Alarm bells ringing (0)

Mexico’s potential delay in opening up its energy sector may have caused concern, but a closer look reveals there is no reason for midstream investors to lose hope.

A lot has been written in recent months about the promise Mexico offers in light of President Enrique Peña Nieto’s energy reform agenda. Two weeks ago, however, that much talked about subject tied in with another news item dominating headlines: the falling price of oil, which two days ago fell to below $59 a barrel.

A real connection emerged when Mexico’s Energy Minister Pedro Joaquín Coldwell said that the government may delay or scale back the tendering of exploration and production projects due to the low price environment.

One question that came to mind was: ‘What will this mean for the much-anticipated investment opportunity in Mexico’s midstream space?’

Conversations with analysts, lawyers and fund managers investing in the country’s energy sector provides a clear and resounding response – Mexico’s energy sector remains attractive and is full of opportunity.

There are several reasons for this. First and foremost, Mexico lacks “a tremendous amount of midstream infrastructure today,” – and that’s without taking into account new drilling activity getting underway, one lawyer told us. The country has very few gas processing plants, a serious shortage of storage facilities, and a number of fields that are inaccessible due to a lack of transportation infrastructure.

Therefore, build-out of the energy infrastructure network is necessary – and possible – now, especially since the legal framework allowing private investors into the midstream sector is already in place.

Natural gas is another factor that necessitates investment in infrastructure for several reasons. The first is that Mexico needs to import natural gas from the US. As one analyst pointed out, a good example is the Los Ramonas pipeline, which is being extended so that more gas may flow from Texas into Mexico.

Improvements and upgrades to the country’s electricity production and transmission sectors also require investment. Here, too, natural gas is part of the equation since some of these projects will require an additional supply of natural gas as fuel.

And the opportunities do not end there. In addition to opening up the country’s energy sector, Peña Nieto has also set an ambitious goal as part of his energy reform agenda to increase the amount of electricity generated from renewable sources from 14 percent last year to 35 percent by 2024. The increase in the use of renewables will also mean a greater need for high-voltage transmission networks.

While lower oil prices may erode the cost competitiveness of renewable energy, “Mexico’s ambitious renewables target, its General Law on Climate Change and strong project pipeline” justify a positive outlook for Mexico in the medium to longer-term, one analyst said.

Another analyst agreed that “the below-ground potential is going to trump any concerns.”

Fund managers, which are betting on the Mexican market and have already invested in it, also expressed optimism. “We’re enormously excited about Mexico’s energy sector,” one fund manager said, adding that Mexico’s reforms are just the beginning.

Another investor echoed that view: “The fundamentals of the growing Mexican economy, the availability of cheap shale gas in the US and lack of infrastructure remain in place as the pillars of our investment thesis.”
The message is loud and clear: There are many reasons to stay positive.

*We would like to take this opportunity to wish our readers a wonderful festive period. Week in Review will be back with you in the New Year. Over the Christmas and New Year period, please keep checking our website infrastructureinvestor.com, where you will find regular postings from leading asset class professionals offering their thoughts on 2015.