Investment opportunities in the Mexican oil industry

September 2017  |  FEATURE  |  FINANCE & INVESTMENT

Financier Worldwide Magazine

September 2017 Issue

Following the deregulation of the Mexican energy industry in 2013, the country’s oil sector is now, finally, open to private investment for the first time in over seven decades. Progress has been slow. Four years on, the market is well behind where the government would like it to be. But the reform is beginning to pay off. Mexico’s energy sector will receive about $100bn in investment this year, according to energy minister Pedro Joaquín Coldwell.

“Everybody is looking into Mexico, and we are starting to see that oil companies and private equity money are starting to believe in the new industry, not only to put its money at risk in exploration projects but also in the new infrastructure that would be required,” says Oscar A. López Velarde Perez, a partner at Ritch, Mueller, Heather y Nicolau, S.C.

The first real movement in the oil industry came in May when a private company began to drill a new offshore oil well in Mexican waters. A joint venture between London-based Premier Oil Plc, Houston’s Talos Energy LLC and Mexico’s Sierra Oil & Gas began drilling a well, the first of its kind since Mexico nationalised its oil industry in 1938. This landmark moment for the industry, should the joint venture prove successful, may act as a siren call to other international investors. Joint ventures will be increasingly important to the industry in the coming years, says Miguel B. de Erice, a partner at E&I Asesores, Pemex, and organisations that have had service contracts with the firm will be able to lend their considerable experience of operating in the Mexican market. “The reform has already produced some good outcomes. In particular, several companies have participated in the biding processes for exploration and extraction contracts. The investment interest is driven by multiple factors, including the constant demand growth of petroleum products, the State’s commitment to support the reform, Mexico’s experience in the industry and the profound research on proven reserves and prospective resources, as a result of seismic studies,” he says.

According to Rogelio Lopez-Velarde, a partner at Dentons Mexico, partnering with domestic players can bring value to an investment if the project will have a great impact on communities or a specific geographical area. “Developers of natural gas or liquids pipelines will find that a domestic partner can play a big role on social, land and permitting matters. We expect that more international players will see Mexico as a great area of opportunity for project development and investment in ongoing projects”.

Investment is now beginning to flow into the Mexican market in a number of different ways. American oil companies won five out of the eight blocks auctioned in Mexico’s first sale of deepwater oil licences last year. The industry is approaching a unique point in history, offering many different opportunities for growth, not only in exploration and production activities, but also in midstream and downstream activities. “The Mexican oil industry is in a transformational, modernising phase,” says Mr de Erice. “The reform package has enabled the flow of private investments, which means that for the first time, the production processes are not strictly dependent on the size of the federal budget. Instead, private entities with ample financial resources, experience and technology needed by the industry have been allowed entry to the market and will overcome the deficiencies of the state.”

A move toward cleaner and more sustainable forms of energy could also bring benefits. Mexico’s national climate plan could save the country billions of dollars up to 2030, and should attract investors. “To the extent Mexico continues to bet on cleaner fossil fuels to power its economy, additional investments will occur in pipelines, storage and trading of natural gas,” says Mr Lopez-Velarde of Dentons Mexico. “Also, as the midstream regulator implements the reform, investments in pipelines and storage facilities of clean products will see a spike.”

Given the breadth of the reform and the interest in the oil industry, there will be many opportunities for investors, as existing infrastructure will not be able to adequately support this developing market. “Mexico will require a lot of capital for the infrastructure that would be required,” says Mr Lopez Velarde Perez. “We are starting to see oil companies putting money into Mexico, and the first wave of private equity, but there is more to come. Private equity still needs to make a real impact, and banks will also start lending money for the development of projects.”

However, there will also be headwinds to overcome. Donald Trump’s presidency could be problematic, as the subsequent sharp depreciation of the peso has shown. Furthermore, a January 2017 report from the Organization for Economic Co-operation and Development (OECD) expects the Mexican economy to grow at around 2.3 percent this year and manage growth of just 0.1 percent in 2018.

Nevertheless, Mexico’s oil industry should be a tantalising prospect for investors willing to make the most of the country’s ample resources and strong local knowledge base.

© Financier Worldwide

BY

Richard Summerfield