Mexican Energy Revolution

Mexican president Enrique Peña Nieto has proved the doubters wrong and implemented a huge energy reform. LatAm INVESTOR looks at how it will impact investors...

The revolution is under way

It’s fair to say that Peña Nieto divides local opinion. He may have won a controversial election two years ago, but a large chunk of the population still hasn’t been won over. In fact, his approval rating has slumped this year to 37% from 54%. But now it looks like Peña Nieto will end up having the last laugh. After a year of wrangling and horse trading he has finally passed the legislation for his landmark energy reform.

"the path is now open for the private sector to get involved, which is good news for investors…"

This might not give him an instant poll boost, but it will mark him down as one of the most influential Mexican presidents. And, more importantly for us, it opens the door to one of the most exciting investment opportunities of the decade. You see, at the end of last year, Peña Nieto managed to change the constitution to allow the energy reform to happen.

But important though it was, it remained meaningless until he managed to pass the legislation that gave companies a legal framework to take advantage of the reform. And that’s what Peña Nieto has achieved this month and the path is now open for the private sector to get involved, which is good news for investors.

Mexico’s energy potential: 87 billion barrels of oil and gas

What’s striking about the reform is the scale of the opportunity. Mexico has an estimated 87 billion barrels of prospective oil and gas resources – that’s more than twice as much ast Britain has taken from the North Sea over the last half a century.

Of course, as we’ve seen with the Scottish independence debate at the moment, these figures are just estimates. But the fact remains that there’s clearly a lot of oil and gas.

The Gulf of Mexico holds huge oil reserves

Pemex, Mexico’s state-owned energy giant, has come up with four packages of opportunities for private firms. The first looks for companies with the technology and money to help it boost production and mature fields.

The second requires almost $7bn of investment and focuses on fields with technically challenging extra-heavy oil.

The third package is made up of two giant deepwater gas fields in the Gulf of Mexico. And the fourth and final package is for two deepwater oil fields.

In total, Pemex is looking to sign $32bn-worth of partnership deals over the next 15 months. Of course this is just the first stage, which involves areas where Pemex knows there is oil and gas. Private firms will also be able to explore new areas and bring shale gas online.

How to invest in Mexico’s energy revolution

There are also opportunities in other parts of the energy sector. The petrochemical industry has been opened up completely, with foreign companies allowed to start 100% privately-owned operations. Private players in electricity generation will also be allowed to sell directly to business customers.This liberation of the electricity market will boost gas transportation – which was privatised in the ’90s. With more freedom to negotiate prices, there is more incentive to build pipelines that can bring cheap natural gas from the US.

The electricity sector is also being liberalised

These moves in petrochemicals and gas pipelines don’t attract as much attention as the oil exploration, but they’ll have a quicker impact on the Mexican economy. Cheap gas and a more efficient petrochemical industry will give Mexico’s competitive manufacturers yet another advantage.

Lower energy prices would also help to shore up public support for the reforms and convince sceptical Mexicans that this is not just a wheeze to enrich a bunch of foreigners and the elite.

So, how to play it? Well, until we see who bids for what, we can’t take a punt on any of the oil and gas firms yet. Some names, such as Pacific Rubiales, Total and Noble Energy have already declared an interest, but nothing confirmed yet.