Víctor Herrera
Managing Director
Standard & Poor’s Rating Services
José Coballasi
José Coballasi
Senior Director
Standard & Poor’s Rating Services
View from the Top

Spotting Low Hanging Fruits

Wed, 02/24/2016 - 14:36

Q: How important is the Mexican energy sector to S&P’s activities in the country?

VH: Our activities in the Mexican energy sector are dictated by the analyses we carry out in projects that investors bring to us for financing in the capital markets. From the moment the Energy Reform was enacted, we knew that deepwater drilling would garner the attention of investors. The projects are astounding, as we see projects that can cost up to US$7 billion that range from exploration to production and take up to ten years to mature. We know that these projects will take some time to materialize, and it is probable that investors will wait until shale gas reaches over US$5 per BTU, but the market has potential.

There are two main global rating agencies used by the capital markets: Moody’s and S&P. In Latin America we hold dominant positions in certain countries in terms of coverage. What differentiates us from other rating agencies is our expertise and global credibility. We have the ability carry out complex projects, and as we see more of those arriving to Mexican shores, S&P will be well-positioned to offer our services. We are in approximately 40 countries and we have global experience with local knowledge. There is heavy investment lined up to interconnect the natural gas pipelines from the border to the center of the country.

Q: What advances have you seen in the development of natural gas pipelines and what issues are companies encountering?

VH: At the moment the industry is importing natural gas from countries like Peru at US$16-18 per BTU, while at the US prices are at US$3.50-4 per BTU, so naturally importation from the US is more lucrative. Now there are possibilities to invest in gas pipelines to transport this cheap gas that will then be used by CFE to produce cheap electricity. Fuel oil is currently being burnt and this source is far more expensive and polluting than natural gas. The importation of natural gas will not only make CFE more competitive, but it will contribute to manufacturing and heavy industries as well. Rights of way have been a challenge in Mexico for some time, and I anticipate the same for gas pipelines. The possibility of speeding up the process to compensate landowners will be tested, which will be a better for the projects, since planned trajectory can be deviated due to issues with rights of way.

Q: How do you view the arrival of the green bond market in Mexico, and what are the barriers to its success here?

VH: The capital market in Mexico took 20 years to develop, and it was possible thanks to a series of reforms that trace back to the early 1990s. The clean energy certificates and the green bonds are obscure concepts of which investors are wary. The market worldwide is limited when compared to the size of the capital markets, and being able to comply with the requirements of the World Bank will be challenging. Certainly, the advantage of the World Bank’s reputation may make the endeavor worthwhile; however, the government must offer some support in the creation of this market.

Q: How do Mexican companies fare against their US and Canadian counterparts on the Dow Jones Sustainability Index, which S&P largely helps to prepare?

JC: In order to benchmark the efforts of companies in Mexico with their counterparts in the US and Canada, the countries’ context must be taken into consideration. Mexico is a country in the process of development, and in terms of competitiveness of infrastructure, it is placed in the middle of the pack. The driving force behind the market is the substitution of fuel oil with natural gas. We see a commitment from the government and private players to fully develop wind resources in Oaxaca. Compared to other countries in Latin America, like Brazil and Colombia, Mexico lags behind in renewable energy, mainly due to the fact that these countries rely on water for most of their power generation.

VH: Countries like the US and Canada are eons ahead in water management and waste disposal techniques. At the moment, companies in heavy industries are implementing sustainability programs but not of their own volition. Once again, the focus is on the substitution of fuel oil, since Mexico continues to burn around 40% for power generation. The reason we have this footprint is due to the fact that the refineries were producing this fuel in large quantities, and it made sense to burn it back then. The fact that we did not have natural gas at the time compounded this situation.