Mexico has nothing to fear

A lot has been written in recent months about the promise Mexico offers in light of President Enrique Peña Nieto’s energy reform agenda. A few weeks ago, however, that much talked-about subject tied in with another news item dominating headlines: the falling price of oil, which has dropped almost 50 percent to below $50 a barrel.

A clear connection emerged when Mexico’s Energy Minister Pedro Joaquín Coldwell said in early December 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 resounding response – Mexico’s energy sector remains attractive and is full of opportunity.

A clear and present need

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 remarks. 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 both necessary and possible, 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 points 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. “In terms of electricity, Mexico is also experiencing a current deficiency between supply and demand. […] There are going to be very, very important investment opportunities just to improve the existing generation and transmission infrastructure of the country,” the lawyer explains.

Here, too, natural gas is part of the equation since some of these projects will require an additional supply of natural gas as fuel.

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 in 2013 to 35 percent by 2024. The increase in the use of renewables will also mean a greater need for high-voltage transmission networks.

What’s more, Mexico’s Electricity Law, which came into effect in August 2014, creates a market for Clean Energy Certificates that can be bought and sold. “The certificates will be issued to clean energy generators and large consumers of power will be required by law to acquire these certificates. So there is going to be an incentive to purchase energy from clean energy producers,” the lawyer notes.

That incentive, combined with “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, according to one analyst, offsetting any erosion lower oil prices may have on renewables’ cost competitiveness.

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

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

Another investor echoes 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.”

Furthermore, the delay, according to Joaquín Coldwell, will most likely affect non-conventional oil, shale gas and shale oil.

“In my opinion that makes more sense,” one analyst states. “I think the unconventional part of that is probably going to be the most expensive, most technically challenging. So that makes sense given the current oil price and cost environment; delaying that shouldn’t be much of a problem.”

In sum, there are many reasons to stay positive.