Financier is high on Mexico's potential.
P&GJ: Why did President Enrique Pena Nieto institute the Energy Reform program?
Ennis: President Enrique Pena Nieto created the Energy Reform program to bring in billions of dollars in investment to the country's ailing oil, gas and electricity sectors. The program is designed to usher in a new wave of economic growth in the second-largest economy in North America.
P&GJ: What opportunity does this present for investors in oil and gas?
Ennis: By ending the 80-year-long monopoly of Mexico's two state-controlled energy giants, national oil company Pemex and electricity utility CFE, the Energy Reform opens up new opportunities for investment across the industry. Mexico is an excellent location for international oil and gas investors to add substantial reserves. The bidding process is well-defined and open to any qualified oil and gas investor.
P&GJ: What does deregulation mean for the Mexican economy?
Ennis: The Mexican government believes the reforms will boost annual growth by 5% per annum through 2018. By 2019, at the end of round five, Mexico expects to have auctioned just over a third of the country's prospective resources. This deregulation can lead to the creation of $37 billion in potential energy development projects.
P&GJ: What has been the market reaction to the first offshore developmental auction?
Ennis: Low oil and gas prices negatively affected the first-round auction with only two blocks being awarded. A number of investors are still worried about negative reactions to the selloff. The administration wants to make sure that the selloff doesn't look like they are selling their jewels off cheaply to international companies.
P&GJ: What types of investors do you expect to see involved in pipeline development?
Ennis: Interest has come from well-established companies like Sempra's IEnova, TransCanada, Energy Transfer and Enagas. Mexican companies like Carso Energy and Fermaca, which have both recently won pipeline contracts are also active. Through most of 2015, CFE offered 12 pipeline projects for tender; we expect more to come and interest from many international and domestic investors.
P&GJ: Do you see more funds flowing in from foreign or local investors?
Ennis: The investment in this newly available asset will come largely from foreign players. Pemex was forced by the Energy Reform to relinquish some of its acreage to be auctioned and has withdrawn from bidding because of financial restraints. Preapproved qualified bidders in the auctions include ExxonMobil, Chevron, Total, Statoil and BG, as well as Malaysia's Petronas, Lukoil of Russia, Anglo-Australian resources company BHP Billiton and ONGC Videsh of India.
P&GJ: Do U.S. investors need a local partner in Mexico to conduct business?
Ennis: Additional reforms introduced at the end of 2014 by the president have resulted in an increasing need for corporations and joint ventures to ally themselves and combine local market knowledge with the expertise and capital required from foreign partners. As more international firms look to joint ventures to conduct business in Mexico, we have seen higher production of oil and billions of dollars in foreign direct investment in the energy sector.
P&GJ: What do investors and developers need to know about different finance structures between the U.S. and Mexico?
Ennis: Structuring oil and gas infrastructure development deals in Mexico is unique compared not only to the U.S., but around the world. Success requires a partner with an in-depth knowledge of the key differences Mexico presents. A good example is in how natural gas pipeline service is paid for in the U.S. vs. Mexico. In the U.S., natural gas pipelines are financed on a cost of service model. This means that companies factor in the amount of money needed for operation and maintenance, cover capital expenses, and deliver the product and then set rates that allow an opportunity to earn a profit above the anticipated fixed costs.
In Mexico, rates are set up front as a per month transport fee, and are often fixed over a long period of several years. As a result, it is imperative to structure the financing terms of any deal specifically tailored to meet the parameters of this model, as well as to provide a level of flexibility should an unforeseen event change prices.
P&GJ: What is the history of ING's involvement in Mexican energy finance?
Ennis: ING has been in Mexico for over 35 years. Since 1975, our finance team has led some of the most innovative and forward-thinking projects in Latin America. Most recently, local developers leveraged ING's Mexican presence and natural resources expertise to finance construction of the Fermaca Global's Tarahumara pipeline from El Paso, TX to Chihuahua, Mexico. This project will have a significant impact on the Mexican economy, bringing in more, cheaper energy to power new manufacturing and developments in the region. ING recently closed financing on the $820 million La Laguna pipeline.
P&GJ: What types of financing has ING participated?
Ennis: In addition to the Tarahumara and La Laguna pipelines, ING has financed an LNG import terminal and is helping to finance storage facilities, power-producing plants and energy transmission power lines, all of which lead to more jobs.
P&GJ: What type of clients are you currently working with in Mexico?
Ennis: We work with local and international pipeline and energy infrastructure developers, local Mexican banks, international investment banks, as well as private equity firms.
P&GJ: Where does ING see this market in the next five years?
Ennis: The Energy Reforms are ushering in private investment and developers, creating a boom for international energy development in Mexico. We expect this to grow exponentially over the next five years. As a result, we fully expect to see a renaissance of the Mexican economy, fueled by access to larger amounts of cheaper, cleaner energy. Take this statistic as an example of the potential of Mexico. The U.S. consumes on average 70 Bcf/d, whereas Mexico, with a population roughly a third of the population to the US, consumes only 5 Bcf/d. Through financing the development of pipelines throughout Mexico, those numbers will even out and the Mexican economy and people will greatly benefit.
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|Title Annotation:||Mexico Reform Update; ING Capital L.L.C|
|Publication:||Pipeline & Gas Journal|
|Date:||Jan 1, 2016|
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