actually if you add all of these things together

in terms of increments including ngl liquid. so this is a robust, probably the fastest-growing sustainable area of production growth in the world and it's north american. i actually is used these slides in this room before. we just on the u.s. side see the net balance going positive on the u.s. net oil side before the end of the decade. if you take into account where oil demand is going so we see the oil and gas parade balance combined becoming net positive by twen2020. i know guy talked about north american self-sufficiency as did jesus a little bit but i think the real issue is the atlantic basin versus the rest of the world because the atlantic basin is already a self-sufficient environment. that's a result of decline in

european refinery requirements and the growth of north american production, gret of western hemisphere production in general. any growth from now on is going to make the atlantic basin if you look at the supply/demand balances in the atlantic basin and that mean there is a lot of crude oil coming into the atlantic basin that is kind of trapped there. i'll talk about it very quickly. the atlantic basin focrude defit really is fading so fast that it's likely to end by the end of this year. the u.s. has pushed out almost completely imports from africa. we are pushing out imports from the middle east but the problem is not by enough because imports from the middle east still are

well above a million four hundred thousand barrels a day and by the time we get to the end of this year and have pipeline capacity to bring canadian crude to the u.s. gulf coast, that reliance on crude from outside of the atlantic basin is going to fade substantially. we can talk about u.s. export restraints loosening to the degree there is a loosening of u.s. export constraints. it will feed into a growing surplus in the atlantic basin and i've also used part of this slide in this room before indicating in our own view that under the current regime for oil exports the u.s. if not by the end of this year, certainly by this time next year without any change in policy will be exporting probably over a million barrels a day of crude oil and we'll see canadian crude coming into the u.s. through increased pipeline capacity in

the mid-continent of the u.s., bringing crude to the u.s. gulf coast where it will compete with crude oil from saudi arabia, kuwait, venezuela, colombia, mexico and iraq which practically sees no crude oil imports. already mexican crude oil exports to the u.s. is falling even more than production is falling because there's not enough room in the u.s. gulf refining system to refine all of the crude oil coming from mexico. we're seeing diversion of crude to europe and to the pacific basin where, again, the pipeline at salinas cruz has been exporting into the pacific basin, including the u.s. west coast and growing in numbers. the real place where crude oil exports are needed from the

americas is really asia where the deficit is currently around 21 million barrels a day is going to grow to probably 24 million barrels a day by the end of this decade if not more. and mexico is no exception, looking increasingly to asia and europe one of the other places that one can find incremental north american crude going into the pacific basin is from canada but pipeline politics in canada are very difficult and it looks as though we'll see significant amounts of crude oil from alberta moving east to the atlantic basin by pipe and rail an south to the gulf of mexico by pipe and rail and not taking advantage of the higher net facts that can be realized in the pacific basin. so mexican crude may be the only north american crude to take

advantage of that. but here's the summary of what i would say by 2020 the three north american producers could see combined incremental growth of liquids. 8.3 million barrels a day. the bulk of that coming out of the u.s. combined with new exports out of krg from iraq and from central asia the already crowded med is going to become more crowded. the self-sufficient north atlantic and south atlantic basin are going to become surplus. oil will want to get out of this area toward other countries. the problem is worsened by the fact that some of the exporters to the western hemisphere, saudi arabia and kuwait have their exports relatively sticky on the saud di side because they don't want to lose market share and a big market b and rely on east

asia and south asia for market growth and kuwait because they believe that exporting 330,000 a day to the u.s. gulf coast market no matter how remunerative it may be helps keep 15,000 u.s. troop there is. so there's a sticking amount of oil that won't leave the atlantic basin making it more difficult for the crude produce in both mexico and canada to achieve a fair market value in a global marketplace and even though canadian crude is likely to have the highest net backs it might have by exporting through the pacific that's not likely to be the case. any liberalization of u.s. crude oil exports is going to even make the atlantic basin market more crowded. so the challenge for mexico today exacerbated by growth of 500,000 a day maybe by 2018, 700

or 800 by 2020 and a minimum of a million by 2025 is where to maximize value, where to optimize the maximization of value of that crude oil and it looks like that won't be easy. anyway, thanks for the opportunity to share this little addendum to the other remarks [ applause ] >> well, thanks to all three of our speakers for a comprehensive overview of the reform by jesus and i think a very sobering realistic view of the challenges from -- faced by the implementation that pedro outlined and then ed's view of how these might affect the global market and i -- one thing i can say about ed is i look at

those numbers and i say it looks like it's going to be a challenge to get those into the market without causing downward pressure on price but when you think about all the uncertainties we're now facing, even though 2020 is still a ways out with uncertainty in iraq, iran, nigeria, et cetera i think -- i'm glad that we do have these potential new sources of supply because we're probably going need them. and with that i know we're getting tight on time so i want to go right to q&a so please identify yourself and your affiliation and keep your questions as concise as possible and i appreciate it. >> hi, i'm dr. donna wells, an expert in the russian language internet but i also happen to be a native texan. we're reading about mass graves

and heads on pikes down there. should private investors be concerned about cartel violence or possible growth in political power of the cartels? thank you. >> you're a cartel expert. >> i certainly -- i -- no, i think that there are parts of mexico where you will have to contend with these issues and some of the companies present there, halliburton, baker hughes, already are. i was told recently that control risk that manages the security risk frates northern mexico along -- on the same level as southern iraq. although that was before the situation we have right now in iraq.

so -- but i do think there's some issues that the companies are facing. when you talk to some of the players they tell you, well, you know, yemen, i'm in nigeria, i think i can deal with northern mexico. so it's not that they disregard the security issues but it's that oil companies are pretty hearty lot and some of them -- not all of them, interest. >> i -- i mean, if you're an operator in south texas or west texas and you're going to mexico for the first time ever it's going to be a little bit of an issue and you're going to need to find crews that are willing to go to mexico, et cetera, which you might not. on the other hand, if you're -- let's say an oxy, for example, i mean, oxyis in pretty rough places. so are they going to feel

comfortable there? not comfortable, but do they think they can manage it, i think they can. there's another dimension which everybody focuses on the security issue i think there's also big issues in terms of community relations. and this is a big issue that happened when we were talking about the gas reform because pemex has ways of dealing with this that are not necessarily open to the private sector. and in areas, for example, on shore in the south of mexico and tabasco, chiapas, you have a lot of community relations issues. i understand that there's one particular service contract that is operated by schlumberger where they haven't been able to operate the first day. they haven't been able to go in at all. so those are issues that are going to have to be dealt with, no doubt. >> maybe we could take a couple

questions starting with here and then any over on this side and that would be second. >> steven donahoe. i'd like to pick up on something that mr. haas said and ask dr. reyes a question based on his experience as the director general of pemex. given that you have an entrenched bureaucracy in pemex that's used to doing things in a certain way and that now the rules are changing, it takes away a will the of that authority and power and ability to act as a monopoly and also in cfe, how do you think that transition is going to go and how long is it going to take before you reset the mind-set of these people that reason used to running things for so long? and what's the impact of that on retention of these mid-and senior level executives in those institutions? >> thank you and next question and then we'll answer them both. >> i'm the inter-american development bank.

i was just wondering, i didn't hear much about environmental assessment impacts. i noted in several other jurisdictions that you move one reform ahead but you also need all the environmental approvals to be able to move several projects ahead. how do you see that working out together with the community approval and so on for several of the projects? >> jesus, maybe you can answer that question about pemex and then whoever -- >> well, i think that pemex cannot be changed from within. i mean, i probably am living proof of that, no? so it needed a major shakeup and it had to come from outside. this does the trick, obviously, these reforms, because it really puts pemex in competition in

every aspect of the whole chain. now, the big issue is -- i think from within pemex, if you sort of -- obviously the top management, the top, top management is convince to have had reform and they are working for it. the issue is how successful they will be to implement the changes within the company so that pemex is able the cope with competition and at the same time by doing so allowing a significant and rapid expansion of the private sector in mexico. actually, a lot of companies really want to go to mexico partnering, but to -- i mean, you -- there are some -- there might raise -- arise some questions within the capacity to

be a good partner. so -- which in turn has to do with the regulations and with the treasury and the way the treasury is going to treat pemex. i think that the critical issue is that within pemex some of the most important layers of teches, the guys who are in the field, the supervisors, they accept the notion of eliminating the exclusivity of pemex. there was a very important discussion about this in relation with the reform of 2008. informs 2008 when the taboo of discussing these issues was eliminated. i mean, in 2006 when i entered into there it was a prohibition to actually talk about the opening of pemex or the opening of the sector. this is only six years ago.

it's a completely different ball game now and everybody's discussing that, every political party includes this topic in their agenda and so on. soy think my perception is this -- this layer of executives to accept the fact that the exclusivity had to go and that pemex had to compete with other companies. but -- and this is a very important but -- but in a level playing field. and it's there where the fact that they took pemex out of the budget and the -- i will say excessive intrusion of the treasury in many of the decisions of pemex creates a problem. because some of those middle layers and high layers are completely unhappy with that. okay, you want and we want pemex

to compete, let us compete. but do not put us in an unlevel playing field. if you're really making an assessment, it seems that the big loser of the reform as it is is pemex. paradoxically. because one would say that within the mind of the government strategically thinking they need to understand that they need pemex to be the dominant company for quite some time, some years, for the country and the sector to keep moving ahead. there is -- the other thing is impossible to imagine from day one to day two and the monopolies is gone and everything is dobey somebody else. so -- and that is not -- in my mind is not clear that they really get it. it's a complicated thing and they have to put a lot of attention to that so as not to become an impediment of the

reform. there are other aspects, the taxing aspects and other things but i leave it here. >> and answering annette's question, is the environmental protection regulations, are they part of this secondary legislation or different? >> well, actually constitutional reform did include the creation of a commission on a security issue -- not security, safety, labor safety issues and environmental aspects in the energy industry. it will become a new agency and the -- i would say pemex has made a lot of strides over the past years so i have no concern with that. actually, if you see the records of pemex compared to other international oil companies, pemex does very well. the issue is the environmental, and the environmental has to

do -- i'm not very concerned about current operations of pemex in regard to the environmental impact. there are some, as every company in the world has. but if you see the standards with which pemex operates currently, they're relatively high standards. the question has to do more with the issue of shell operations. how will all the discussion that is really going on in the u.s. and in other corners of the world in regard to shale permeate and be dealt with in mexico by the agency and by public opinion and by the government. that, i think, is a critical issue. now, there is an important difference. if you saw the map that they actually presented here, it's very interesting that some of the areas where there's potential for shale operations in mexico are on the coastal

areas. and this makes a big difference in regard to the issue of water because there are some in the -- not just bordering with the u.s. and very north, it's a dry area, but as soon as you move a little bit further south especially in veracruz there's a lot of water. it's a completely different thing. now, we are not going to pollute the water. the issue is what techniques to use to return the water in the same conditions that they were taken from nature. and that will -- the good thing is that there's a lot of ways that have been already -- a progress that has been made here and in the u.s. with technologies and with the know hows of how to do that. that mexico will benefit just by sort of receiving the know how with the investors that will be interested in doing