Equity Funds Looking for Mexican Energy ExposureWed, 01/22/2014 - 10:35
Q: How will GBM Infraestructura capitalize on the changes that the Energy Reform will bring to hydrocarbon transportation and distribution?
A: The natural gas pipeline industry is evolving very rapidly, from being a public works endeavor with PEMEX and CFE as its sole clients, to a similar framework as that seen in the US that is highly interesting for us. There will now be be a wholesale market for electricity and combined cycle plants are going to completely change the distribution of natural gas. These plants will act as an anchor for the construction of new pipelines, which can then also be developed by private companies. As a private equity fund that specializes in energy and infrastructure, we are interested in projects related to the wholesale distribution of natural gas, and we expect there to be huge plays in terms of pipeline construction. At the same time, natural gas distribution is going to change Mexico’s economic landscape. In some parts of the country, this will create new demand that was previously non-existent. For example, a city like Guadalajara is specialized in industries such as software and electronics because it lacks the availability of natural gas at an accessible price and, thus, has little industrial manufacturing or production. As natural gas reaches regions which were not able to readily access the resource, we will soon see industrial changes in states like Sonora, Guanajuato, and Jalisco, among others.
Q: Which role will the new National Center for Natural Gas Control (CENAGAS) play in creating business opportunities?
A: The fact that PEMEX and CFE have full control of the operation of pipelines at the moment limits CRE’s ability to establish transportation costs for natural gas. However, CENAGAS will now be in charge of the operation of Mexico’s national pipelines and storage facilities. Having an independent entity like CENAGAS ensures transparency in its dealings with PEMEX and CFE. Another benefit is that it will launch pipeline development projects to increase distribution capacity. In 2013, LNG was imported at prices of up to US$20 per million btu. Conversely, if the appropriate distribution network existed in the country to bring the resources directly from the other side of the border, it would have only cost US$3.50 per million btu. This is a substantial disparity that indicates just how big the opportunity is. I hope that the country and PEMEX can work at international market prices rather rapidly because that would allow us to participate in more projects as an equity fund.
Q: What opportunities does GBM Infraestructura foresee in the downstream segment in the near future?
A: The country is in urgent need of a pipeline that runs from Tuxpan to the central area of Mexico, since this port plays a huge role as the largest import center of refined products. This is a significant project in which I envision GBM Infraestructura participating by providing equity. Moreover, there is a need for a pipeline from Progreso to Cancún for the same purpose. At the moment, fuels are brought in by trucks from Progreso, which is far from being efficient. Additionally, there will be a significant play in terms of jet fuel to supply airports, as this market will soon be open. Since Mexico is a member of the International Civil Aviation Organization (ICAO), which regulates the aviation sector worldwide, it must respect quotas for jet fuel produced from biomass. The required volumes are huge, as Mexico would need to be producing at least US$1 billion per year. This is why this project represents a huge opportunity in terms of refined products.
We are also going to see some interesting developments happening in the petrochemical sector. Etileno XXI is a great project that shows the potential of a completely different structure for the development of the national petrochemical sector, as just this one project has garnered up to US$4 billion in investment. These projects did not exist in the past because there was an artificial barrier in the petrochemical value chain: the private sector was permitted to produce ethylene but not ethane. PEMEX was the only company able to supply ethane but it was not signing long-term contracts. As a result, no one would dare to build an ethylene plant without ensuring the necessary ethane feedstock. Etileno XXI was finally carried out because PEMEX tendered a long term contract for ethane. However, it only planned to award one contract because it decided that it was only planning to produce that amount of ethane as there was no more investment for new ethane plants. Things have changed now, as the private sector can now produce ethane. It is important to mention that the more ethane is produced, the more ethylene outputs are generated, resulting in significant changes to the entire polyethylene value chain. This is going to be a big play and I expect there to be room for us to provide private equity. We would have loved to participate in Etileno XXI, but by the time we had listed our fund on the Mexican stock market in September 2013, the equity structure of the project had already been decided.
Nonetheless, we are expecting interesting opportunities to arise, since the likes of Grupo IDESA, Mexichem, Alpex, and Grupo Kuo are not going to build everything that is needed with their own capital. They will look for partners such as GBM Infraestructura. The downstream segment is likely to see developments reaching billions of dollars, allowing it to change much faster than the upstream segment.