Mexico's emerging infrastructure opportunity
With energy reform in Mexico under way, US companies are eager to participate in the Mexican oil and gas renaissance. One of the biggest opportunities is the need for investors to develop midstream capacity to support new exploration and production.
The timing could not be better, as Mexico is an attractive market with significant opportunities for inbound investment. Mexico, the 14th-largest economy in the world, has abundant natural resources, including both conventional and unconventional oil and natural gas reserves.
Opportunities and challenges
There are many opportunities in Mexico, including the following.
- The Mexican population has a growing and increasing well-educated middle-class.
- The Mexican Government, under President Enrique Peña Nieto, has placed a significant bet on Mexican energy reform. The Mexican Government is looking for direct investment of approximately US$350 billion in the next five years from outside the country to reinvigorate domestic energy production.
- The Mexican electric utility, Comisión Federal de Electricidad (CFE), is currently looking to expand natural gas import capacity substantially in the coming years.
There are also many challenges in Mexico.
- Currently, the transportation and storage business in Mexico is fragmented and unsophisticated.
- Mexico’s crude oil infrastructure is aging, and many parts of the country are unserved.
- Although energy reform in Mexico is designed to be attractive to foreign investors, there is little evidence that the Mexican Government would be amenable to a corporate-tax-free, master limited partnership (MLP) structure.
Midstream investment is needed now
One often overlooked investment opportunity for the US oil and gas industry is Mexico’s vastly underdeveloped midstream sector. A recent study by the Binational Center Library at Texas A&M International University suggested that capital investments in Mexico’s midstream segment could total US$17 billion over the next five years.
Structuring midstream investments
In 1997, Mexico opened up a portion of its midstream sector, allowing private investors to build and operate natural gas pipelines (although the Government kept the prohibition on private investment in oil pipelines in place).
However, the move did little to encourage new capital flows into Mexico, and the natural gas pipeline industry is still largely controlled by Pemex and CFE. A new agency, called CENAGAS, has now been created to oversee and manage crude oil and natural gas transportation infrastructure.
The complexities and tax implications of midstream investments in Mexico should not deter US (or other non-Mexican) energy companies from pursuing these attractive opportunities. There is considerable upside to be gained from companies that can not only invest capital wisely but can also bring structure and cohesiveness to Mexico’s transportation and storage needs — especially on the liquids side of the business.
We can provide a wide range of planning and advisory services to companies interested in the Mexican midstream market. With the proper structure and approach, US companies can participate successfully in this important component of Mexico’s energy future.