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

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

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
An Update on the Mexico Energy Market Liberalization

An Update on the Mexico Energy Market Liberalization

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

 

Government of Singapore Investment Corporation Sets Sights on Mexico

Government of Singapore Investment Corporation Sets Sights on Mexico

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.

10 tweets trying to explain the Mexican Energy Reform

10 tweets trying to explain the Mexican Energy Reform

Photo credit: A Twitter Banner Draped Over The New York Stock Exchange For Twitter’s IPO by Anthony Quintano

Originally posted in my Twitter Account @DoBusinessMX on June 24, 2014, this is a collection of tweets trying to explain the Energy Reform in detail. Well, as much detailed as possible within the 140 characters constrain. Flexibility on style and spelling is understood. One tweet per topic block, as presented by the Executive Branch to the Congress. Currently under discussion. I welcome any RT, fav and reply.

 

Im making a 9-tweet analisys of 21 energy laws under discussion @ the Mex Congress (659 pgs) HT #EnergyMX RT please. Thx.
1 #EnergyMX PEMEX w/o monopoly on hydrocarbs or ducts. Keywords>1st refusal Sep21 DFI contracts profit/prod sharing MexicoEagleFord!!!
2 #EnergyMX Electricity opens. Pub&priv: Gen, Trans/Dist, Supply (priv>big users / pub>basic users), Trade. CENACE to admin the grid.
3 #EnergyMX Geothermal opens for recon (8mo permit), exploration (3+3 yrs) and exploitation (30 yrs + renewal). Big data analytics biz.
4 #EnergyMX Industrial Security and Environment Hydrocarbons Agency gets more powers to oversee PEMEX, CFE, oilers and gas companies.
5 #EnergyMX PEMEX & CFE 2yrs to become gov corps under private law. Leave gov proc laws. Flexible contract&JVs. +Governance.
6 #EnergyMX Hydrocarbs (upstream) and Energy Commisions (mid-downstream) regulate in coord. Res challenges in court. No suspension.
7 #EnergyMX hydrocarbs incomes from licenses (explor quota, royalty, signing bonus, consideration) and contracts (explor quota, royalty).
8 #EnergyMX sovereign fund will receive all oil&gas incomes for savings, investment and protect public finance.
9 #EnergyMX if sovereign fund is 3%+ of DGI can be applied to universal pension, renewables, infra and ed (% spending rules apply).
Oil Exploration Opportunities Open up in Mexico

Oil Exploration Opportunities Open up in Mexico

Rossville-Oil Tanks 2 by Joseph Kranak

By the end of 2013, Mexico had opened its state-run petroleum sector after over seven decades of being monopolized by Pemex. Now, the country is taking full advantage of this change in the constitution and preparing itself to become the next frontier to many of the world’s top oil companies.

Lourdes Melgar, deputy minister for hydrocarbons, said, “We are seeing in the first bid round, two areas in deep waters, some areas of shale gas, some areas of the non-conventional Chicontepec (basin), and some areas in shallow waters.” The industry is expecting private investors to be tendered some parts of the highly profitable Perdido Fold Belt and a few offshore heavy oilfields along with technically challenging areas.

In addition, the energy minister is going through the 68-page Round Zero wishlist detailing the fields Pemex wants to hold onto to tender some of those fields by June 2015. The government has until September 17 to determine which fields Pemex will lose, but the decision is expected much earlier to avoid hurdling the state-oil monopoly’s operations. Besides, Pemex is planning to discuss joint-ventures and partnerships for the fields it keeps, so it needs a decision to start its own plans.

While the first step Mexico is expected to open its deep water oilfields to tender starting 2015, Pemex believes that the first international round of bids could start by the end of this December. The bidding will cover 25,000 sq km, enabling international oil majors to get their share of Mexico’s 86.6 billion barrels of oil and gas. This is widely expected as Perdido, Mexico’s deepwater discovery, will be available for bidding despite Pemex controlling a large part of it. However, Melgar expects the Mexican state oil company to require partners since deep water isn’t its specialty.

Melgar also anticipates Chevron and Exxon to express interest in its extra heavy oilfields since both have the experience to do so after developing the Kearl project in Canada. However, it’s Chicontepec that’s causing the most concern. The onshore field has been a disappointment despite constant drilling operations. Regardless, Melgar is optimistic. “We have had a lot of interest in Chicontepec and not just from international companies, but also from firms that are perhaps working as contractors,” she said.

To complement these changes, Mexico is planning a flexible tax framework for the private oil and gas companies coming to the country. The government, along with the conservative opposition, is negotiating this necessary document to give the country a competitive edge in the North American energy sector, define how much the investors will receive, and specify the government’s share of its oil and gas resources.

The tax model is expected to include a sliding-scale royalties system that would differ depending on the type of field, the cost of oil and gas there, as well as the production. In addition, a royalty discount may be offered for shale gas producers to make it more tempting despite its narrow profit margins. However, both the government and the National Action Party are yet to finalize the details.

Mexico will hold at least ten bidding rounds and will be holding them annually unless the authorities plan more frequent shale tenders.

Yet, the complete package of bills to the energy sector is expected to be presented this week.

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