All Eyes On Mexico Energy Reform Creating Opportunities

In the next two weeks, Mexico’s lawmakers are expected to release a series of Mexico energy reform bills, known as the secondary laws, that should begin to delineate how the revolutionary energy reforms approved last December will be implemented.

Prior to the reforms, Mexico had the most closed energy regime of any country in the world, save North Korea, some have quipped. This Latin perestroika is not going unnoticed in the US and abroad. It has become de rigeur at nearly every oil and gas conference to have at least one panel to discuss the changes, and with good reason.

Not only is Mexico close, the opportunity is huge. The country is prospective for 54.6 billion barrels of oil equivalent in conventional resources, and 60.2 billion in unconventional, according to PEMEX figures. And don’t forget NAFTA. Although Mexico’s energy industry had been excluded under Chapter 6 of NAFTA, that exclusion may no longer apply given the reforms, said Dallas Parker, a partner with Mayer Brown, during a presentation at Mergermarket’s 6th Annual Energy Forum last week in Houston.

US executives frequently bandy about words like “excited” and “excitement” to describe the eagerness with which they look forward to doing business in Mexico. While upstream players have many questions about expropriation risk, booking reserves, structure of joint ventures with PEMEX, or even securing seismic data, opportunities may actually emerge more quickly for other parts of the oil and gas supply chain.

Mexican business leaders are approaching these reforms with excitement too, but leavened with a dose of caution. During a keynote at IHS CERAWeek in March, Pemex chief Emilio Lozoya warned, only half-jokingly, that he would not look kindly on potential partners trying to poach his employees. A potential problem, in fact, discussed earlier in the day during another panel.

Although Mexican midstream company Fermaca sold a majority stake to Partners Group for USD 750m in February, another Mexican midstream CEO told Mergermarket that he wanted to wait a couple years to see how energy reforms played out before pursuing a similar course. And he indicated many of his peers felt the same way.

The caution may be warranted. Even after passage of the secondary laws, Mexican lawmakers will need to change or amend 28 existing laws that come into conflict with the reforms, noted Mayer Brown’s Parker.

One area where Mexican companies may be more bullish is in offshore support vessels. Under Mexican law, offshore support vessel operations can be undertaken only by Mexican companies with majority Mexican investment of at least 51%, and with Mexican-flagged vessels, said Jesus Ugarte Aznar, an attorney with KSA. The US itself has similar protectionist laws, a la the US Jones Act.

With an eye on participating in Mexico, US offshore support vessel operators are already talking about joint ventures, and at least one Mexican company is looking for investors to fund its entry into the market, according to recent reports by Mergermarket.

Opportunities in the pipeline

Midstream is another active area because energy reforms also removed PEMEX’s monopoly over distribution, storage and related areas.

Mexico is already a major importer of US propane and it has immediate need for cheaper natural gas. There are plans to build gas pipelines to powerplants on the Mexican side of the border to reduce electricity prices, which are 25% to 40% higher than in the US, said Mayer Brown’s Parker. Private equity-backed NET Midstream has already received a Presidential Permit from FERC to build a $665m pipeline to Mexico, according to reports.

US infrastructure and private equity funds are particularly interested in such opportunities, but also are investigating entrance into Mexico itself, Mergermarket has reported. A Mexican investment banker told Mergermarket that several specialized energy funds are expected to enter Mexico, and more could be created by both national and foreign investors.

One such fund was announced by former Mexican president Vicente Fox in June 2013. At that time, Fox said that he himself has not invested in the $500m fund and declined to disclose who the founders or investors were, saying only that the fund is entirely Mexican. The private equity firm is called Energy and Infrastructure Mexico (EIM Capital), and is headed by Carlos Michel, former Vice-President at HSBC Asset Management in Mexico, the banker said.

US midstream master limited partnerships (MLPs) like Mexico too, but concerns over tax leakage may keep MLPs focused on the US side of the border, said William Moore, senior vice president of Crestwood Midstream Partners, during a panel at the Mergermarket Energy Forum.

Long-term midstream has plenty of upside. Increased production onshore or offshore will likely require a massive build-out in gathering, processing and long-haul pipelines. There’s even the possibility that one day Mexico’s West Coast LNG import terminal, Energia Costa Azul just south of San Diego could be converted to an export facility, according to Mergermarket reports.

By Mark Druskoff in Houston and Adriana Curiel in Mexico City