Jesús Rodríguez Dávalos
Partner
Rodríguez Dávalos Abogados
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Infrastructure Challenges Loom Large after Reform

Wed, 01/21/2015 - 10:58

Q: What will be the impact of the Energy Reform on Mexico’s natural gas infrastructure?

A: The first results will become evident in the form of new infrastructure. During the previous two administrations, there were serious debates about energy policy, which became a severe obstacle to infrastructure development because the government was incapable of deciding which model to implement. During the last year of the Calderón administration, CFE launched a series of tenders for infrastructure projects that should have been offered at the start of his government. In the end, the country lost the momentum of low gas prices. Following the opening of the oil and gas market, and the propane market, the commercial model will change completely. The advantage for distributors will come from logistics. PEMEX’s gasoline will be regulated by a firsthand sale methodology as in gas and propane. If gasoline from the US is imported, it will have to be very competitive in relation to PEMEX’s prices. There will not be high margins which means that cost effective logistics will be a key driver of competitiveness. Companies will be very concerned with having secure storing facilities and transporting the resource to the distribution zone in the cheapest way possible.

Q: How do you see the interplay between the private companies and PEMEX if the interconnecting pipeline system is targeted for theft?

A: This is a critical issue, although one that will be solved. Currently, not all pipelines have measurement systems. There is usually precise knowledge about how much oil left a specific location but no information about how much arrived at a particular destination. This will have to change for oil, as it did for gas. The issue is significant, but it will provide a great opportunity for many companies. There has been broad discussion about the increase in production that will be triggered by Round One. Yet, it is also necessary to consider what will happen to those resources once they leave the ground. That is why we will see a lot of opportunities in infrastructure as well as serious bottlenecks being created.

Q: Who is best positioned to take advantage of these opportunities: Mexican or foreign companies?

A: Mexican companies will dominate for the next couple of years. We will start to see storage facilities in the Bajio and other parts of Mexico, which will be developed to a great extent by local providers. When the time comes to start building new pipelines, huge investments will be required. Some Mexican companies will participate as developers or on the construction side, while it will still be challenging for big foreign companies to participate in the Mexican infrastructure sector. That is why all of these companies are approaching PEMEX and proposing joint ventures for terminals and pipelines to consumption sites. Much of the infrastructure that will be built is a direct result of how the market will work in the future, especially for refined products and the gasoline sector.

Q: What needs to be done next to overcome the challenges you have mentioned so far?

A: The Energy Reform has brought about a model that has satisfied the market, and banks and investors are willing to finance the projects that will be set forward as a result of the Reform to address Mexico’s infrastructure deficits in areas such as refining, pipelines, and storage facilities. Mexico still moves many of its liquid products by truck, which is insane given how much cheaper and more secure it is to do so through pipelines. The model is now in place to fix this and, by following international standards, should be able to attract international companies to the national market to help address these issues. At the same time, CRE, ASEA, and other authorities need to ensure no bottlenecks happen in the processing of all required permits. The section of the Hydrocarbons Law that relates to land access is very focused on E&P, nonetheless it also relates to infrastructure. In my opinion, Congress and the Executive branch attempted to “socialize” the land acquisition process in excess. This is certainly a challenge. The new obligations under the law will complicate the acquisitions of right of way and will also increase costs, because of the new obligations mandated by law. Oil and infrastructure companies will have to learn from the mining sector on how to deal with rights of way in the Mexican fashion. All of these companies will need specialists who are knowledgeable in the Mexican operating environment, not only in international standards.