David Enríquez
Partner
Goodrich, Riquelme y Asociados
/
Insight

Considerations for a Financially Solid Midstream Segment

Wed, 01/22/2014 - 13:48

“The reforms made by President Enrique Peña Nieto’s administration are creating a lot of expectations, especially in the oil and gas sector, and this is reflected in the coverage given to Mexico in renowned international publications,” says David Enríquez, Partner at Goodrich, Riquelme y Asociados. In his view, the administration was wise to take a conservative approach in the reform proposals regarding the constitutional amendment. Otherwise it would not have been possible for PRI to include licenses in its bill as an alternative to concessions as it would have faced strong opposition from the general public and even from within PRI itself. Enríquez believes accomplishing structural reforms is in the country’s best interest, mainly because Mexico will lose credibility if this is not achieved. “The unsuccessful outcome of the 2008 Energy Reform had an anticlimactic impact on the oil and gas industry, and repeating this result in the 2013 Energy Reform would have caused a certain degree of skepticism among foreign investors.”

Enríquez believes the goal of increasing natural gas production is being pushed by political motives. “If the proper pipeline infrastructure is not in place then PEMEX, acting as a value-driven enterprise, would not make the decision to increase the natural gas production target by 25% for 2018, as it would not make economic sense to do so.” He says that the sensible choice for the company would be to develop pipeline infrastructure and import natural gas from the US whilst at the same time converting existing LNG plants in Mexico into exporting facilities. In this vein, Enríquez sees potential for Mexico to become a regional exporting hub for LNG. If Mexico was to further liberalize its natural gas market, the country would have to recognize that the US has the most competitive natural gas prices and therefore accept it would not make economic sense for PEMEX to make large-scale investments to increase natural gas production. Enríquez claims it would be better for PEMEX to invest in other projects and areas where it can be competitive, particularly in shallow water oil production, while teaming up with IOCs to develop deepwater projects

“The idea of Mexico being a large natural gas producer is not realistic in the short-term,” says Enríquez. Nonetheless, he believes Mexican shale gas could play an important role in long-term plans. “The shale gas market in the US is radically different to any other region. I am not only talking about geophysical features, but also about the level of existing infrastructure that makes the whole extraction process very straightforward. There are a handful of fully integrated companies that might take up the shale gas opportunities that will be offered in Mexico in the future.” For Enríquez, these companies have to be robust and integrated with experience in structuring shale gas projects and a solid track record in upstream activities. However, he warns that operations in Mexico will not be as simple as in the neighbouring US since any incoming company would need to have their own midstream facilities.

Although he praises the recent reforms as a good starting point, he claims capitalization and sound fiscal legislation must accompany the restructuring process to enable PEMEX to develop its full potential. Plans for the restructuring of the company include the merger of PEMEX Refining, PEMEX Gas and Basic Petrochemicals, and PEMEX Petrochemicals into a single Industrial Transformation division. Enríquez believes this initiative could have a positive impact in terms of making the whole company more efficient but adds that PEMEX would still have to fight to maintain its market position. “PEMEX Gas and Basic Petrochemicals’ presence will gradually be diluted as new players gain market share. The same goes for the Industrial Transformation branch. I still have some doubts with regards to the refining sector because as long as there are externalities at play, especially in the guise of subsidies, there will not be a real open market,” he asserts. “For PEMEX to operate as an independent company, political motives should be replaced with market interests.”

Regardless of how secondary legislation, contracting models, and institutional designs are implemented, the Constitutional Amendment is already attracting the interest of major new clients for Goodrich Riquelme y Asociados in a wide range of sectors, including natural gas. “The financial sector is very active at the moment and many investment institutions that have approached my firm are eager to enter the Mexican market alongside operators and oil service companies that have worked in Mexico and other regions,” says Enríquez.