Russ:  Hi, I’m Russ Capper and this is The EnergyMakers Show, my guest today Eric Eyberg, Director, Latin America Gas and Power with Wood Mackenzie Consulting; Eric, welcome to the show.

Eric:  Thank you very much Russ, appreciate it.

Russ:  You bet.  So I understand we want to focus mostly on Mexico because that’s where all the action is right now.

Eric:  That’s right.

Russ:  Describe the power and grid, the power situation in Mexico, for the last 5 or 6 years.

Eric:  Mexico’s power grid for let’s call it multiple decades has been dominated by CFE, it’s the state run power monopoly, and it largely was dependent upon fuel oil generation and natural gas – fuel oil being more expensive, dirtier than natural gas.  And what we’re seen over the last 5 or 6 years is a stronger push toward natural gas; cleaner natural gas, more efficient natural gas turbines being utilized which has reduced the power prices in Mexico correspondingly.

Russ:  Okay is it rated as a reliable system throughout the country?

Eric:  Yeah, so it’s quite reliable.  Of course what we see, and this happens in lots of Latin American countries and all over the world, is you do actually see some at the very local level – transmission, distribution – you do see some theft of power.  But as far as the overall transmission grid is concerned it’s actually quite reliable.

Russ:  Okay, so what really motivated this transition towards natural gas?

Eric:  So number one was obviously thinking about it from an economic perspective and a pricing perspective.  Number two the Mexican government made a big decision to move toward cleaner fuels and also renewables as a big piece of the picture.

Russ:  Okay, so this kind of improvement is not necessarily directly related to the recent transition that started about 3 years ago about opening up their exploration and production to outsiders?  Or is it connected?

Eric:  Not really connected to the upstream story.  In fact, one of the things that’s lost on many is the fact that the reform in the power sector has actually moved faster than we’ve seen reform move upstream and in natural gas.  So we’ve seen a significant amount of private investment in the power sector.  We’ve already had two successful power auctions this year with a number of different developers entering into the country with real dollars, real investments over the next several years.

Russ: But could those people have entered the country before this change?  I mean it was always an open market?

Eric:  Right.  Well, it wasn’t an open market.  So what is happening now is you’re having different types of transactions.  So you would see power generators entering the country, they have for the last several decades, and when they’ve done that they’ve done that with direct contract – a direct PPA contract.  Now with the idea that in several years we’re going to have more liquid power markets you see other people coming in for different reasons, different motivations.  Thinking about a Mexico power market that could look very similar to the power market here in Texas or PJM in the Northeast, MISO; where you actually have tradable products not just a single, bilateral deal.

Russ:  So also though you mentioning that they’ve been importing natural gas I assume a lot of it from right here in Texas?

Eric:  That’s exactly right.  So we’ve been importing into Mexico roughly 2 or 3 BCF a day of natural gas in the last couple of years.  That’s been ramping up, our expectation is that that doubles over the next 4 years.  And as far as pipeline capacity, which of course we need to build pipes in order to take more gas from Texas into Mexico, we actually see capacity at 7 BCF a day today doubling to 14 BCF a day in only 4 years.  So we’re opening up the Mexican market to take more and more natural gas and what that means is even lower power prices and the ability to have even cleaner fuels developing power, generating power in Mexico.

Russ:  My goodness, before this growth was there always sort of an out of sync with the demand and availability of natural gas?

Eric:  Yeah, so what happened in Mexico, as you’re aware, on the oil production side – which a lot of natural gas that’s produced in Mexico is associated with oil – we’ve had that decline for quite a long time now and that means that there’s been less gas available domestically, more need to import it from the United States, hence the boom toward building pipeline.  And we’re building $15 billion of pipeline capacity between US and Mexico right now.

Russ:  My goodness.  And you also mentioned renewables; they have a big commitment to renewables.  Is there going to be sort of a competition between gas and renewables?  Are they going to have more capacity than they need?

Eric:  Sure, so the target is to get to 40% renewables by 2035.  There’s another target in 2024.  Right now the system is just shy of 20% renewables driven so we do believe it’s achievable and if you look at what’s happened in the power auctions this year alone they’re going to be pushing well into the lower 20 percentile in the next 3 to 4 years in Mexico.  So we do think the targets are achievable for the next 5 – 7 years, the big question is what happens 10 years from now, 15 years from now when we think about the 2035 goal as well, 20 years away from now, and the will require a tremendous amount of investment in renewables.  It will require continued tweaking of the rules in order to incentivize those renewables.  It’s not just that solar costs have come down so much over the last 5 years and wind costs, it’s also the fact that there is an incentive program.

Russ:  So it’s a subsidy essentially.

Eric:  Exactly.

Russ:  Okay, and so is it wind and solar?  You mentioned solar as though that’s the predominant one or is it both?

Eric:  It’s been a mix of wind and solar.  Our view from Mexico looking at the actual conditions is that solar will be the predominant source of renewables.

Russ:  Geography being that far South, yeah.

Eric:  But Mexico has some of the best wind generation zones in the world, but they’re very localized.  So there’s a couple of areas, that limits the amount that we can actually see but we still see wind being a big piece of the overall puzzle.

Russ:  Okay.  Well it sounds like once again another interesting period of time for the Mexico people to be upgrading their lifestyle, lowering their costs and cleaning up the air.

Eric:  Absolutely.

Russ:  All right, well Eric I really appreciate you sharing this story with us.

Eric:  Thank you very much, I appreciate it.

Russ:  You bet.  And that wraps up my discussion with Eric Eyberg, the Director of Latin America Gas and Power with Wood Mackenzie Consulting.  And this is The EnergyMakers Show.