Fibra E to Stimulate Energy Infrastructure OpportunitiesTue, 11/01/2016 - 12:47
Q: How do investment opportunities in Mexico’s oil and gas market compare globally and which areas hold most promise?
A: By effectively abolishing the monopoly of the stateowned oil and gas company, the new legal framework has the potential to unleash significant business opportunities for private investors, both domestic and foreign, and both upstream and downstream. Moreover, the country has one of the world’s most promising resource bases, stable politics and an open and large economy. Few oil-producing countries feature similar characteristics. Upstream activities hold arguably the greatest promise. Downstream areas will also offer investment opportunities, derived from the gradual liberalization of the retail market.
Q: What is your perception of Mexico becoming Latin America’s powerhouse and the main economy in the region?
A: Mexico currently has the second largest economy in Latin America after Brazil but whether it will become the largest will depend on a number of domestic and international factors, as well as the relative performance of other countries. Mexico, however, has distinct advantages in that its economy has been opened to the world for the past two decades and it has become a major global trading player and strong manufacturer. Also, its population is young, which should help sustain growth for decades to come. The country is closely integrated with the US and Canada and North America is clearly emerging as a dynamic economic area.
Q: What is the background of Fibra E and how has it adapted to the needs of the Mexican oil and gas industry?
A: Fibra E is primarily intended to finance the construction of new energy infrastructure in Mexico, such as pipelines, terminals, power plants and transmission lines, to complement the country’s Energy Reform. Fibra E has largely mimicked the Master Limited Partnership (MLP), which was launched in the US in the 1980s. In general terms, by bundling together assets that generate stable cash flows, MLPs allow companies to raise capital at lower cost and offer higher returns than traditional debt instruments. In this vein, the new Fibra E has been designed as a Mexico-registered trust fund, which can issue energy certificates via the stock exchange, and which will be backed by specific types of assets. Holders can claim ownership over the trust fund in proportion to their investment and hence a share over future cash flows.
A significant amount of new infrastructure remains to be built. As a result, Mexico’s energy industry should become an attractive investment, especially compared to developed markets like the US. According to some estimates, total investment could be as high as US$70 billion by the end of the decade, which would go a long way to solving Mexico’s infrastructure bottlenecks. Processing, transportation, refining or storage of crude oil, petroleum products or natural gas, power generation, transmission and distribution, among others, are areas most likely to take advantage of the new instrument. The challenges will consist of selecting and properly structuring the assets to be monetized. PEMEX will be able to capitalize some of its existing assets and eventually invest in new infrastructure. It should also be noted the new instrument contains several fiscal advantages designed to nurture long-term investments.
Q: How should PEMEX’s financial burden be adapted to reflect its new position as a productive enterprise of the state?
A: Under the reform, PEMEX’s fiscal obligations will be gradually reduced. In addition, the company will be able to migrate some of its upstream assets to the new contractual framework to benefit from the fiscal regime applied to private players. As for the government’s dependence on PEMEX revenues, it will gradually decrease as non-oil tax receipts increase and as private oil and gas players start their own production. The new PEMEX administration has put in place a new plan to reduce wasteful expenditures and to focus on profitable operations. PEMEX has the potential to become a company mostly focused on upstream activities, able to capitalize on its knowledge of the Mexican geology and to engage in numerous joint ventures with private partners, both local and international.