application. what's taking so long? >> well, it's a subject that i can't comment on. >> okay. how about if i try airport fees? the -- there's a proposal to increase the cap on as the jer pa silt charges and there are disputes about whether that should go up. the airlines do not like the idea of raising those fees. what are the prospects of raising that cap this year as the president has proposed? >> you know, i think our aviation sector is one that's undergoing rapid change. it's been consolidation activity in the industry itself among commercial carriers. we are very bullish on the work that is involved in next gen and bringing our airspace from world war ii radar technology to 21st

century gps technology. we think it will make the airspace more efficient and create more capacity and make the airspace cleaner that way. so what's interesting is that over the next year hopefully, once we get over this issue with the highway trust fund, the next big issue in transportation is going to be an faa reauthorization bill. and i think there are some issues in aviation that are on the table now about how we structure and how we finance and how we set the aviation sector up to compete in the 21st century economy that we'll have a chance to work with industry and work with other stakeholders to help resolve. but i think that's going to -- that period of time is going to allow all these issues to be laid bare in a much different dynamic and just in the budget season and i'm looking forward to having those conversations. but i will say welcome i think

that conversation has to be more complicated if we're still trying to deal with highways and transit next year. we need to get this done now so that we can clear the space to be able to focus on aviation. >> reuters? >> on the ge, i was surprised to hear you say that automakers are in a better position to know about their cars than the federal government. >> i didn't say that unqualified. moye point was is that sometimes in some cases, they're in a better position to have access to information that would be material to even our evaluation. that's why we have a timeliness review but not a blanket matter, no. >> my question is, give even the crisis nature of the gm recall is there any sense that testify administration that this does require a more robust response from the government to be pro active with automakers when these kinds of safety issue surn

fatalities and the risk to the automake errs integrity itself? >> you take this situation and this there was data that was reviewed by nitsa and as i've said before, had there been anecdotal information provided to nitsa, that gm had the kind of concerns we now know they had, that were being rush add side internally, that would have been material to the review that we were making. so sometimes it's a combination of, like, data and anecdotal information that creates conditions for them to step up activity on something. now, as i've said, we're going to go back and look at ourselves in this. it's not just external folks looking at us. we're going to be looking at ourselves and figuring out whether there's something more we can do.

after toyota, one of the things that happened was that we work with ibm to implement a system that actually analyzes the data much more rigorously than it had at any point before. to help us issue spot and predict issues before they emerge. and that's been very successful for nitsa so i think this is an instance where nitsa wasn't looking at this. i think this was an issue of they didn't have all the information that would have been material to its review. >> on the highway trust fund, you know, the gas tax, politically, touchy subject. is the issue of raising the gas tax something that we could only expect to have discussed after the mid term elections our does it have to wait until after a

presidential election? >> you know, let me put hit the way. in some sense, what you're asking is a political question. we've decided that this issue is one that's important enough to put legislation in place and we talked about the use of business tax reform as a way to pay for the building we put fort and the reason we talk progrowth business tax reform is because based on conversations we've had i've had plenty of them with republicans and democrats on the house and senate side. many of them don't want to raise rates and many of them don't want to increase deficits and this is a way to help us accomplish substantially more

investment and transportation without running against those two principals. if congress comes up with this, another form laces is that we'll listen to what they have to say but they have to speak with one voice. the senate has had a lot more public discussion about this. i have concerned that we haven't heard as much from the house although i know folks were thinking about this and working on it. this cliff is coming. i've been saying it for six months and i'm worried we may find ourselves running over it. >> jeff? bloomberg? >> yeah. sure. over the weekend, there was a truck crash in delaware where the driver temperature asleep.

this crash didn't get a lot of attention but it comes a couple of weeks after a crash in which celebrity tracy more zban wgan injured and that's gotten a lot of attention. there's about 4,000 truck fatalities a year. in this act, the administration put in one very specific provision that is designed to change the way truck drivers are paid and including additions to their normal pay of being paid by the mile. they would get paid for time when they're at the loading doc waiting for their loads. so i wondered if you could talk a little bit about how big a priority for the administration to kind of change this economic system that we have where it seems like a design that we have a lot of drivers out there on

the road that are working really long hours and fatigue has been shown to be a factor in a number of fatal crashes. >> that's an important question because when you're talking about trucks or airplanes or rail, we saw in metro north up in the new york area, tired driving is bad driving. it's a risk not only to the driver and him or herself but also, to other folks that are on the roadway or the railway or the airspace. and there's discussion in the senate about relaxing some of our hours or service requirements that are designed to prevent drivers from and

we've got to relax these rules that are promulgated to protect the traveling public but this is a real issue. 57d it's an issue that's particularly challenging in the trucking industry where the economics are but make no mistake. our job is safety. that's what we're here to do. that's the central mission of our agency. s and even if the economics prove more challenging. >> let me do a time check.

we're about 9:28. we'll go back to matt wall, mark shields, lynn sweet, sam stein, keith lang, paul bedard, david harrison and martin becarro. >> gm has not recalled any cars yet? >> that's right. if they didn't spot the cobalt problem because gm didn't turn over everything they knew what rewith going to do so we don't have to count on companies that have bad management and bad culture and internal problems? when are we going to rely on government instead to have a good shot at spotting these problems before they go years and year and kill a bunch of people? are we going top analyze accident better? what are we going to do? >> you know, wait a second. we actually, over the last ten years, nitsa has recalled more than 1200 vehicles.

i'm sorry -- issued over 1200 recalls affecting 95 million vehicles. and that doesn't even count the latest round of recalls that have occurred. so that 100% of the time they're responding to a timeliness warning from a car company and going back and trying to look at the data to figure out whether a recall is happening. it happens all over the map. sometimes we issue spot before afternoon automaker has identified the problem. that happens. that's why i've asked them to look at the circumstances of this incident so see if there are other protocols that will

help us handle the next problem. in a sense, you know, the loss of life here is highly, highly regrettable. highly -- you know, our thoughts and prayers are with all the families that have been affected by these situations. but you talk about recalls, i'd rather have a recall that allows to us get something corrected than to have a sleeping problem that nobody knows about and that's -- we're working hard to make that happen every day. they have these condition issues and the latest recall has reports of three deaths. are they going to formally look at these recalls to see if gm didn't meet the five-did

requirement to report them in a timely fashion? as a standard practice we'll take a look at the recall. >> there's always a sort of decision point as to whether this stems from the same nucleus of fact as the previous ones. that determination will have to be made by them but we'll obviously be taking a very careful look and i'll also point out that in our work with gm in a resolution to the initial problem we've been able to extract from gm unprecedented commitments to fix things going forward so we're going to keep putting the screws on this until it gets rite. >> do you know that the chrysler vehicles for ignition problems, how big a concern across the industry, is it that ignition keys are moving out of position and do you think there are other auto companies that have similar problems? >> we're taking a look and where we see problems we'll address them but it remainings to be seen. it's something we're definitely taking a look at as you point

out. >> mark? >> mr. secretary, any roster of great governors of the 20th century, jim hunt would be on it. the democrats were noncompetitive between 1976 and 2008 in the tar heel state at the time presidential level between jimmy carter and barack obama. great breakthrough in 2008. obama and hagan and the state has turned hard deep right? what happened? what went wrong that north carolina, virginia is all of the sudden a lot more purple if not red than is north carolina. what happened? >> well, i think several things. there may have been -- we may have been a little more optimistic of the 2008 elections about a turning of the corner.

and i also think that redistricting played a very heavy role 2010 for the first time in more than 100 years, north carolina did not have a state or a state house or senate that was democratic controlled. and that resulted in you know, gerrymandering the state house and state senate and u.s. congressional districts. i will point out that the president subsequent to that, in his re-election campaign, lost north carolina by less than 100,000 votes. and that's one of the reasons why i still think north carolina in its essence, is still the state everyone thought it was before. but it's going to take another

tie d tidal wave to that and we'll see what happens in the future and there's some great folks down there who i think will be running for things in the future. >> are you confident that hkay will get re-elected? >> back in september, there was a fee imposed on freight going through cities to make up for the hazardous waste that they carry at the time you were on the fence on it. have you moved toward accepting or rejecting it at this stage? what's the latest that mayor emanuel wants from you? and if you have a moment or two left, what was the best advice that hood gave you when he turned over the shop to you?

>> well, okay rahm wants a lot of things from me. i'm sorry, bhooimayor emanuel. and but on the issue of fee for wh hazardous materials moving through communities i think that's something that should probably be looked at. our "grow america act" takes a position that there's more that we need to know. there's more we need to know about the material itself. there's more we need to know about the various pieces of the safety ecosystem that need to happen. we obviously have some work going on with the rulemaking. but one of the things we found with the situation with the crude is that we have several different agencies with equities, even within d.o.t. and

sometimes, you need resources to do field testing and the agency that's right on the front line has a very small but sweat for testing. so then you have to go to fra and try to figure out whether they have resources. so we've asked for about a $40 million flexible fund to give us the ability to be nimble right now to develop a plan over two years. to dramatically increase our efforts on the safety front there. as we're still working on our rulemaking and as we've taken more than two dozen steps to this point to try to increase safety. your last question was -- >> it's running late so i wanted to -- it seemslike you don't have an opinion on whether or not -- >> i think -- no. i wouldn't say that. i think it's something that needs to be explored but in terms of things that the sequence of what we need to do right now, we need to, lying, push this rulemaking and try to get that done. we need to have the resources

and agency to articulate an even broader set of steps we need to take place with this stuff. and those steps may include a fee. that's something that i would like to look at because i think it sounds lying a good idea but it's something i'd like to take a look at. >> what about the -- >> you know, it evolved. >> sam stein from the huffington post? >> just to nail down a few specifics on the trust fund. can you give us a specific date that you are anticipating the trust fund will actually hit zero as opposed to the general august timeframe? >> so this is something that changes daily. remember, the way the trust fund works is it works on a reimbursement basis sis. we can tell you -- sylvia -- >> the end of august.

we'll go over the $4 billion threshold in the beginning of august. august 1st is what's in the letter that went out today. the balance is projected based on current aassumptions the ends of august, beginning of september. >> when you get -- we historically have marked it down around the $4 billion mark. because that's basically the kind of cash cushion you need to meet the obligations of the states. so at the beginning of august we're going to run below the $4 billion mark. and by the end of august we'll be at zero. >> and with respect to the -- just to clarify. you said $60 billion shortfall over four years? >> four years. >> with respect to the gas tax. you spoke about how you haven't basically, seen a proposal that you could really weigh in on. but there's a baerps bill now in the senate from as your aware

of, from kris murphy been by corporate to raise the gas tax. the chamber of commerce wachblts to raise the gas task. there are democrats that wanted to raise if gas tax. ray la hood wants to raise the gas tax. why is the administration drag its feet so much on something that so many people support and think is a logical collusion to this? >> we said if congress acts on something, we'll keep an opened mind. that's been my position all along. the reason why we've propose had with we proposed is because we heard from members of congress that they don't want to raise rates which the gas tax increase would require. >> but they're proposing. >> there's not been a vote on that. >> so you're only going to comment on it after it gets a vote? >> wooir opened to what congress has to say did you we have a proposal we'd like to see a vote on, too. >> you're not ruling it out? >> i've said that many times. >> i wanted to ask about the

trains. it's almost a year now since the accident. and you've got this very important rulemaking going on. there's a lot of economic interests that are very interested in that rulemaking. very concerned about how it's going to affect them and what's it's going to cost them. on the other hand, you have all these areas of the country where these trains go through. albany, chicago, up in seattle area. they are very concerned about their safety. what kind of guarantee can you give the people in those communities that are worried about their safety that you're not going to water down safety in this rulemaking to satisfy these big economic interests? >> well, as i said before, we've taken more than two dozen measures, very few of which have been very popular with the industry. and we've done that because our northstar is safety. you know, our work on -- our

work on a rule is a work that's organized around what's the safest approach to the movement of this crude oil, particularly given the volumes in which it is moving around the country. we have these unit trains that are stacking with in some cases, 100 or more trains together and that's a different caliber of problem than we've seen in the past. so if that's the way it's going to be, what is the right way to structure our rule to make it as safe as possible? there's a lot of variables. there's the art itself. as we said for many months there's also speed. there's also with you know, track quality and there's also any number of things. we want to strike the right balance. but the balance we're trying to strike is the balance around safety and that's going to continue to be our gravament.

>> mr. lang? >> you mentioned that you're moving to a system of -- is there a contingency plaintiff after the september 30th deadline that's kind of lost in the shuffle if it's not reauthorized? >> i contingency plan? >> if you get to september 30th and the gas tax hadn't been reauthorized? >> if we get to september 30th and there hadn't been a funding swlooiv solution and there hadn't been a reauthorization extension at a minimum, we'll not be able to spend money even if we had it. so, you know, that's another part of the crisis. let me say in response to both of these questions on the gas tax. nothing i'm saying is meant to understate the work that many people are doing. senator boxer has worked with her committee that proposed a bill. representative dave kemp from

the house ways and means committee on the very day we announced our framework back in february, he came forward with a framework that was very similar. and the bipartisan work of senators murphy and corker. a lot of people are trying to weigh in here but the constitutional fact is that until congress does something collectively we're stuck. and the country is going to be stuck and gridlock in washington is literally going to translate into gridlock at hem. >> mr. bedard? you got one more? >> quickly on drones. the dot said last week that the faa would not likely meet the september 2015 deadline on crafting a drone rule. i wanted to see if i could get a reaction to that from you? >> you know, i need to -- i want to get back to you on that. i think what we've tried to do over the last few months has been to really step up the work on this. that's why we have four of the

if test sites stood up. we are worked to put forth some rules to this point but we obviously have to work on the other rule here. so i'd like to get a more contained response that will be direct to your question. >> did you read -- >> you shouldn't be promoting the "washington post" but here it goes. did you read the "post" series about craig whitlock talking about this. 15 cases where drones were flying close to planes and when i read that, i thought -- i hope they don't take too long coming up with a rule. >> let's be clear. commercial use of drones is not authorized unless the faa says so. >> a rule widely ignored? >> well. and you know where we find violators we're going to go

after them. and the reason why is because the faa has a lot of experience. they set the world standard for managing airspace. and as we look at this bold new world of unmanned aircraft, safely integrating that technology into the airspace is something that can't be done overnight and has to be trial tested and stress tested in a lot of ways so that's why we're doing the test sites, trying to learn from examples around the country in targeted cases. but we will not allow folks to just treat this like a wild west and do whatever they want. because we think there will be some safety implications to that, obviously. >> paul? >> two unrelated questions. one, a lot of secretary and government officials wrooivt around the gm products,

everything from suburban to a cruise. do you feel comfortable in gm cars? do you get any complaints from others? being a former mayor of a dnc convention city, like four cities you're looking at and the republicans are look at two right now. do you have any advice for them? what did it take to win? >> yeah. in terms of my feelings, you know, i've said this before. folks need to follow what's recommended with any recall activity. and if they do that, we feel like they're going to be fine. and just follow up with the manufacturer or go to the dealership. get checked out and keep it moving. so i don't have concerns about riding in the gm car that i'm riding in. in terms of dnc, i can only say

that i'm looking forward to going as a visitor and you know, i don't know if i have any really great advice on that. i think there's a lot of great cities that are in the running. all of them would be fantastic. and i am looking forward, hopefully, going just as a passive visitor. >> mr. harrison? >> mr. secretary you told us a couple of times today why you chose this tax reform as an offset rather than gas tax increase. but i'd like to ask you, are you a little concerned that using -- the idea -- would move us away from a user-fee system of funding transportation projects as opposed to the gas tax which would maintain this system? >> no. for several reasons. one, the ditch we're trying to dig out of is so substantial that we need to have an infleck

shun point. we need a moment on fights we can fund at the same level we did last year to a discussion of how to get more investment in infrastructure. and our proposal would help us do that. the second thing, the current user fee system is broken. and it's broken because you know, frankly for good reason ares. the vehicles are becoming more efficient and folks are using less fuel. and wherever you set the gas tax, the curve is still downward facing. so that means that at some point in the future, we've reached the very same point what we're reaching today. so i think what our proposal enables is a moment in time where we start to think differently about how we support our infrastructure system.

we put additional funding in place. we haven't even talked about many of the policies that we think are important right now that focus on getting projects done faster and focus on changing some of the dynamics between the federal government, state and local governments, giving more local control to local communities, to determine how they want to move forward? all those things are really important. but i think that they'll always be a user fee component to how transportation gets funded. i don't want to say that's not the case but we need to be thinking about it. also, public/private partnerships ought to be part of the conversation. >> are you willing to sort of to abandon this notion that the transportation system should be funded solely tlooi users fees rather than say, looking for another user fee like a dmt tax or something like that? >> yang there are a lot of options out there, some user-fee based. others different. i don't think that the conversation about where we're

headed is going to stop with the passage of our bill. but what our bill does is provide an answer that is actually politically, like, feasible, given the congress we have right now. gives us four years of certainty and gives us time to brooelt so we've we can have discussion cushion without the nasdaq crisis around the corner. >> ask for more money. >> i have a couple of questions. first one, directly, if a gas tax increase reaches the president will he sign it into law? >> you no, we've said we're opened but all i can tell you is that we have a proposal that we think is politically acceptable that actually works for our transportation system. that we think is the best solution right now.

but i'm not going to speculate on that. i'm going to tell you that we expressed openness. and that's where we are. >> today, maryland's gas tax went up again. it went up last july 1st three and a half cents a gallon. today is an inflation-trigged increase. 15 or 20 states have passed gas tax increases and folks in those states have said public is not as opposed those as some might think right off the bat. follow-up on what my colleague asked you before, instead of waiting for congress to speak, why won't the administration take a lead position on raising the gas tax when there's across the board support in the business and labor community and -- >> i think that's unfair. the administration has put fort a comparable bill -- and i can tell you because i spent the time working on the thing and it is a good bill.

>> and we're taking the position that this is not -- it's not just a question of funding, although that's a criticalally important question. it's a question of, you know, is there -- are there ways to create more capacity within the system by getting projects to move faster? athere ways to engage public/private partnership? we have trillions of dollars of money on the sidelines not being put to work so is there a way to put that to work for infrastructure in this country? we've not takesen a backseat on this and we haven't a pay for that's we think is an effective pay-for. >> i have one follow-up. whether it's a gas increase, the corporate tax reform, all these in the end are short term. even though your plan does four years. what's the administration's vision for once and for all solving the nation's funding issues? is it moving away from a dedicated way and instead, funding transportation out of the general fund like some european nations do? a national vmt?

a combination where you have public/private partnerships and highways and keeping the toll revenue? >> i don't think the american public, the congress, many stakeholders understand how severe this crisis is. the average person is paying about $100 into the highway system right now. in most states, the american society of civil engineers estimates people are paying $200, $300, depending on your state, additional wear and tear on your vehicles because of potholes or what have you, buying new tires, whatever it is. and so in reality, people are paying for this problem. they're paying for it. but those costs in some cases are -- it's aggregated from what they pay at the pump. and i think either a host of questions involved here on what we do going forward but what we need right now is we need long

term stability in the system. and that's what our bill is trying to get. >> last question, michael lind berger with the dallas news? >> how much will you're bill rely on privatization? >> i come from dallas where they invested more than 10 or 15 -- about $15 billion in infrastructure in the metro area and it's come from privatization and leveraged tolls. the flip side of that is -- though they have more highways than just about anywhere in america, people are paying two, three, four, $500 a month in toll fees. that's an offset. in the legislature in congress has not put more money in so some people with paying out of their pockets on these tolls. is that a viable path forward for other cities? is that something to worry about? >> we have essentially a prohibition o prohibition on tolling. there's know feature of our bill

that pays for the federal piece of funding through tolling. you know, that's now how we pay for our bill. but our bill does lift that ban and offers to governors who wish to look at tolling as an option. to apply to d.o.t. and request the ability to toll. now, you know, that would have to be looked at by d.o.t. i tend to think that if there's a commitment to do maintenance on the facility that it would be tolled or to invest in congestion relieving systems. that there may be acceptable ways to see that happen in the country more. but our bill is not paid for by tolling. it's just that we recognize that there's a need to created a little more flexibility at the state level for folks to be

enterprising and to figure out how to get things done. >> is there any thresholds, can you toll i-64 in kentucky without -- can you put tolls on it or would it only come if you added additional toll lanes to the freeways? >> in theory, yes. as i said, any proposal would have to come through the department and be looked at independently. >> here comes the last ceremonial softball over your plate. you told "the washington post" that if you could get one person from the private sector to help you it would be eric schmidt of google. i wondered if you had reached out to any high-tech private sector people for help since you've come to washington? >> absolutely i have. i've talked to eric schmidt. not surprisingly. he's a -- he's got a lot of ideas. we could use his help with the highway trust fund. one of the things that i'm really fascinated by is the way

analytics can be used to improve performance. and it's a place where d.o.t., i think there's a lot of room for us to do that. you know, when a prosquaekt comes in the door that needs permitting, historically, it's come by mail. and you know, a big stack of documents go from one place to another within government. and it takes, you know, in some cases, years for projects to get moving. and so queer looking to digitize that process and looking to go from having departments do sequential reviews to doing concurrent reviews. but understanding what our baseline is today and how we cannism prove prooererformance forward that's something that we think d.o.t. is a really useful exercise. we hope to do more with that going forward. >> thank you foye coming. >> thank you. i appreciate all of you. thank you.

the house veteran's affairs committee holds another hearing looking at the issues of the veterans affairs department. today's hearing examines t s wh blowers who report inadequate

coverage. that is on c-span2. next, a discussion on mexico's oil and gas production with mexico's ambassador to the u.s. this was hosted by the center of strategic and international studies and it's an hour and 45 minutes. welcome to css. i'm john hamrick, i'm so happy that everybody could get here on such a hot day. this is washington. it's this time of year but hopefully the air conditioning will hold out. i checked to make sure that we're going to be okay. delighted to have everyone here

and delighted to have an opportunity to explore this topic. we're talking with the ambassador a few minutes ago and he said you used to have a mexico program, didn't you? i says, we did. that was back when. -- she did a terrific job of creating a mexico program and we really have not caught our balance since then so we're making up for it today by taking pieces of mexico. we need to get together and talk about how we do all of mexico together. but i'm glad that we could do this part. this is -- we've all been anxious to hear how mexico is going to deal with the reform agenda. it is coming. we had thought our timing here would let us talk about the details of it. but we know that it's going to be coming and it's an exciting thing for us. it's part of this -- we want our neighbor to do well. we think energy is a big part of doing well and we're going to

listen and talk a little bit more today about what it could mean for automatic ll of us. i'd like to thank all of you for coming and joining us today. and with your applause, middle east welcome the ambassador who is really going to kick this off for real. thank you. thank you very much. i'm dlooited to be here and it's very important csas to restart the mention okay program. and we were just come commenting through lunch that we take each other for granted and we shouldn't. actually, mexico is the second-largest customer of the u.s., african da and in business school they teach you to take care of your customers. you are our numb -- first, number owuone customer and ther no accident in this situation. it's successful and ongoing.

but i'd like to congratulate csas for hosting this event. and for promoting the very timely and necessary dialogue. i am very excited to be here and to be able to listen to the experts and understand their points of view on mexico's development under 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 american infoenergy st and we listened to different perspectives on the considerable economic impact of this unconventional revolution. there is a growing consensus that north america has a capability to unlock a great potential and become an energy, self-sufficient region in the next 20 years. but there are very important challenge that we need to address to turn these into a

reality. including the infrastructure, regulatory issues and the shortage of skshort age skilled workers in the industry. we have to think about how we're going to address they challenges together in order to facilitate the transformation which is within our grasp. as a matter of fact, it's already here because our energy sector is very much integrated already in north america. and one of the beauties of this successful integration in terms of how we trade what each other and produce together is that it's not coming from a political statement which would have been sort of difficult to manage. but from market realities. it just makes sense. it happens. it gives the basis for companies and business people to actually

go after the opportunities. and make decisions and make things happen. but one of the main conclusions in this conference summitt 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 days to come. mexico, with a long overdue package of reforms, has can dramatically updated its framework with a series of far-reaching and transformative reforms that we have concludeds in legislated. congressional terms with the approval of the second legislation in energy sometime 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. this is structural reforms encompassing labor, education, telecommunications, financial services, communication policy and the her of all reforms, the energy sector. we'll transform our economy in the year as made, provided, of course, that the limitation is successful. the energy reform in mexico is 'important but even before it takes place, the sector remains a central component of u.s./mexico trade. let me give you a couple of examples. in 2013, the united states was afternoon estimation of approximately 72% of crude oil export from mexico. which arrive via -- the value of crude oil export from exokay to the u.s. is more than two times the value of all export which were roughly $18 million. mexico was a destination of 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. african da and saudi arabia. we have benefitted from the lower natural gas prices in the u.s. and pipe line exports by 6%, a record level. most likely the demand will grow in all sectors mainly in industry and power generation but there's a great potential to use this as a transportation fuel. gas exports from the u.s. to mexico to find line also continue to increase in the years to come. we're expanding the natural 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.

the geography has blessed the north american region with significant energy research according to the latest outlook, north america will be the only region in the world that moves from being a net energy imimportanter to a net exporter. so while china and europe become for depend on energy imports north america is becoming self sufficient. but 2035, north america will be a net oil exporter accounting for 6% of global energy exports and by 2017 the region will be a net exporter of natural gas. north america has a necessary nar energy resources to fuel its economic growth for a long time and reliable and affordable energy will be a key company negligent in ensuring a very competitive north american manufacturing base. at the end this is the most important component of competitiveness, looking toward

the future. through energy reform, mexico will control the energy sector while the u.s. is adjusting to a new reality as a potential exporter of oil and 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 reinvigorate ed economc 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 as well and these can be, of course, transformational.

initiatives launched at the north american leaders summit last february, international engagement with latin america through the pacific alliance and with asia via the tpp. mexico's already significant role in the world economy has strengthened. energy reform is a critical part of boosting prosperity and along 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. and i'm very optimistic as well that we will be able to do so. thank you very much. [ applause ]

>> you'll be next to jesus. okay. >> well, let me add my welcome to john hamre's, to all of you 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 carl mechum. 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 heroles who is former secretary of energy, former director general of pemex and now in the private sector as ceo of a private company in mexico city. 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 has 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.

then finally, ed morse, who is a senior -- head of commodity research at citibank. 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.

>> thank you very much for coming, jesus. >> i would like to sort of lay the ground for the discussion that we'll have later on. for some of you, some of the things i'm going to present may be your knowledge, but it's basic for all of them to know the essence of the reform and proceeded into the exchange of points of view. let me see if somebody -- it's this one? oh, okay. okay. this is ease city. this is ease zer than this. all right. first in terms of discussing

energy issues in north america really was very difficult, and many, many friends in this room and i did discuss about this or tried to discuss about this for years, but it was really basically an empty discussion. it was diplomatic discussion. there was an impossibility to discuss further interaction in energy because interactions do exist and are very significant. any kind of policy for the future because mexico couldn't. basically it had no leeway, 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 were 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, i would call relatively consistent and steady energy policy over the past decades, 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 absolutely essential for mexico's energy -- economic policy. i mean, 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 simply is not growing and this government knows very well that one of the critical factors is to increase significant 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. it eliminates this -- 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. national oil company will not disappear, and that is not the purpose. the purpose is basically saying we want to maximize their resources allocated to the hydrocarbon sector. of mexico. up to now that had been limited because mexico's framework, legal framework, constitutional framework, basically said, only one agent will be responsible of exploiting the hydrocarbons in mexico and that agent is pemex. and with time, it was obvious that pemex -- and even the constitution went further because it was pemex who had the privilege, but you have to do it all by yourself, which was a complete abnormality in the world. if you see other national oil companies, they don't have the prohibition of partnering with

others to do some of the many things other companies have to do. in mexico, that was really very limiting to the development of the hydrocarbon sectors in mexico. now it allows pemex to partner with whomever it wants, in some cases with the majority state not establishing the law, but according to pemex's interests of commercial and business interests, and it can do it in a very flexible -- 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.

i mean, in the past, it was really impossible to make pemex more, the protection to the company was so big. the incentives for the company and 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 pemex within the budget. i mean, some of us had really pushed forward saying one relatively easy and far-reaching change is to take pemex out. because the problem is it's not only the government tape, but all the red tape and all the 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're still the same way they have been for the past since they were born. as you see in this reform, in my way, the critical issue is there's too much intervention in many of the decisions that should be have left to pems ex by itself. the other thing is the reform also reaches the electricity sector. it allows the participation in generation for third parties. 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, install, maintain, manage, operate, and expand 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. this basically gives you a notion of the speed, the base at which the reform will move forward.

and i will not take a lot of time here. the constitutional reform was enacted in december last year. pemex started -- the first was for pemex to request in what areas or fields or places where pemex is already working or has intention to do so. pemex 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 will pemex keep will be defined by the government. decision of the government, the state of the mexican state. that will be september 17th. it's a mandated constitution.

and then you will have all the things moving like the creation of mexico's energy reform, but the very 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. and that will have to be there. those relations will have to be there for january of next year. so this is one of the areas where there's a huge need for additional investments. there are many bottlenecks in the mexican system because pemex was not allowed to invest in the past in expanding its network of fuel pipelines and warehousing facilities. so the -- it's really, i would say, almost an emergency that has to be dealt very quickly and a lot of investment opportunity

will emerge for the private sector as part of that. and 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 35% which is a very -- in mexico, it was very curious pemex was not a very much -- had not long-term relationships with a lot of suppliers and epc companies because the way the procurement of mexican public sector entities did not allow for pemex to establish a long-term relationship with a lot of its suppliers and epc 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, what is it -- in the very, very short term, the first priority, and that is to basically address mexico's gas deficit that the increased very speedily since '08. fuel deficit is increasing 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. will become rather a net exporter of gas. we have been importing gas from the u.s. for quite some time. the ambassador mentioned that before. but this is the most urgent

thing. actually it's going on because the gas sector was opening 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 kilometers and it's $3.2 billion project. under construction. it's very important. and also in the center and in the west, the national utility the cfe, is building all these pipelines you can see there on 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 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 -- i'll try to put it simple as possible. the investment opportunities have emerged in mexico with the reform. and in the horizontal, you can see the complexity of the projects and the complexity is associated with the time that it will take for these projects to be -- to materialize.

that, wroyou know, that you cane that things are happening. in the vertical, you have amounts from projects. you can see, for example, what 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 an inexpensive project. so you require that. but in mexico, there's no production of that. it will be possible for private 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 the next -- within this month. so the day after that, immediately production will emerge. and so i will give you the list in a minute, but you can see in

the north, northeastern quadrant of the graph, you can see obviously 17 is up because it will take more time to see things happening in terms of deep water and it will require a lot of resources. but things -- the purpose of this graph is really seeing that what has been triggered with the constitutional reform is a process. it's a process that will show up first in some activities and in some other activities depending on their complexity and the constitution under 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 from gas pipelines that are open now, then you see fuel stations until 2017. this is still being discussed at the congress because people think it's too far away. that a lot of congressmen 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 distribution systems now. oil pipelines starting in january of 2015 of next year and so you can see step by step when that will occur.

and it's probably easier to see here. you can see more with some detail what is -- how the reform will evolve and you see january 2015 as a critical date because storage and distribution terminals of fuels will be opened up. oil pipeline facilities for logistic maritime terminals. then gas production in 2015, also next year. production of fields in the new regime next year. and so you move along over time and you can see in january 2018, domestic marketing of hydrocarbons. this is what nobody understands very well why the government proposed it to be so far away toward the end of its administration. administration ends up in 2018. so this is being amended by the congress now to make it sooner

rather than later. and then if you move to the left, you can see shale gas production in 2017, oil production. the exploration own production project in 2017. 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 terms of the research. what pemex keeps is in blue and what the state would be able to actually grant to third parties in contracts or contract with third parties.

in 3p, 29%. in 2p, 17%. and so on. it's more important in terms of the lower -- the total of the three of those above is what in terms of perspective resources. pemex keeps only 31% or requested 31%. we don't know if they are going to be granted 31% or less than that. they say 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, the most important one are obviously in shallow waters.

deep waters is not bad. that's what is known. 8.1 billion barrels of oil equivalent. and you can see that in terms of onshore, basically the prospective resources that will be available for the state to grant to private companies is our equivalent to 82% of the known research. so let's stop here, and then let's see how the conversation evolves. thank you for your attention. >> pedro, thank you very much. [ applause ] i neglected to mention in my introduction of pedro that about a year ago you left mackenzie to join hetco and your now current position is head of advisory services for hetco in new york. thank you, pedro. >> 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, you know, public attention in mexico and even political attention has been focused on the "e" and "p" part of the mexican energy reform, and 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 a 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 asymmetry between the attention that has been spent on exploration and production. and the complexity of the reform. i don't want 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 infrastructure. you think about residential power sales and distribution networks. all of those things are going to require a very significant overhaul and the creation of that entire regulatory, legal regulatory contractual framework is a massive work that is difficult to fathom. i'm not, again, belittling the importance of that side, but just from an execution complexity, the non enp side of

it is pretty vague. the other issue i'd like to focus on, i think the ambassador 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 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 in the secondary legislation is pretty much defined although there's still some discussion, is that 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 know. 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've heard that, you know, all of those texts are ready, in fact, they're not. and, you know, thank god they're 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 there so it's what i know. so i apologize for not talking as much or not at all about the cfe. but pemex is a self-contained animal, and it's had operating legal regulatory

discretionality. 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 you open up the valves on one particular, you know, field more to compensate for another that has to go into unscheduled 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. now, the problem is if you take those pipelines and you turn them into open access common carrier pipelines, open access

pipelines, now you have different producers, you knows, that are connecting themselves to those pipelines possibly. and then, you know, pemex cannot just decide overnight that i've got to shut this pipeline down because, you know, i need to do some unscheduled maintenance on it. all of a sudden that has production consequences on other players. now, take that example and multiply it across the entire pemex system. pemex is going to have to transition from a monopoly situation to a situation that is rule driven. and it's not only because it's going to be competing, but because the authorities, particularly the cre and cnh, the two regulatory bodies, are going to create a series of rules. now, you're not going to be able to have a system where these two regulatory bodies are, you know, 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 here 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. well, along the 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 100,000 and 150,000 barrels a day, and that is water. it's water that comes from the water cut in several areas of production, and particularly the cantarella field. in the month of may, that number has reached about 260,000 barrels 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. so that crude is going to be -- the water is going to be eventually separated, et cetera. but 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 issue with statistics becomes absolutely crucial when you have to introduce private sector actors into the picture.

for example, we know that there's been some issues with investors in the incentive-based service contracts where some of the baselines that pemex had originally given were proven not to be, you know, what they had been reported originally. in the future, when you're talking about farm-outs, for example, with psas, if pemex goes ahead with some of these farm-outs and some of the baselines prove not to be correct, then the private sector investor is going to litigate because obviously, you know, the original data were not correct. so anyway, there's a big issue. all i want to say in this respect is shifting from a state monopoly to a market solution is a very complex endeavor.

and the managerial transition in addition to the regulatory transition, the managerial transition for pemex is very difficult. and remember, some of these issues as jesus mentioned, like the tax -- the budget issue, have not been changed and particularly importantly, the labor relation, relationship between pemex and its wrunion h not been changed. so, you know, i fail to see at this point or 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.

jesus referenced it. 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 and cfe. i think the public is not stupid and it recognizes that these company companies that these companies need to improve. i think the key problem is there is a fear of corruption. and there's 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, the citizen. those are the big issues that the government has. this is valely important, because in my mind, the test of

the success of the reform is not whether it brings gazillions 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, you know, tough to achieve. now, the second part of the impact is with private sector

investors. and there i think that you're going to see a wide variety of attitudes. i think deep water offshore companies are pretty comfortable in the sense they don't have to deal with any of the securities onshore. they can -- they understand more or less the geology because it's not too distant, particularly in some parts, et cetera. it's not too distant 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 -- 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 goingc defend very much on a company-to-company basis. to me, the biggest danger there is that the regulatory -- it's aggressive law kind of problem. it's a situation where the good operators stay away, and the not so good operators essentially, you know, 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 fact that we never really managed -- the mexican government never really managed to coordinate the federal, the

state, and the local level. and so i could see a situation where, you know, you have your federal permit, you've earned your acreage, you show up with an oil rig and the state authorities or the local authorities prevent you from drilling. 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 -- i'll finish on this point -- there's a bit of a disconnect. i think there's a bit of 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 adjust 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 are some people who think it's going to take, you know, a much longer. maybe two, three years to get there. there some people who are going to be first off the, you know, the starting line. and there are some people who are going to wait and see 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, you know, translation into investment opportunities and decisions is

going to be -- is still to be defined. >> thank you, pedro. [ applause ] senor morse? >> thanks. it's an honor to be with you. thanks for the invitation. i was asked to address what's 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 thwarting

financially for pemex and the mexican government. where if they were a big open global system that could process mexican crude, undoubtedly the netback to mexico would be higher if not substantially higher than is currently received on the u.s. gulf of mexico coast. and i'll talk a bit 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 global markets is that timing is pretty exquisite in terms of the potential opening of mexico to foreign investment. if you are a big international oil company or an even more modest sized international oil company, and you're looking for a place to invest where there are opportunities for a large-scale rewards, they are canada, the united states, and 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-adjusted basis the risk/reward opportunities will likely be moving toward the acceptance of risk for the 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 could go, what's used, kind of general government numbers, increase in production of a half a million barrels a day by the time of president pena's end of term and then maybe a million barrels 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 onshore conventional -- nonconventional production up to a half a million barrels a day, yet alone whatever might be happening on the conventional side. so let's use these as working numbers. canadian production is likely to continue. these are quasi official numbers based on caps. so current production in canada is roughly 3.5 million barrels a day, and we can kind of readily project 5 million barrels a day, adjust it for where the price of oil may be. there's going to be an uplift as canadian oil reaches waterborne markets. even if global prices falter. so in addition to the, say, half a million or 7 00,000 barrels a

day by 2020 from the gulf of mexico, there's another 1.5 million from canada. on the u.s. supply, our own view is there's going to be around 4.3 million barrels a day. more production by 2020 in comparison to the end of last year. 3.35 million 3.5 million onshore. 800,000 offshore mostly deep water. in addition to that, some 2 million barrels a day of natural gas liquid. 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, and may be 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 very robust, probably the fastest growing sustainable area of production growth in the world in its north american -- i actually have used

these slides in this room before. we 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 trade balance combined becoming net positive by 2020. i know guy talked about northsed jesus. the real issue is the atlantic basis bases the rest of the world. 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, growth of western hemisphere production in general. any growth from now on is going to make the atlantic basin a surplus area. if you just look at the

supply/demand balances in the atlantic basin. and that mean there's 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 crude deficit 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, 400,000 barrels a day. 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 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. exports 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 crowd 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 through europe and to the pacific basin where, again, the pipeline at salinascruise has been exported into the basin including the u.s. west coast in growing numbers. the real place where crude oil exports are needed -- deficit during the -- 1 million barrels.

mexico. the other places that when you find american crude going into the pacific basin is from canada, but the pipeline -- we'll see significant amounts of crude oil from alberta moving east to the atlantic basin by rail and south to the gulf of mexico by pipe and rail and not taking advantage of the higher netbacks 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 and 8.3 million barrels a day. the bulk of that coming out of the u.s. combined with new

exports out of iraq and from central asia. the already crowded is going to become more crowded. the already atlantic and south atlantic basins 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 saudi side because they don't want to lose market share in a good market. and rely on east asia and south asia for market growth. kuwait, because they believe that exporting sweet 130,000 barrels a day to the u.s. gulf coast market however nonremunerative as it may be helps them keep 15,000 u.s. troops there so there's a sticky amount of oil that won't leave the atlantic basin, making it

more difficult for the crude produced in -- in both mexico and canada to achieve kind of fair market value in a global marketplace, even though canadian crude is likely to have the highest debt back by exporting to the pacific that's not likely to be the case. and liberalization of u.s. crude oil exports is going to even make the atlantic basin market more crowded. for the challenge for mexico, today, exacerbated by growth of 500,000 a day, maybe by 2018, 700 or 800 by 2020, a minimum of a million by 2025 way up to maximized value to optimize the maximization of value of that crude oil, and it looks like that won't be -- anyway.

thank you for the opportunity to share this little addendum. >> thank you, ed. >> 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 one thing i can say about ed is i -- i look at those numbers and i say looks like it's going to be, you know, 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 to need them, and with that i -- i know we're getting tight on time so i want to go right to qs and as. please identify yourself and your affiliation and keep your questions as concise as possible. i'd appreciate it. >> hello. i'm dr. donna wells, i'm an expert in the russian language internet but i also happen to be a native texan. we're reading about mass graves should private investors be concerned about car tell violence or possible growth in political power of the cartels? thank you. >> pedro? you're our cartel expert. >> yeah, i certainly am.

no, i think that there are parts of mexico where you will have to contend with these issues. and some of the companies present like halliburton, baker hughes, already are. i was told recently that control risk that manages the security risk rates northern mexico along, you know, on the same level as southern iraq. although that was before, you know, the situation we have right now in iraq. so, but i do think that there's some issues that the companies are facing. now when you talk to some of the players, they tell you, well, you know, i'm in 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 hardy lot. and some of them, not all of them, interestingly, 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, you know, let's say an oxy for example, 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 focusing on the security issue. ity 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 onshore in the south of mexico, jalasco, chiapas, you have a lot of community relations issues. i understand that there's one particular service contract that is operated by schluberget where they haven't been able to operate the first day. they haven't been able to go in at all. those are issues that are going to have to be dealt with, no doubt. >> maybe we could take a couple questions, starting with one here, and then any over on this side. >> steven donahue, i'd like to pick up on something that mr. haas said, and ask dr. reyes heroles 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 lot 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 have been 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. next question then we'll answer them both. >> annette haaser, interamerican development bank. i was just wondering, i didn't hear much about environmental assessment impact, and i've 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? >> thank you. >> jesus, maybe you can answer the 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 shake-up, 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 that from within pemex, if you sort of -- obviously the top man, top top management is convinced of the 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 to cope with competition, and at the same time, by doing so, allowing a significant expansion of the sectors of mexico. actually, a lot of companies really want to go to mexico. but to, i mean, there are some, there might -- they might arise some questions related with the capacity of pemex 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, if some of

the most important layers of executives, the guys who are in the fields, the supervisors, the accept the notion of eliminating -- the pemex there was a very important discussion about this in relation to -- it was the taboo of these issues was eliminated because there was a taboo, 206, there was -- it was a prohibition, actually talk about the opening of pemex and reopening of the sector. this is only, you know, eight years, six years ago, it's a completely different ball game now, every political party includes that this topic in their agenda. so, i think my perception is this -- this layer of executives do accept the fact that the exclit