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Analysis

Infrastructure Opportunities Finally Unfold

Wed, 02/22/2017 - 15:59

As in most emerging countries, Mexico’s economic landscape is in constant transformation. In the energy sector, new projects are changing the country both below and above the surface. More kilometers of natural gas pipelines are running through the country, supporting the growing demand from the manufacturing sector and power producers. Above the ground, new transmission lines cross Mexico’s blue skies while more and more renewable facilities are popping up, driven by the availability of local natural resources.

The approval of the Energy Reform slowed down infrastructure development in its initial stage as the incomplete regulatory framework sparked uncertainty among private companies and investors. But now that the implementation process is much more advanced it has brought the opposite effect, accelerating investments in energy infrastructure projects.

“The first change we saw after the Energy Reform was an increase in the number of new oil and gas projects and investment opportunities,” says Carlos Albarracín, Partner at Milbank. “Before the Energy Reform, there were one or two pipeline projects every year whereas now there are five or six tenders per new project in a single year. CFE’s restructuring is also welcomed by the market because it is likely to create more opportunities to invest in and finance a whole host of power projects, ranging from traditional power generation to distribution and transmission,” says Albarracín.

In the case of natural gas pipelines, the publication of the National Expansion Plan 2015-2019 in October 2015 reignited companies’ interest in participating in the construction of Mexico’s natural gas transportation and distribution system, reassured by the publication of the Public Policy for the Implementation for a Natural Gas Market in mid-2016. By the end of this year, the government had already committed 78 percent of the 10,000km planned for 2019, of which 2,386km are already in operation. Together, the pipelines operating and under construction represent an investment of US$12 billion in new energy infrastructure.

MAIN DRIVERS

CFE’s public tenders for combined-cycle plants and CENACE’s long-term power auctions were the main drivers in the case of power generation projects. The auction winners committed to starting operations in the next three years, with variable dates depending if they won the first or the second edition. Other projects were constructed for self-supply purposes, mainly sponsored by large energy consumers in the manufacturing and mining sectors. Construction companies, equipment suppliers, consultancies, legal firms, project developers and all others involved in the infrastructure sector are thrilled about these new opportunities. But previous experience shows that there are other stakeholders – often overlooked in the past – that must be brought on board to ensure projects are successful: local communities.

“The strategic location of power generation projects is a crucial element for reducing costs and enhancing competitiveness,” says Alfonso Caso, Director General of ANAF Energy. “A lot of regions with attractive energy resources are located close to indigenous or rural communities, highlighting the importance of establishing communication channels between local communities and project developers to agree the compensation the community will receive. Complying with the construction schedule of the winning projects and having the support of the different stakeholders involved will be key elements for the Reform’s success.”

Project attrition due to social rejection put Mexico under international scrutiny, but cases such as the TamazunchaleEl Sauz pipeline demonstrate that it is in fact possible to complete profitable energy infrastructure projects on time with the proper environmental and social strategies in place. Dealing with ejidos, numerous world visions and languages in a country with some of the broadest biodiversity in the world is complex but companies operating in Mexico are rising to the occasion, with the help of specialized consultancies in anthropological and environmental matters. They are demonstrating to international investors that Mexico’s cultural and environmental diversity is not something to fear.

Companies in the infrastructure sector are used to preparing ahead due to the large-scale nature of the projects and the capital investments required. 2015 and 2016 were the tip of the iceberg in terms of infrastructure development opportunities. For those companies that diversified their services into the energy sector, especially clean power plants, transmission assets and natural gas pipelines, the next three years will be particularly interesting.