Critical Point in Energy Reform

Antonio O. Garza (Ambassador to Mexico, 2002-2009)

Cross-posted from Ambassador Garza’s October 2014 newsletter.

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I’ve been following Mexico’s energy reform closely—from the lead-up to the constitutional reform through the passing of the secondary legislation. Almost one year in, what Mexico has accomplished is nothing short of historic. The reform went far beyond what many believed possible and international energy companies are already busy announcing their investment plans and partnerships with Pemex.

But this doesn’t mean that the work is done. And in fact, for many companies the game is just beginning. Though not grabbing the headlines, today’s process of designing contracts and bidding rounds, will be, in many respects, far more critical.

Mexican officials will be hitting the road over the next weeks, meeting with investors and companies in Houston, New York, and beyond. Their job will be to explain the rules of the bidding rounds and seek input on the fiscal terms, which could be announced as soon as November. Getting these terms right, and implementing the other parts of the secondary legislation, will be critical to laying the reform’s foundation (something I’ve written about before here). It will also be important for bringing in the foreign investment necessary to reverse declining oil production and develop new fields (estimated to be around $8.5 billion annually).

Some of this investment will come from Mexican companies and their counterparts in Europe, Asia, and Latin America. But U.S. companies, given their deep economic relationship with Mexico, are particularly well positioned to take advantage of these new opportunities.

U.S. companies have a long history of doing business in Mexico, sending south an average of $10 billion a year between 2002 and 2012. Up until now, much of this money was channeled into Mexico’s manufacturing sector (helping create today’s North American manufacturing platform). But the energy reform opens up entirely new sectors for investment, and not just for major oil and gas production companies. Midstream infrastructure gaps and opening competition in the electricity sector are just two more possible opportunities.

The two countries also sent back and forth a total of $57 billion in oil and gas products in 2013, totaling some 12 percent of the $500 billion in bilateral trade. While this was the highest amount of total trade ever for the two countries, 2014’s exchanges look to be even larger. From January through July of this year, bilateral trade was $15 billion more than during the same period in 2013 (equaling $74 million more in goods every day).

Texas is front and center as the number could grow further with the completion of the Ramones Pipeline, which some are calling the future backbone of Mexico’s natural gas pipeline network. Stretching from Agua Dulce in Texas to Central Mexico, the pipeline will connect the Texas’s natural gas fields to Mexico’s manufacturing heartland and begin funneling cheap gas south starting in December 2015.

Bottom line, there is a lot to be watching in Mexico and along our border.

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