Mexico tenders oil drilling to allow foreigners

Mexico tenders oil drilling to allow foreigners

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Mexico’s lawmakers have approved new and historic measures which will be opening the energy sector to private investment. The Mexican oil sector had previously been a state monopoly for over 75 years. Mexican President Pena Nieto made liberalization of the energy sector, among others, a central part of his platform when he became President. At present, Mexico is the world’s 9th largest oil producer.
In the next 6 months, details of the tenders will be made available by Mexico’s energy minister. There will be between 30 and 40 zones where private companies will be able to bid in the first tender. As has been reported widely, Mexico has an enormous, untapped oil reserve. The first round of public tenders will likely take place in early 2015.
Royal Dutch Shell, ExxonMobil and other foreign oil companies are reportedly interested and actively monitoring the recent legislative activity surround the proposed tenders.
As the new law outlines, foreign and private domestic energy companies will be permitted to explore, produce and refine oil. In 1938 Petróleos Mexicanos (Pemex) was created to perform these duties and has since done so exclusively. The new regime is the first time ever the Mexican government has permitted foreign or private energy companies to participate in this work.
Zepeda told news reporters that no big surprises should be expected from the tender process. That Pemex’s requests for some biddings to be reserved for its exclusive tender – will not be. In particular, where there are areas that Pemex does not have a demonstrated expertise – the government will be seeking foreign experts. Deepwater and unconventional drilling and exploration are some examples.
In the future, Mexico’s Congress will decide on further tenders. They will retain the right to award or not reward certain areas for public tender in the future. Mario Gabriel Budebo, a former hydrocarbons undersecretary, told media reporting on the matter that any new law should clearly spell out what criteria would be useful for those future tenders. In particular, he cited the need for clarity in the areas of licenses, profit or production-sharing contracts
After the initial tenders are completed, Mexico’s Comisión Nacional de Hidrocarburos (CNH) will administer annual tenders aimed at exploiting the approximately 115bn barrels of oil (equivalent) that is estimated that Mexico contains and that Pemex is unable to develop.

Zepeda told reports that the tender is likely going to take place next summer. And that “Blocks could range from 150 sq km for shallow-water fields to up to 500 sq km in deep waters and as big as 1,500 sq km in virgin areas.”
Despite these sweeping changes to the energy sector, the Mexican economy is predicted to grow at 2.7 percent this year – a slower growth level than what many had hoped for. As a result, Mexico’s President, Enrique Pena Nieto – has seen his popularity dip. Despite this, he promises to continue to focus on reform – and it appears clear too, that despite any political developments in the future, it’s likely that Mexico’s’ economy has been permanently changed to one open to the world.

Photo credit: Oil and rig by Curraheeshutter / www.bigstockphoto.com
Mexico Japan trade ties bolstered with visit of PM Abe to Mexico

Mexico Japan trade ties bolstered with visit of PM Abe to Mexico

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Japanese Prime Minister Shinzo Abe ad Mexican President Pena Nieto have agreed to work together to help secure a twelve-nation agreement on the Trans-Pacific Partnership (TPP), as La Prensa reported last month. The TPP is an ambitious proposed treaty that would solidify trade ties between nations across the Asia-Pacific region – from North America, South East Asia, Latin America and North East Asia.  Apparently, the negotiation also included issues related to members of the Pacific Alliance like Colombia, Chile and Peru, an economic block that Mexico joined to promote common investments through cooperation mechanisms.
As was reported by Fox News, the accord has “hit a snag…due in large part to the Japanese government’s desire to maintain its barriers to farm imports”. Peña Nieto’s administration, [however], has expressed confidence that the ambitious trade agreement will be signed before year’s end.
But this complex treaty was not all that was on the agenda when Abe visited Pena in Mexico at the end of last month. No, the leaders of Japan and Mexico signed 14 cooperation agreements covering oil, education, health, agriculture, renewable energy and environmental protection.
Both leaders also agreed to revisit and strengthen the bilateral economic association agreement the two countries signed ten years ago.

The Japan-Mexico economic relationship
Japan is Mexico’s fourth-largest trading partner. Among Asian countries, Japan is Mexico’s second largest trading partner behind China. Nearly 1,000 Japanese companies operate In Japan – with 20% of them having only just recently arrived in Mexico. As Fox News reported: “Peña Nieto noted that bilateral trade has risen by 64 percent since then and totaled nearly $20 billion last year.”
Fox News reported President Nieto as having said of the future of Japan-Mexico trade ties: “’There will be more academic exchanges, greater access to the Japanese market for small and medium-sized enterprises, a greater push for renewable energy and the development of sustainable agricultural models.’” Reporting further that Prime Minister Abe referred to a “’shared commitment to spur collaboration and investment promotion in the oil and shale gas area.’”

While no mention of Japanese investment to auto industry was made, Mexico is becoming a strategic hub for these Japanese auto firms, which had a combined 32% market share in the US during 2013. From official reports of Q1-2014, 122 Japanese auto firms invested $4,3 Bn representing 12.7% of total auto investment in Mexico.

Moving forward
While the trade ties between Japan and Mexico are envisioned to be broad based, one of the most important reasons Prime Minister Abe visited Mexico was the 2013 energy market liberalization, which ended Petroleos Mexicano’s (the government’s oil company) monopoly. The liberalization allows private companies to develop crude reserves for the first time since 1938.
During the Abe visit, an agreement between Mexico’s state oil firm Pemex and Japan’s development bank, and another between Pemex and the Japan Oil, Gas and Metals National Corporation. These agreements will see Japan able to import energy from Mexico at a time when it is in much need of these resources.

The 2011 Tohoku earthquake in Tsunami has placed strain on Japan’s domestic nuclear energy resources as the tragedy hastened the closing of many of the countries power plants.
In particular, Japan has a particular interest in Mexico shale gas, but no specific plans have been made to import that gas yet, Yahoo news reported. Underpinning this interest is the ease with which that gas can be imported versus more challenging import routes. “The American gas Japan currently buys comes from the eastern United States, and must be shipped through the busy Panama Canal.”

Photo credit: DSC21812, Byodoin Temple, Uji City, Japan by Jim G
The Mexican Eagle Ford

The Mexican Eagle Ford

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The Mexican Eagle Ford

The Eagle Ford Shale is considered the largest economic development in the history of Texas, with a USD 60 billion impact estimated for 2012 alone and over 115,000 jobs created in 20 nearby county areas. It is also ranked as the largest oil and gas development due to the USD 30 billion spent in developing the play in 2013. With a record-breaking rate of 4,000 barrels per day of oil, the Eagle Ford play has put South Texas on the map. However, whereas the lights can be seen from the surface-level gas flares and rigs in the area, the Mexican part of the shale is engulfed in darkness.

The Mexican share of the Eagle Ford Shale has hundreds of mile forming the Burgos Basin, and bear the opportunity of thousands of wells to boost the economy. While the American side has over 5,400 wells, Mexico has only attempted 25. It is expected a change from the secondary legislation that is under final discussion at Congress now.

The Effects of the Mexican Energy Reforms

Initiated by President Enrique Pena Nieto, the energy reforms will open the Mexican oil industry and private foreign investment sector after over seven decades. As a result, foreign investors are having a serious interest in the country, and could bring along new technology, expertise, and risk assessment tools that state oil monopoly Pemex has failed to introduce in its operations. Though lawmakers are currently working on the details of the reforms, U.S. oil and gas companies as well as others from across the world are optimistic about being able to bid on projects by the end of 2014 and initiating projects even in some of the country’s most violent areas in 2015.

If all goes as planned, Mexico can easily become a large net importer of oil in a few years. Pemex predicts that the formation holds approximately 60 billion barrels of oil, which is more than the volume the country has produced since 1904. Natural gas especially is expected to be plentiful; a 2013 survey by the U.S. Energy Information Administration showcased that Mexican shale gas reserves were the world’s sixth.

Unfortunately, despite the country’s rich resources, its demand for electricity and pipeline infrastructure has forced it to depend on imported gas. At certain parts of the country, the prices of natural gas can reach four times as high as those in the United States. Therefore, in addition to countering this issue, the shale’s resources have the power to help the country’s economic and energy development and ensure its self-sufficiency when it comes to its fuel needs.

Finally, due to the lower cost of gas, Mexico can generate energy for less, empowering its manufacturing and assembly plants and helping them compete with China. According to Javier Trevino (PRI), the Mexican Congress’ head to the energy commission, “This is critical to the re-industrialization of North America. Mexico needs to develop these resources, or else we’ll be left behind.”

How the Reforms will Benefit Eagle Ford Shale Producers

The American producers will get numerous opportunities to start tapping into the Mexican side of resources. With Congress currently taking the necessary steps towards creating laws which complement the reforms, numerous organizations have started applying to the Federal Energy Regulatory Commission (FERC) to build border-crossing pipelines from the U.S. side of the Ford Shale to Mexico.

Columbia Pipeline LLC has already filed an application to construct a pipeline from Texas to help with generating power in Mexico. The company, which is a San Antonio based unit of Howard Midstream Energy Partners, has been collecting gas and continuously working on the infrastructure which Eagle Ford producers depend on.

“Howard Energy’s gathering pipelines are connected, either directly or indirectly, to significant supplies of gas produced in Texas…The border crossing facilities will…meet the needs of the expanding electric generation and industrial markets in Mexico. As such, the border crossing facilities will expand the market for domestically produced gas…will further national economic policy by stimulating the flow of goods and services between the United States and Mexico, in the process improving our international balance of payments,” said the company’s official.

Also following in the same footsteps is Kinder Morgan Inc., which has proposed the Sierrita Pipeline and made plans to connect it with natural gas transmission channels towards northern Mexico. The pipeline will connect El Paso Natural Gas Co’s mainline at the interstate system in Arizona to a point near the international border at Sasabe. “Sierrita Pipeline will serve new demand for gas transportation by MGI Supply Ltd. delivering natural gas to the border crossing facilities and on to Mexico; Sierrita’s services will not replace any existing services by other pipelines,” FERC announced.

Issues Which Should Be Addressed First

There are a number of issues which Eagle Ford Shale producers will have to take into consideration before they can venture into the Mexican oil and gas market. The first of these is the less developed Mexican infrastructure. Pipelines, rail and roads need to be taken care of and improved to facilitate production and allow raw materials capital equipment to make its ways from South Texas.

Another problem which Ford Shale producers will need to take care of is the security factor. Due to the constant drug violence in Mexico, especially around the borders, oil and gas producers tend to hesitate about entering the Mexican energy sector. Luckily, President Enrique Pena Nieto has already been waging a drug war two months since he took office in 2013. “My government will continue mounting a real fight against the trafficking of marijuana and all other drugs.”

In addition, due to its proximity to Mexican shale oil and gas deposits, the United States will make the most of these resources. While many countries are interested in tapping into the reserves in Mexico, most of the expertise needed for this task will be from the United States. Therefore, the U.S. is bound to benefit more from the prospects for shale oil and gas exploration in Mexico since has a wide experience in fracking and exploring techniques. However, still some environment regulation is still in process to be decided.

The Bottom Line

Mexico’s oil reforms will open the country for international investors and oil and gas explorers, allowing them to take advantage of the rich reserves in different parts of the country, including the Eagle Ford Shale. Aside from the U.S. and Mexico, shale oil and gas exploration will take its toll on global markets. The shale’s businesses and producers will be able to tap into the shale boom, strengthening their position and establishing themselves beyond North America.

Photo credit: Oil And Gas Industry – Refinery At Twilight – Factory – Petrochemical Plant by Ttstudio / Bigstock.com

An Update on the Mexico Energy Market Liberalization

An Update on the Mexico Energy Market Liberalization

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Mexican President Enrique Peña Nieto has revolutionized his country’s oil and gas industry, opening it for foreign investors after 75 years and taking strict action against the 20 years of production decline, political stagnation, and a slow, underperforming economy. With the constitutional reforms already approved and the Congress finalizing discussion to determine and implement secondary legislation, Mexico is gearing up for a new future. It could end this very week.

The Effects of the Reforms on Pemex

Petróleos Mexicanos (Pemex) was previously celebrated as a symbol of national unity; the people of Mexico went as far as treat the day Pemex was established as a holiday. However, the oil and gas monopoly burdened the country by becoming a large employer of unskilled labor.

In addition, as half of its revenues were paid to the government in the form of taxes, Pemex’s low income was not able to contribute much to the economy. In 2013, Pemex reported an overall loss of USD 13 billion and about USD 2.74 billion in the first quarter of 2014. Inefficiency and low revenues aside, Pemex became a nuisance as it interfered with the country’s politics, meddling with the government whenever possible. Therefore, change was necessary to bring the company and the economy back on track.

By liberating the market from Pemex’s hold and allowing foreign oil companies in, the national Mexican oil producer will receive the help it needs to start efficiently producing oil. The reforms will also spare the Finance Ministry from its duty to approve the company’s budget. In addition, selling gasoline, which was monopolized by Pemex, will now be open to competition.

This may come as a blow to Pemex, especially after being in control of Mexican oil for so many decades. However, the government is taking steps to ensure a little leniency towards its national oil company. Not only is the government proposing that Pemex pay it fewer taxes for the next ten years, but President Peña Nieto himself assured its 153,000 employees that they will not be losing their jobs.

Regardless, Pemex expressed its wish to control most of its operations. Despite acknowledging that it lacks the financial and technical requirements to make the most from its existing fields, its officials are demanding that they be in charge while private companies entering the market join them as junior partners. This has brought on the criticism of many in the oil and gas sector, including deputy energy minister Lourdes Melgar who said, “Pemex wants to eat all the cake, but it can’t. I think there will be gray areas where we will have to ask Pemex for more information and at some point tell them, ‘This one won’t work.’ ”

In order to boost Mexico’s production by 20% or approximately three million barrels a day come 2018, President Peña Nieto intends to separate Pemex from the government and make it function like a for-profit company. To give the company the help it needs to start oil exploration and production operations in 2014, the government will also provide USD 28 billion. Though it may seem like an unnecessary step since the government wants to weaken the company, it will actually open the opportunity to boost the competition level in the Mexican energy sector. Pemex may even become as successful as Brazil’s Petrobras or Columbia’s Ecopetrol.

Through these changes, money and expertise will be flowing through the Mexican energy sector. The U.S. especially will be interested in partnering with Pemex since it shares many reserves of shale gas and oil with its southern neighbor.

How the Reforms Affect Market Valuations

The Mexican stock market in 2014 may not be as strong as experts expected, but many investors remain positive as the market has been trading at a higher valuation than most Latin American markets. However, investors are cautious, especially since the economy is still recovering. Besides, the past year came with its set of problems, including adverse weather conditions, lower government funding, and financial distress reported by three of Mexico’s top homebuilders. This explains why the Mexican economic activity did not meet forecasters’ expectations and the GDP growth amounted to a mere 1% in 2013.

Complementing the energy reforms is Mexico’s fiscal reform, which has affected both companies and citizens. Around the end of 2013, before the tax reform was implemented, corporations hesitated before investing and hiring. However, things have changed in 2014 and companies are following the new fiscal rules and higher taxes. Similarly, individuals are starting to slowly embrace healthier habits as high taxes were levied on sugary, high calories foods and drinks. Their spending habits will also recover near the second half of 2014, which is when the true effects of the new rules will be noted.

A Look at the Risks Facing Investors

Investing in Mexico is not that difficult, especially since the country flaunts the lowest banking penetration in Latin America. Experts believe that the financial sector will help boost the economy and ensure potential growth in consumption. However, as is the case in any form of investment, there are numerous risks which can lead to devastating consequences including loss of principal. Foreign securities are especially most susceptible to currency fluctuations and economic and political uncertainties.

Since the energy market is one of the emerging ones in Mexico, the risks associated with it are plenty. For starters, the lack of legal, political, business and social frameworks will cause chaos in the market. Prices will grow more volatile and the market will show lesser liquidity. There may even be numerous trade barriers and exchange controls, all of which may affect currency rates and ultimately reduce returns. Therefore, the government should start establishing regulations quickly.

Corruption risks are also hindering foreign players. According to the Department of Justice’s Transparency International’s Corruption Perception Index, Mexico scored 34 out of 100 with 100 being a corruption-free country. Mexicans themselves admit this characteristic and even associate Pemex with it. However, even corruption is not deterring many large investors as they can always create a risk-based compliance program that is perfectly tailored to overcome risks.

The Bottom Line

As the reforms are still at a delicate state, Mexican opposition figures are constantly criticizing them. However, officials like the Mexican Secretary of Finance Luis Videgaray Caso believe that changes are never easy. “Making fundamental changes is always challenging,” he said. “There… [is] some resistance to change. Mexico’s energy sector has a lot of potential to create jobs and to lower the cost of energy to families and companies across Mexico. But for that, we need to have investment and we need to have technology that we currently don’t have,” he added.

However, opportunities will come Mexico in due time to those who follow and analyze in depth the reform.

Photo credit: PEMEX gas station by Alberto Esenaro

 

Mexico to Spend $100 Billion Dollars to Develop Shale Resources

Mexico to Spend $100 Billion Dollars to Develop Shale Resources

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Photo credit: Gasoline Storage Tanks by Rennett Stowe

The Mexican Congress is expected to approve the secondary legislation related to the energy reforms before the end of summer. This legislation will detail the now approved Constitutional Reform on energy that opened the market to foreigners. While no exact date has been set, end of July seems reasonable. Once passed, these reforms will complete the opening of the tightly closed oil and electricity sectors. However, while they may be used to reverse the decline of domestic oil production, they are mainly beneficial for the development of domestic shale deposits.

The Ministry of Energy is keen on investing in developing Mexico’s shale resources, which it estimates will cost USD 100 billion (or USD 250 billion according to some resources) for the next ten years. Previously, the task was entrusted to national oil producer Pemex, but it only managed to invest USD 250 million in shale gas exploration. However, it will be a while before foreign companies can become involved as the reform process will take until the end of 2014 or the first quarter of next year to settle down. A phase of implementation is being discussed.

One of the shale formations Mexico has its eyes on is the “Mexican Eagle Ford” shale, the sixth largest in the world, now covered under the US-Mexico Transboundary Hydrocarbons Agreement (cross-border oil reserves). The shale is responsible for two thirds of the country’s shale gas resources, which is approximately 600 trillion cubic feet. In addition to Eagle Ford, Mexico has 13 billion barrels of recoverable oil resources, ranking it the 8th largest in the world.

While this is a huge opportunity, it does come with its fair share of challenges. Despite the reforms, the exploration process will not be easy as infrastructure needs ample work, especially in the northern part of Mexico. Another issue that shale extractors face is the large amount of water required to drill reserves. In Coahuila, where the largest untapped shale is located, the water supply is scarce, making the state the second driest. Even the water that does come to the state is mainly used to agriculture activities. However, an amend to Waters Law is in process to support Geothermal business. Will it help shale too?

Drug cartels are also a threat foreign investors are wary of, especially since they have always extorted and stolen from foreign investors. However, Mexican president Enrique Pena Nieto is continuously urging local governments and private enterprise to address security risks and fight the growth of cartels by improving education in local communities, especially those in the shale-rich communities of Coahuila and Tamaulipas.

To further discuss the shale resources Mexico has to offer foreign investors, a two day oil and gas event named the Mexico Shale Summit will be held in San Antonio, Texas in February 2015. During the event, Mexico will showcase the opportunities and challenges of its northern regions, giving valuable industry insight and establishing strategic relationships that help the country ensure the success of its future ventures while mitigating the risks frightening many foreign investors.

Shale in Mexico has created many expectations along with solar. Can Mexico convert this interest in direct foreign investment? What is your opinion?

Government of Singapore Investment Corporation Sets Sights on Mexico

Government of Singapore Investment Corporation Sets Sights on Mexico

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DSC00928 by gigile

Government of Singapore Investment, one of the two ventures owned by the Singaporean government, is planning a number of investment opportunities now that Mexico has opened up its energy sector. One of the GIC’s upcoming projects is a partnership with Mexican oil company Pemex, the latter which was forced to give up most of its oil field to end up its 70-year monopoly in this sector.

“We think Pemex is being transformed by inspirational leadership,” said Anthony Lim, GIC’s president for the Americas. “We are open. We will explore any investment opportunity that is brought to us.”Lim also showed interest in approaching public company such as the state electricity company CFE, which is also being transformed to become more productive and up to the new government’s standards.

GIC’s decision to venture into the Mexican oil industry is one that will be welcomed by the government. President Enrique Peña Nieto’s government has been trying to attract foreign investors since 2013 before the energy reforms were passed. In fact, foreign secretary Jose Antonio Meade had met with a group of businessmen in October 2013 and signed a memorandum of understanding between the Mexican infrastructure and construction company ICA and the Singaporean company KS Energy. Both planned to form a company in Mexico to provide drilling services and equipment, boosting oil and gas exploration.

However, the reforms have been receiving much resistance, especially from the left which believes that foreign oil majors will control Mexico’s resources. To that, Lim from GIC comments, “We don’t seek control. We are long-term investors. We are very, very patient.” Lim also pointed out that this level of skepticism actually makes it worthwhile as he believes that opportunities will thrive in any business “where we see there could be a valuation mispricing gap between what the market thinks and what we think the new management brings to the table… that’s why we’re interested”.

While the first project of GIC in the country may be partaking in a tender for a new airport in Mexico City, Lim says that it intends to be very careful while picking its points of entry. GIC has already started adding to its 3% of assets invested in Latin America to come close to the 40% belonging to the U.S. and the 25% of Europe. However, it hasn’t disclosed the size of its assets yet. In addition, the government-owned organization is considering Brazil to increase its presence in Latin America.

Singapore is currently Mexico’s second largest investor from the Asia Pacific region and the fourteenth largest internationally. It is also the fourth largest trading partner in Asia, with its trade amounting to USD 2.095 billion.

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