Photo credit: Global Santa Fe Rig 140 by ST33VO
Despite the Deepwater Horizon oil spill and natural gas fracking boom three years ago, experts expect offshore oil drilling in the Gulf of Mexico to produce huge amounts of oil. Big finds, which are known as “elephant fields” by engineers, have the power to produce for at least 50 billion barrels over the next 20 years.
For Mexico, this is a pleasant surprise as its oil production had started decreasing since 2004. With the aging of oil fields and lower returns from the largest field Cantarell, the US Energy Information Administration (EIA) believed that Mexican oil production would continue declining. However, with the introduction of the August 2013 energy reform proposal, President Enrique Peña Nieto has focused on attracting foreign investors to boost oil production and build Mexico’s economy.
As the US is Mexico’s largest trading partner, the economic growth of the latter is deemed of great importance. This is why a number of US oil companies have signed a Memorandum of Understanding (MOU) with Mexico’s national oil company Petróleos Mexicanos (PEMEX). One of the latest to jointly develop, own and operate a facility in Mexico is Keppel Offshore and Marine.
Keppel has signed up with PEMEX’s subsidiaries PEMEX Exploración y Producción and P.M.I. Norteamerica S.A. de C.V. In his congratulatory message, CEO of PEMEX Emilio Lozoya said, “This MOU highlights PEMEX’s commitment to increase oil and gas production in the long term by developing a sustainable offshore and marine industry in Mexico that can readily meet our needs. By partnering with the world’s leading rig builder Keppel, we are confident that the shipyard will be a success and help to provide a wide array of solutions for the production of oil and gas. Mexico’s proven reserves of oil and gas at the start of 2013 is almost 14 billion barrels of crude-oil equivalent and we believe that a significant number of shallow water and deep-water drilling rigs as well as FPSOs and FLNGs will be required to maximize production in the years to come.”
The US Senate has passed legislation in October to enact an international treaty to govern oil drilling in the Gulf of Mexico. Through it, a framework for oil and gas development across both countries’ maritime boundary would be implemented. Alaska Senator Lisa Murkowski explained, “In addition to opening up nearly 1.5 million acres of the outer continental shelf, it also ensures that any exploration along our maritime border adheres to the highest degree of safety and environmental standards.”
The House and Senate are yet to decide whether or not to exempt publicly traded companies from disclosing what they pay other countries for drilling and collecting oil and natural gas. However, once the treaty goes through, the Bureau of Ocean Energy Management believes that both countries will have access to 172 million barrels of oil and 304 billion cubic feet of natural gas.
Aside from benefiting the US and ensuring its place as the top oil and gas producer in the world, offshore drilling in the Gulf of Mexico will boost Mexico’s economic development. With more jobs and an added competitiveness in the international market, the growth in oil production will increase the 3% economic growth by 1-2% this year.
Many experts believe that Pemex or Petróleos Mexicanos the state owned oil monopoly is the jewel of Mexico. For years it has funnelled billions into state treasury funds for schools, highways, ports and hospitals. Yet, even with Pemex being credited for building the Mexican nation, officials have acknowledged that the inefficient company is in financial trouble. Officials have been quoted as saying that if the company is not opened up to foreign and private investment Mexico will find itself a net energy importer within the next ten years. This is quite a shocking revelation given that Mexico is currently in the top ten of the world’s largest oil producers.
As Mexico’s new president begins to establish his administration, he is looking set to create plans which will overhaul Pemex and meet with great political opposition. The reason behind this is that many Mexicans believe that the removal of foreign oil companies in the 1930’s allowed Mexico a sense of true independence. Some believe that allowing foreign investment back into the Mexican oil sector will allow greater powers access with their troops.
Experts are anticipating landmark legislation for energy reform, which should include proposals and policies addressing Pemex. Industry experts and government officials believe that advancements in technical expertise which will come from outside investment and companies is the only way to retrieve reserves of gas and oil from shale rock and deep water formations. These sources are estimated to contain over half of Mexico’s reserves totaling over seven billion barrels.
However, Pemex is currently not allowed to choose their associations which would reduce risk levels of deep water exploration. Pemex executives believe that the company needs flexibility and budget autonomy to be able to form joint ventures. This would require significant changes to the constitution and will be a politically sensitive battle for the government to instigate. Even mention of parties agreeing to reform by President Peña Nieto sparked fierce debate and argument about Mexico’s ability to remain independent from foreign interference.
However, even opponents of reform cannot deny the legendary problems associated with Pemex. The company’s past history of poor management decisions, corruption, huge union demands and inefficient corporate structure, it provides a business model of how an oil company should not be run.
According to a study from 2011, Pemex revenues per employee is a fraction of the oil giant BP and approximately half of the part state owned Oil Company from Brazil Petrobras. Even Pemex executives acknowledge that Mexico is decades behind industry standards regarding deep water exploration. They haven’t had the pressure to pursue riskier searches since there was an abundance of inland and shallow water oil. This meant that the engineers have not kept up with the technological advancements which are commonplace with competitors.
Mexico has a wide array of sources of energy which is almost as diverse as the United States. However exploiting them is too overwhelming for one single company. There is much speculation as to how the Mexican constitution could be amended to allow production sharing agreements, or if secondary laws will allow other opportunities of cooperation, or whether taxation will be reduced to allow investment and make Pemex more efficient, but until the discussion is not focused on solving the problems of Pemex, the obstacles are too great.
Photo credit: Copenhagen Takeoff by Julien Menichini
The aerospace manufacturing industry in Mexico has been building momentum over the last decade. The national government has been focused on developing domestic industry to build the Mexican economy. This focus of priorities has encouraged the growth of the aerospace industry from $146 million of exports in 2004 through to $3.5 billion in 2010.
The Aerospace Summit taking place in Mexico September 2013 will showcase this growth and is aimed at building further growth. The summit will allow visitors to appreciate the competitive advantages which can be enjoyed by manufacturers operating in Mexico. It also looks set to detail the logistics and business dynamics of aerospace manufacture in Mexico, with tours of plants and facilities, exhibitions and seminars from experts within the industry.
This can only strengthen the position of Mexican estimates that the aerospace industry is forecast to achieve consistent growth of up to twenty percent per year through to 2016. This would boost the economy considerably and be responsible for the creation of approximately 37,000 jobs across 350 companies.
There are numerous benefits for companies looking to establish operations in Mexico, including significant cost savings. Recent research conducted documented savings of approximately thirty percent when compared to operational costs in other countries. Mexico manufacturers currently produce engine parts, turbines, landing gear, fuselages and other components. However, there is a great effort to coordinate the resources of state and federal government together with private industry to allow the further and strengthened development of the infrastructure including education to facilitate and support further industry growth.
Mexico has been keen to welcome businesses within a number of industries including the aerospace field to encourage establishing operations. Many companies have been attracted by the lower structure of wages in Mexico which allows manufacturers to pay a fraction of the assembly wage costs in the United States. Expert analysis estimate the job costs of Mexico manufacturing is approximately ten percent of U.S costs and almost thirty percent of European costs. This could be explained as different levels of skill but Mexico on state and national levels is aggressively pursuing aerospace investment and jobs to broaden their industrial base beyond current expectations of electronics and auto-motives. This approach appears to be extremely effective as two hundred and seventy aerospace companies now have factories within various regions of Mexico.
In fact, the World Bank now reports that ninety percent of Mexico’s exports are now industrial products and their economy is now classified as the thirteenth largest in nominal terms with a ranking of eleventh for purchasing power. This explains why the label of made in Mexico is becoming more familiar and commonplace.
The geography of Mexico, free trade attitude and adoption of new legal processes are also huge factors in this industry growth. These measures have removed a great deal of the bureaucracy and red tape for foreign owned companies looking to establish production operations. It has also allowed for efficient and speedy establishment of factories which far outstrip factory creation in the European or U.S market.
All these factors combine to confirm that aviation manufacturing has certainly found a home in Mexico, where it looks set to stay in years to come. Now, you may add that automotive industry has established a blooming industry that share IMMEX (export incentive program) with aerospace manufacturing. With IMMEX program, operations reduce and sometimes, eliminate duties and taxes. Mexico is building “the” automotive/aerospace cluster.
Despite the global recession, Mexico is actively seeking out investment from Chinese companies. One of the major investment sectors being targeted is the automotive industry. With this in mind Mexico is participating in the Auto Shanghai annual event for the first time, to showcase Mexico’s suitability and meet with potential investors.
There have already been several commitments from Chinese companies looking to invest but many other companies have already begun researching and feasibility studies to determine whether setting up factories in Mexico would be a sound investment. The Shanghai event has allowed Mexico to begin talks with some of the largest Chinese automakers who attended a ProMexico seminar at the event.
Mexico has a number of advantages which would provide opportunities for Chinese companies, including the proximity to the United States. The U.S is the largest consumer of vehicles worldwide, which represents a huge market share. While Mexico also has a number of trade deals which allow privileged access for Mexican exports to over forty nations. Investment in Mexico for operations and infrastructure would save on logistical costs and delays to facilitate more efficient export to the United States and Canada.
Of course, the current economic climate has had an effect on Chinese investment. The automobile market in North America has halted or delayed a number of investment plans, but many companies look set to establish operations in Mexico should the situation improve. Mexico is currently the tenth largest producer of auto-motives in the world, but this could grow considerably should investment plans become a reality.
However, the Mexico-China relationship is not limited to the automotive industry. Many Chinese manufacturers have begun to establish operations in Mexico over the last ten years. China based firms in the textile, cellular telephone and electronics industries have set up operations. By 2005, there were over twenty Chinese manufacturers operating in several Mexican states. Many of these investments were considered small, but they have created thousands of job opportunities.
Mexico has also signed agreements with Chinese companies to cover equipment, technology and ships to support the Mexican oil industry. The line of credit from the Bank of China allows for the acquisition of equipment and ships needed for offshore activities and includes the possibility for finance for the overhaul of the state owned Permex fleet. These agreements lay the groundwork for potential cooperation for oil pipelines in the future. Since Pemex is the fifth largest oil producer in the world and is one of the only firms to handle all aspects in the production chain, this represents a great opportunity for China.
With rapid rises in costs including transportation and wages occurring in China, Mexico represents a good opportunity for Chinese companies to cut costs and improve productivity. Since many also believe that the Yuan may also be adjusted upwards against the U.S dollar, this could also highlight Mexico’s competitive position.
Many experts believe that we may soon see factory cities being established close to the U.S border which will present great investment opportunities for Chinese companies while boosting Mexico’s economy. It is certainly a development that many will be watching in the future.
Despite the fact that Chinese look for a free trade agreement without restrictions with Mexico, there are a lot of laws, benefits and breaks that Chinese are eligible. For example, Chinese-investment corporations are still eligible for IMMEX (export incentive programs), automotive production benefits, tax breaks from local governments, free-granted land from county governments, and many vast programs that are making Mexico attractive for auto manufacturing, regardless of the nationality.
Photo credit: Hacking Circuits, Digital DNA, City of Palo Alto, Art in Public Places, 9.01.05, California, USA by Wonderlane
I hope you have read the First Part of this Post. If not, feel free to catch up here. This is part 2 of 3-part post on the recently published Mexican Telecom Reform. Follow me to explore the great opportunities to come.
It´s STEM People time.
The debate of immigration across the US is being fueled by the lack of STEM professionals (science, technology, engineering and math). The scarcity of STEM people in Silicon Valley has forced the tech community to push US Congress for a flexible immigration bill that can attract foreign tech startups and talent, as Toronto and other places are doing.
Mexico has a base of 400,000 software engineers and 65,000 graduating every year that could fill-in the needs for tech people in the Mexican telecom industry. With the right infrastructure, a successful outsourcing service can be set up to serve the US and the world. Even more, such services are eligible for IMMEX export incentives in Mexico.
Mexico also has the advantage of having a flexible immigration policy for qualified technicians/professionals and businessmen, as well as great conditions for startups. The opportunity and the challenge will be for schools and human resources. They need to create better models for attracting and keeping up the best. Companies could expand work-from-home policies, a very limited spread in Mexico.
In my recent post “Mexican Telecom Reform: The Rise of the STEM Lawyers”, I discussed that this Reform will be taken at court very often. Incumbents will play defending tower, and entrants will try to siege the market. STEM lawyers will play an essential role on arguing complicated concepts like dominant player, relevant and related markets, essential facilities and substitutes with the variables of regulation for each service. These are concepts taken from economic theories inserted into the Law, but lawyers will be in charge to enforce them.
Now, you may add that telecom courts will have a learning curve, and the scarcity of STEM lawyers in Mexico will not make an even battlefield for the parties. Also, technology is ever changing and converging. All these changes are the cue for the legal industry worldwide to develop business in a non-liberalised legal market.
Broadband Internet Access.
The Reform granted all Mexican citizens and residents the constitutional right to broadband and Internet. This acknowledged right has effects on the business environment.
First, no authority, of any level, can unreasonable obstruct telecom infrastructure.
Second, any Project pitched to the Government under the Public Private Associations with the label “broadband” increases its chances to get public funding.
Third, the term “essential facilities” will be key for telecom and IT businesses, as convergence makes it difficult to unbundle essential from accessory facilities. Again, court will decide.
Fourth, long-term growing and sustainability will require open and collaborative models, as restrictions could be declared unconstitutional.
Fifth, universal broadband service is still in discussion as to the speed, if it will apply for corporations or how to enforce it and up to what extend.
Sixth, Supreme Court has just started its electronic signature and file program. The intention of the Court is that all federal proceedings would be electronic. A major overhaul in firms and courts will be needed to migrate from paper to electronic, as major part of commercial proceedings are in written.
Seventh, MVS won a constitutional writ to recover part of the 2.5 GHz band. There is a possibility to keep enough bandwidth to implement his broadband-for-everyone Plan with Intel and Clearwire.
Bonus life, Gartner calculated that during 2011, there was a spending of $74 US Billions in video games. Mexico spent $1.2 US Billion in video games that year, with the growing annual tendency of 25%. Microsoft has already announced that “Xbox-One” (due by December 2013), will require always-online. Adding up the trend of free-to-play, VOD, paid content/subscriptions, mobile and social gaming, this represents a heavy amount of GBs that will be demanded in the mid-term. Even PROMEXICO (Mexican Promotion Agency) has placed a bet on video game production in Mexico.
Third and last instalment is coming in a couple of days …