November 30, 2016 ENERGY ALERT First Open Season for natural gas transportation. CENAGAS, (Natural Gas National Control Center) published its call for the Open Season for natural gas transportation through the SISTRANGAS (Natural Gas Transport and Storage National Integrated System) which will allow interested parties to secure natural gas transportation reserved capacity from March 1, 2017 to February 28, 2018. Background Following the 2014 energy reform, the CENAGAS was created as a decentralized public entity entrusted with the gas transportation pipelines and storage facilities operations, as well as with the management and apportionment of the SISTRANGAS pipeline system capacity, which, as a consequence, entitled it with the assignment of different PEMEX assets and reserved capacity contracts. As part of the Constitutional reform framework, the CENAGAS was attributed with the ability and duty to guarantee non-discriminatory open access through its role as SISTRANGAS technical administrator and the SNG s (National Gas System) haulier. The SENER (Energy Ministry) has published the guidelines and policies to develop a short, medium and long term strategy to create an efficient and competitive natural gas market approaching 2018 (for more information please refer to our alert published July 27th: Public Policy for the Implementation of the Natural Gas Market, which can be found in this link: http://www.ey.com/publication/vwluassets/ey-energy-alert-public-policy-naturalgasmarket/$file/ey-energy-alert-public-policy-naturalgas-market.pdf). The guidelines and policy s ideal pillars are based on providing users with i) accessible and useful information to determine, among others, used and available capacity; ii) providing open access to reserved capacity, and; iii) the implementation of a competitive environment in natural gas marketing and commercialization. The SISTRANGAS Open Season is a direct response to the restructuring process of this industrial reorganization in Mexico -which main objective is no other than the optimization of conditions for developing the natural gas market-, as well as to the 2014 energy reform -which among others, seeks to create a free and competitive market in the hydrocarbons supply chain-. It is well known that the transportation of natural gas in Mexico has been in hands of a monopoly throughout the past years. Thus, through the incorporation of a renewed
institutional and regulatory framework in the pipeline transportation and storage segments, the government intends to guarantee open access and non-discriminatory market principles by efficiently assigning existing capacity to liberalize natural gas prices while eliminating first-hand sales prices. This first SISTRANGAS call represents a transition from a volumetric regime (where users do not have guaranteed fixed capacity) to a reserved capacity regime, whereby users are allowed to bid in similar conditions to reserve firm based capacity to the extent capacity is permanently available. This transition is reduced to the implementation of Open Seasons, which are regulated by the CRE (Regulatory Energy Commission) and have the object and purpose of providing transparency and equity in capacity apportionment to all interested parties. For such purposes the CRE has published a calendar, available to all interested parties, where the most relevant dates for the 2016-2017 open season can be identified: Open Season Procedure State Productive Companies (EPE) Round The Hydrocarbons Law recognizes EPE s right to restrain the necessary reserved capacity to confront their electric generation and hydrocarbon industrial transformation operations, which implies that no assignation process (open season) should interfere with neither CFE s (Federal Electric Commission) nor PEMEX s (Mexican State Oil Company) assigned capacity. Therefore, an EPE Round will provide both CFE and PEMEX the opportunity to lock their required reserved capacity, which in accordance to their historic consumption standards, were determined by the CENAGAS as follows: EPE Total Maximum Capacity GJ/d CFE 1,152,752 PEMEX 1,430,877
Vested Rights Users There are certain users that, by virtue of their large natural gas consumption and as a consequence of prior regulations, were permitted certain reserved capacity following volumetric gas supply contracts. Accordingly, the Hydrocarbons Law establishes that users with supply/capacity vested rights (Vested Rights Users) should not be affected by the 2014 regulatory transition which would bring open access to the general public. Bidding Process Under the non-discriminatory open access principles, SISTRANGAS reserved capacity should be assigned in a bidding process to be carried out through one phase, and will encompass two types of bidders: Vested Rights Users and Public Users. In order to preserve vested rights as described above, the open season will allow Vested Rights Users to bid before other Users. For this open season, the reserved capacity will be assigned from March 1, 2017 to February 28, 2018. However, service contracts may be renewed for effectively used capacity. It is expected that CENAGAS will call for a second Open Season during the third quarter of 2017. Vested Rights Users will bid for injection points and any residual capacity will be offered to Other Users. Other Users will bid for injection points and extraction centers. i) Awarding Mechanism The criteria to award capacity will follow an economic approach, whereby the bidder who offers the highest additional unitary cost (ß), measured in Mexican Pesos per Giga-joule (GJ) 1 by the Fee for Reserved Firm Base Capacity per Route (see section iii) below). Furthermore, β is the awarding variable that not only reveals the demand on capacity per route, but also guarantees non-discriminatory open access through the open season bidding process, according to CENAGAS. If there is a tie in the awarding variable, a different criterion applies depending on the type of bidder: Vested Rights Users: First come first served basis. Other Users: a) Longest route; b) If a) results in a tie, largest volume; c) If b) results in a tie, capacity will be assigned in a pro-rata basis. 1 Consider that 1.003 GJ equals 1 million square feet.
βß, which for purposes of executing the service contract all successful bidders should pay, will be the additional unitary cost of the last interested bidder (Vested Rights Users or Other Users) awarded with capacity. This, according to CENAGAS, means that users would pay a lower or equal β from the one offered in their original bid. Therefore, successful bidders will have to pay: ii) Stages Authorized CRE fee + ß (lowest additional unitary cost) + service fees as established in the contract iii) Overview of SISTRANGAS The SISTRANGAS comprises a 10,068 KM long pipeline system, including the Jaltipan- Sanlina Cruz pipeline, and crosses through 20 States (divided in 6 different Price Zones), with an estimated transport capacity of 6.3 BCFPD, supplied from 27 injections points and delivered in 113 extraction points.
As explained, the Base Firm Capacity Fee per injection and extraction point applicable to each route, based on the price list authorized by CRE, will be the Indicative Rate. In addition, the following table includes the Fee for Reserved Firm Base Capacity per Route applicable for the service request: For additional information regarding to this Alert, please contact the following: Ernst & Young LLP, Latin American Business Center, Houston TX Oscar Lopez Velarde Perez +1 713 750 4810 oscar.lopezvelardeperez@ey.com Santiago Llano Zapatero +1 713 750 8376 santiago.llanozapatero@ey.com Javier Noguez Estrada +1 713-751-2043 javier.noguez@ey.com Juan Jose Paullada Eguirao +1 713 750 8726 juan.paullada@ey.com Ernst & Young LLP, Latin American Business Center, New York Ana Mingramm +1 212 773 9190 ana.mingramm@ey.com Enrique Perez Grovas +1 212 773 1594 enrique.perezgrovas@ey.com Calafia Franco Jaramillo +1 212 773 2779 calafia.francojaramilli@ey.com Mancera, S.C., Mexico City Alfredo Alvarez Laparte +52 55 1101 8422 alfredo.alvarez@mx.ey.com Rodrigo Ochoa Tella +52 55 5283 1493 rodrigo.ochoa@mx.ey.com José Fano Gonzalez +52 55 5283 6425 jose.fano@mx.ey.com Yuri Barrueco Andrew +52 55 1101-8433 yuri.barrueco@mx.ey.com Salvador Meljem Elias +52 55 5283 1300 salvador.meljem@mx.ey.com