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Know-how to Break Mexico’s Unfair Commodity Trade Balance

Gerardo Serrato - Hartree Partners
Managing Director Mexico


Cas Biekmann By Cas Biekmann | Journalist and Industry Analyst - Wed, 10/21/2020 - 12:09

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Q: What is the company’s history and how did it come to do business in Mexico?

A: The history of Hartree Partners dates back to the 90s, when it was originally founded as HETCO, a joint venture between Hess Corporation and the founding partners Stephen Hendel and Stephen Semlitz, who came from Goldman Sachs. The firm specialized in energy commodity trading, focusing on crude and petroleum. However, some years ago, Hess decided to leave for strategic reasons. This is where Oaktree, an important Californian investment fund, entered the association. From there, a process of growth and diversification in activities began. Other than commodity trading, the newly formed Hartree invested in related assets, particularly in storage infrastructure and transportation across land and sea for different types of fuels. Our area for consulting was born as well and now we have offices in Mexico and Dubai.

We decided to do business here in 2015 because the enactment of the Energy Reform a year earlier presented us with an excellent opportunity. We opened a consulting office and prepared other business lines associated with the energy sector. We are authorized to commercialize gas and are waiting for authorization to trade electricity in Mexico’s energy market as well.


Q: What are the main services and solutions Hartree provides in Mexico’s various industrial sectors?

A: Our activity for the time being proposition in Mexico is our consulting office, but we are also looking for investment and transaction opportunities. We are looking to invest in infrastructure, for example. Through our office in Houston, we work to import natural gas for some of our clients in Mexico as well. Our consulting activities, we cover hydrocarbon and power. We are working in many different sectors. Our portfolio of clients in the electrical industry has been growing steadily. We are also working in the areas of natural gas and help companies to rely less on fossil fuels. Clients can be found in heavy industry, metalworking, hotel chains, airport groups, convenience stores and more. We are constantly working with new clients to help them identify the clear opportunities that lie in the energy sector. They can save from 15 to 30 percent on their energy costs, depending on the volume of energy they consume. Bigger buyers have greater bargaining power. Smaller companies do not have access to this but, nevertheless, we can help them with tailored plans to increase their bargaining power by joining consumer groups. Today’s electrical tariffs are set according to the average cost of electricity in the country, integrating a whole series of fees, some of them historical, as well as a tariff structure that aims to better benefit the small consumer. Smaller consumers have easier access to efficient energy from CFE. This leads to bigger energy consumers having strong incentives to look for alternative options for energy supply as opposed to staying in the basic supply scheme.


Q: What has been your experience as a consultant to state governments? 

A: Our experience with working with local governments has been mixed. We have the Government of Guanajuato, that called us to submit a work proposal whose objective was to pinpoint actions that the state could take on the local level to avoid fuel supply issues. Although the state chose not to proceed with our work, we reached some important conclusions that the state could make use of. One of these is related to Mexico’s federal energy policy which in some cases do not take local realities into account. From this point of view, local authorities can carry out actions that allow them to improve their situation by promoting private investment in energy infrastructure. We leverage some of those ideas for other projects and today we are working for the Government of Queretaro preparing a proposal regarding energy supply as well.


Q: Has the company observed changes in demand for its services as a result of the pandemic?

A: The pandemic has had a significant impact, mainly a 14 percent drop in electricity demand and reduced demand for gas, given lower industrial activity. Now, however, we are climbing back up to levels from before the pandemic. There will be changes in consumption patterns that will probably have a longer-term impact, specifically related to the mobility of liquid fuels. I do not think the change will be as striking as in other countries, where the situation will fuel the move to electric mobility. This will take longer to consolidate in Mexico. Nonetheless, patterns for consumption and mobility will have an impact on energy demand.

On one hand, we see that investment decisions are being postponed, and so is our work in advising investors about opportunities. Some of these decisions have been put on hold to see what will happen with demand in Mexico. On the other hand, one of the biggest opportunities for companies is to reduce costs. The energy bill is a key element for many industrial and commercial sectors. We have noticed that there is a great deal more interest to identify more efficient and cheaper forms of energy supply. Reducing energy bills, optimizing consumption, and becoming more energy efficient is a trend. The changes for demand are a double-edged sword in this regard. We are here to help companies make decisions on both sides.


Q: How would you assess the potential for Mexico to start exporting to Asia the natural gas it imports?

A: The opportunity to develop a natural gas liquefaction project in Mexico for export to Asia arises mainly from the cost reduction that can be obtained by having a port of departure for the gas in the pacific coast instead of one in the gulf coast that requires a route longer and therefore represents higher costs. In Addition to this there is the existing pipeline capacity that in principle would allow to import cheap gas from the US and to transport it to the pacific coast in Mexico. But the success of the project depends on the capacity to liquify the gas at low cost so that it can be sold to areas where gas is more expensive. There are regulatory risks that would prevent the project to become a reality since permitting in the energy sector has become more difficult recently. Other important issues to consider are whether the existing conditions allow companies to execute these projects on time, build the substantial infrastructure to liquify the gas and if the ports could handle the increased amount of traffic. In total, several of these key factors need to be identified and evaluated to determine whether exporting gas could be a success We would have to see if this is feasible from the economic and financing sides. Capital can be acquired at low cost in the current environment; however, the key element would be to see if the cost of capital is accessible for Mexican companies in both the public and private sectors.


Q: What are Hartree’s general objectives for 2020-21 in Mexico?

A: We will focus on our two main activities: First, we intend to strengthen our consulting activity in Mexico in both the hydrocarbons and power practices. We will continue helping our clients in the design and implementation of strategic supply initiatives for power and natural gas and, we will support them to understand how and when is worth to invest in on and off site renewables projects in order to reduce their energy bill and their carbon foot print. We have strong involvement in determining pricing strategies for companies involved in commodities as well. We have specific international experience as to how these markets work and how different products are structured, what their prices are and how they can be commercialized. It is important to inform players in the Mexican market that sellers of commodities often have a great deal more information available than buyers do. This can lead to uneven deals. We participate actively in many markets across the world and can share our findings with our clients and follow up on their progress, instead of only being a consultant. Our value proposition is, therefore, a strong one. Second Hartree aims to develop its main office’s commercial activities in Mexico. We are evaluating the possibility to carry out increased importation of natural gas in the country. We are also waiting to receive our authorization to participate in the electrical market to commercialize Power as well. We can see that there are interesting opportunities to participate in these transactions. We are contributing in an advisory role to large-scale energy buyers and sellers. Having the regulatory approval to carry out our own activities would be a significant advantage for the company.

Hartree Partners is a global merchant commodities firm that specializes in energy and its surrounding industries. It aims to detect value in the production, refinement, transportation, and consumption of tradable commodities and to anticipate opportunities in its supply chain.

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