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June 13, 2012
CALGARY, AB, Jun 13, 2012/ Troy Media/ – Canadians would do well to pay more attention to Mexico – their ‘other’ North American trading partner.
On July 1, Mexicans will choose their next president. Most likely, the new president will keep Mexico’s open doors to foreign investment in areas such as water and waste, energy, infrastructure, mining, petrochemicals, and oil and gas. There are 76 major projects under development and more opportunities are expected.
Recently, five companies have submitted prequalification documents to Mexico’s state-owned PEMEX (oil and gas) for incentive-based contracts.
The project targets six mature fields: the Altamira, PÃ¡nuco, San Andres and Tierra Blanca onshore areas; and the Arenque and AtÃºn offshore regions. The companies are Arawak Energy Canada, Cheiron Holdings, Dowell Schlumberger de Mexico, Operadora de Campos DWF and Operadora de Campos de Poza Rica DWF, according to a document from Mexico’s Secretaria de Energia.
Despite their political differences and agendas, all four presidential candidates seem to share common views regarding Mexico’s energy sector, which could include opening PEMEX and CFE (electric power) development to the participation of public-private associations in areas such as exploration, gas, refinery, petrochemicals, and sustainable electric power.
In particular, PEMEX is looking for offshore exploration and production in the deep-water Gulf of Mexico. CFE, the monopoly-giant supplier of electricity, is setting its sights on sustainable power, including eolic and solar energy.
Canadian investors, however, must consider that such possible business opportunities come with a price tag. Liberalization of Mexico’s oil and electric sectors would not be the base case scenario if any candidate/party wins the upcoming presidential election. Given the political heterogeneity, success of future contracts with PEMEX and/or CFE must be based on a careful understanding of how these state-owned companies are under a process of improving, optimizing and adapting new ways of making service contracts. In short, new contracts would not be deemed as final drafts.
Investors would benefit if they look at this as a process, with trials and errors that would imply corrections and negotiations. In this way, imperfections can be improved in future contracts as a way to assure contractors and to provide a model to follow. In any case, even if at the present stage contracts represent novel instruments subject for improving, one thing is certain. Mexico’s energy sector is fast growing and requires increasing production.
A case in point is presidential candidate Andres Manuel LÃ³pez Obrador’s (AMLO) energy policy proposal. If elected, AMLO intends to construct the Tula refinery in Hidalgo State – for which PEMEX is already tendering for engineering – as well as the expansion of the Salamanca refinery in Guanajuato State. Overall, such proposed refining projects would add 750,000 to 800,000b/d capacity to PEMEX’s National Refining System (SNR in Spanish), according to LÃ³pez Obrador’s prospective Energy Minister, Adolfo Hellmund.
At the moment, Mexico’s six refineries have 1.5Mb/d processing capacity. In 2011, fuel imports averaged 678,212b/d. PEMEX has estimated construction of the 250,000b/d Tula refinery could cost some US$11 billion. In contrast, the prospective minister Hellmund said LÃ³pez Obrador’s team expects US$3 to 4 billion investment for each 150,000b/d refining train.
They also estimate that the investment return could be possible in three to four years from derivatives sales. The refining projects would be the key to LÃ³pez Obrador’s proposal to gradually reduce crude exports so the SNR can supply domestic fuel demand, which is currently satisfied largely by imports. Anyway, some crude exports could continue in a LÃ³pez Obrador administration, but to a lesser degree.
Similarly, the PRI’s candidate, Enrique PeÃ±a Nieto, proposes the assessment of production-sharing or risk-sharing contracts to increase exploration and production investment, implementation of public-private associations, and energy sector reforms. He has also said PEMEX could issue shares on the stock market. Currently PEMEX has no shareholders and private firms are barred by the Mexican Constitution from booking reserves.
In conclusion, the chances of Mexico’s energy sector liberalization are slim. Furthermore, reforms could be blocked by lawmakers from different parties in the Mexican Congress. It happened in 2008, when the PRI obstructed parts of President Felipe Calderon’s energy reform, including private refining and transport. Therefore, PAN, PRD or PRI, may be reluctant to cooperate with another party’s-led initiative.
Since Mexico’s 1938 oil-gas nationalization, liberalization has been a sensitive issue, as well as a point of national identity. Any past attempts to liberalize the sector have produced contested reactions from political parties, union leaders, and Mexicans at large.
Nevertheless, the business opportunities for Canadians willing to learn Mexico’s energy sector bidding rules and new incentive-based contracts are clear and present. Despite of the lack of ideal contracts, and what seems to be a long learning-curve, at the end, rewards look promising.
Miguel Angel Aviles-Galan is a Fellow with the Latin American Research Centre University of Calgary.
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