Mexico’s Energy Sector: Boom or Bust for Foreign Companies?

Mexico’s Energy Sector: Boom or Bust for Foreign Companies?

Photo credit: tiny adorable oil pump by Heidi De Vries

As many energy sector investors know, Mexico is world’s sixth largest oil producer and is the tenth largest net exporter of oil.   Mexico’s production is only behind that of the United States in North America and surpasses Canada’s oil production efforts.  As may be expected, the petroleum sector is incredibly important to the country’s economy; however, production has seen a steady decline for decades.  This decline could very well be reversed if Mexico’s ruling party, the Institutional Revolutionary Party (PRI), gets legislative approval for its most recent proposals concerning the oil industry.

The colossal state-owned Petróleos Mexicanos (PEMEX) currently dominates Mexico’s oil sector; and while the current government insists that PEMEX will remain a state-owned company and will continue to enjoy a monopoly, it is aggressively adopting a platform to open PEMEX to private investment.

The goal of the current government’s proposal is to increase production as the energy needs of the country have been growing to such an extent that supply cannot meet demand.   Although the country has vast reserves of oil and gas, they cannot be extracted, as PEMEX does not have the shale oil and gas extraction technology that exists in the United States.  Furthermore, the country’s oil industry infrastructure is badly in need of modernization.   At the moment, in order to meet the demand for energy, this oil-rich/extraction-poor country is importing energy resources from its northern neighbor via cross-border pipelines.

This situation could be reversed as mentioned above; President Enrique Peña Nieto is hoping that proposals to open the oil industry to foreign investment will be passed.  This could mean that opportunities for American investors may arise.  A primary aim of investment would be to get more Mexican oil to the United States; but where foreign companies could profit the most would be in the area of consulting services.

As previously stated, the country is sitting on vast reserves but PEMEX technology is outdated and is not extracting oil in an efficient manner.  Foreign companies that specialize in infrastructure technology could be hired by PEMEX to modernize the country’s facilities thanks to the proposed legislation.

Mexico also lacks shale gas and oil extraction technology.   Since this technology has been implemented in the United States, Mexico’s northern neighbor will most likely become a net exporter of energy in the next twelve years and will no longer be dependent on foreign sources of oil.  Many manufacturing industries that left the country to set up factories in Asia are in fact returning precisely to take advantage of the significantly lower energy costs.  If the PRI’s proposal gets legislative approval, American and other foreign consulting companies could indeed take part in setting up shale oil and gas extraction facilities in Mexico.

While PEMEX will remain a state-owned company and foreign energy businesses may not be able to set up shop in the country, many energy sector investors could turn a healthy profit by investing in the above-mentioned consulting services.  Mexico has the energy resources but needs the infrastructure, technology and facilities to extract them.

One area that could enjoy benefits of these proposed PEMEX reforms is Texas, which already has strong energy sector ties with Mexico.   South Texas, which is experiencing “unprecedented” growth in the industry, is the ideal candidate to bring its wealth of experience to help Mexico modernize its state-owned giant and build an effective, efficient extraction/transportation infrastructure.

Mexico Energy Sector Investment Opportunities: Gas Imports

Mexico Energy Sector Investment Opportunities: Gas Imports

Photo credit: Oil Pump by C2C Balloon

Mexico, although it has what are potentially large amounts of shale gas and oil in its territory, isn’t producing nearly enough natural gas to meet the country’s growing demand for energy.  The result is that for now and the foreseeable future, Mexico will be needing to import natural gas from the United States.  While this might at first encourage companies to invest in American facilities and energy infrastructure projects north of the border, there are actually boundless opportunities to invest in Mexico’s energy sector as the Spanish-speaking north American country scrambles to provide energy for its expanding economy.

According to the U.S. Department of Energy, the amount of gas extracted from U.S. resources bound for Mexico will most likely double in the next year.   There are several pipelines that will be constructed between the two neighbors and these are expected to transport an additional 3.5 billion cubic feet of natural gas per day by 2014.  Last year, exports of natural gas from the U.S. to Mexico reached their highest levels in four decades, and there seems to be no sign that the level of exports will be slowing down.

According to the Energy Department’s Energy Information Administration, “Natural gas consumption is rising faster in Mexico than natural gas production, and as a result, Mexico is relying more on natural gas imports from the United States.”  Although Mexico has traditionally relied solely upon the United States as a source of natural gas when its own resources were insufficient to meet demand, since 2006 Mexico has been looking for other overseas suppliers in a move to diversify its domestic energy sector.

As mentioned above, Mexico is sitting upon a tremendous amount of shale gas, and Pemex, the state oil monopoly, has reported that there are possibly 1 trillion cubic feet of natural gas – but production is idle.  Presently, chances are that this resource will go undeveloped because private investors are not allowed to develop or implement projects dealing with the natural gas.  However, Pemex has announced that given certain financial conditions, 24 shale gas wells may be drilled in the next eight or nine months.

So where do the investment opportunities exist for those who want to be profitably involved in Mexico’s energy sector?  Are there any ways in which investors can benefit from Mexico’s natural gas crisis?

The good news is that while there might not be any opportunities in the natural gas extraction industry, there are ample opportunities in pipeline projects.  In order to meet demand, several pipelines will need to be constructed for United-States/Mexico natural gas transport.  Furthermore, the Mexican state power company Comisión Federal de Electricidad (CFE), who has recently awarded billion-dollar plus pipeline construction contracts to the Calgary-based pipeline giant TransCanada Corp., might be looking for more pipeline construction companies to help meet its energy needs.

Speaking of his company’s 25-year natural gas transportation contract with the CFE, TransCanada CEO and president Russ Girling stated: “Mexico’s government is engaged in a comprehensive plan to expand the nation’s electrical grid and generating capacity and much of that generation will be natural gas fired.  This award is another example of TransCanada’s commitment to help develop Mexico’s energy infrastructure in a sustainable and cost-efficient manner.”

To summarize, if the government decides to break the monopoly Pemex currently enjoys in Mexico, there will be great opportunities for early investors in natural gas extraction.  However, even if this monopoly continues on for years, profit can be made from Mexico’s natural gas shortage.  Pipeline infrastructure will be necessary and the CFE will possibly be financing many more projects in the years to come.

Energy Opportunities in Mexico

Energy Opportunities in Mexico

Photo credit: Foggy Bottom Pump Jack – Duncan, Oklahoma by duggar11

When it comes to energy opportunities, Mexico right now is a very hot market indeed for companies that export oil and natural gas; furthermore, if the present federal government, headed by President Enrique Peña Nieto can manage to break the monopoly that Petróleos Mexicanos (PEMEX) has enjoyed since the 1930’s, it’s possible that Mexico will require  infrastructure investors and technological expertise in the oil extraction industry.

This week, Mexican Senate approved the National Strategy for Energy, which will include the objectives for years 2013 to 2027. Nevertheless, President is lobbying for an energy reform to come during last 6 months of year 2013 to the Congress.

Natural gas

The current situation in Mexico is this; there are plenty of opportunities for U.S. or other natural gas and oil suppliers to export product to Mexico.  In fact, there is, at this very moment, a proposal to build a 124-mile pipeline to transport natural gas from the Eagle Ford Shale area (Texas) right to the Mexican border.  The company building the pipeline will be the Houston-based NET Midstream.

It is well known that Mexico does have very large reserves of natural gas, however, development of infrastructure has not been able to keep up with the country’s demand and consumption, so, for the next while, Mexico will need to import energy such as natural gas until the infrastructure is built.   To give an idea how big the potential market could be, energy consumption in Mexico has grown at four times the pace of its economic growth several times in the past ten years.    The domestic industry simply cannot keep up.

Because Mexico’s automotive industry is growing at a very brisk rate, with vehicle production expected to top 4 million units by 2018, the country does not have the luxury of asking companies to cut back on energy consumption; it is needed to keep the economy growing and it’s needed to lift even more people out of poverty.

Therefore, natural gas exporters should see if they can sell their product to Mexico; and companies with expertise in natural gas infrastructure could perhaps act as consultants to PEMEX, or sell directly within the limits of the law, so the country’s infrastructure will be able to handle the domestic demand.

Solar energy

Other energy opportunities exist in the solar energy market.  Since 2011, the price of existing solar technology has gone down about 30%, meaning that panels will be cheaper to produce and will be affordable for many to buy.  Because the taxes on energy have gone up by 25% in some cases, people cannot afford electricity from the national grids.  However, it is exactly this group of people that would be potential solar panel clientele.  Solar panel suppliers and retailers may do very well in the Mexican market; furthermore, because Mexico receives more than its fair share of sunshine, the country would be a good place to conduct research and development, along with manufacturing.

Wind Power

Mexico has a potential 71,000 Megawatts versus 1,214 Megawatts installed. Wind generates 77% of the total electricity generated through renewable resources. By 2025, it is expected to increase capacity to 11,267 MW.

In relation to foreign investment, by 2012, Mexico received accumulated investments of around US$6.902 billion in the renewable energy industry, which was concentrated in States of Guanajuato, Oaxaca and Baja California; and coming from Spain, the United States and France, mainly. These investments were made in wind farms, as well as plants for manufacturing generators, paddles, towers and other components.

Wind-generated energy is sold to the Government (usually sold through tenders) or generated by industrial companies for self-consumption. Opportunities for builders and engineering firms are open.

Oil

The current Federal Government is looking to open oil industry to private sector. Due to a lack of capital, vast reserves in the country are going untapped.  If the industry opens, investment in infrastructure, technology and skills could be responsible for 1.6 mbd of petroleum in the next 15-20 years.  If private investment is allowed, the opportunities for investment will be massive.

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