Mexico: Boom-ready

For nearly 75 years, Mexico’s energy market was off limits to outsiders, with an oil and gas industry that was nationalised in 1938, effectively banning inflows of foreign capital.

But last year’s energy landscape overhaul by the Mexican Energy Ministry (SENER) via the Hydrocarbons Law and Hydrocarbons Revenues Law now encourages foreign investors to bid for prospective oil reserves and related midstream and downstream activities as part of President Enrique Pena Nieto’s effort to bolster declining production.

As a result, while 2013 projections envisioned 50 percent shrinkage of oil and gas production by 2028, it is now expected to double by that year.

The US Energy Information Agency predicts Mexican production will stabilise at 2.9 million barrels per day through 2020 and rise to 3.7 million barrels per day by 2040, 75 percent higher than the 2013 outlook. Todd Bright, managing director and head of private infrastructure, Americas at Partners Group – which recently bought a majority stake in the in-country gas pipeline operator Fermaca – even goes so far as to predict an impending “oil and gas boom” in Mexico.

Behind the energy expansion push is the belief of Mexican leaders that the lack of existing natural gas pipelines has caused the country to miss out on the US shale gas boom. Through midstream asset buildup, SENER projects that US pipeline exports to Mexico will more than double to 3.8 billion cubic feet per day (Bcf/d) in 2018, from 1.8 Bcf/d reported in 2013.

As part of the overhaul, Petroleos Mexicanos (Pemex) published new governing laws last August, transitioning the organisation from a bureaucratic state agency to an ‘independent’ state entity. This was followed by corporate restructuring in November, which divided Pemex’s Exploracion y Produccion (PEP) arm, while simultaneously collapsing Pemex Gas y Petroquimica Basica (PGPB) and Pemex Refinancion into a single subsidiary, Pemex Transformacion Industrial.

Newly permittable activities through the Secretary of Energy will include: treatment and refining of petroleum; processing of natural gas; and the import and export of crude oil, natural gas, and petroleum products. Through the Energy Regulatory Commission, permits will be made available for: transportation; storage; distribution; compression; liquefaction; decompression; regasification; marketing and retail sale of crude oil, natural gas, petroleum products and petrochemicals; integrated pipeline transportation; and storage systems.

All this amounts to 48 energy infrastructure projects requiring investment of about $11.5 billion, according to Federal Electrical Commission (CFE) chief executive Enrique Reza Ochoa. These include 16 electricity transmission and distribution projects, 15 renewable energy projects adding 2.7 gigawatts of capacity (part of the President’s plan to scale up renewables to 35 percent of energy production by 2024), 11 natural gas pipelines, and six natural gas-fired power generator plants, CFE said recently.

DEFYING THE PRICE SLUMP

The unexpected oil price drop resulted in an announcement by Energy Minister Pedro Joaquin Coldwell that Mexico may delay or scale back planned exploration and production project tendering. But analysts, lawyers and fund managers we have spoken with all confirm that Mexico remains attractive, and that in the near term, there will be a strong focus on liquefied natural gas (LNG) importation from the US.

Political support for both infrastructure and private investment, rapid economic growth, a highly-skilled workforce and a reliable legal system, lead us to gauge Mexico – its energy market in particular – as highly attractive for infrastructure investors in the coming year, despite the call from certain fund managers for further proof of transparency from CFE and Pemex.