In May, we posted “Mexico: A Country in Transition”. That piece received favorable feedback related specifically to its overview of energy reform taking place in Mexico. At that time, we mentioned that the reform is a journey and not a destination, stating that occasional updates would be necessary to stay plugged into the reform process. Recent events create the need for such an update.

What You Should Know

This month, legislation to implement energy reforms was approved with the spotlight now on implementation. The information that will begin to flow will cover corporate investment and business opportunities and will dwell less on the legislative process. Regardless of how these opportunities present themselves and whether investors are able to take advantage in direct ways, the country of Mexico has pushed the ‘go’ button on activity that will create long-term, growth-enhancing capabilities. Investment vehicles that could play the benefits of the structure reforms are limited presently, certainly for average investors. However, the Mexican equity market as a whole should benefit, the Peso should see relative strengthening, the trajectory in economic growth will tilt further upward, and societal benefits will also be seen in a country that has already begun to grow its middle-class. Further sovereign credit rating upgrades are likely to be seen, lowering risk premiums and spreads for Mexican bonds. Some have likened Mexico’s energy reform to Germany’s reunification in terms of economic impact, timing, human capital, and infrastructure. Investors should consider the shot-gun approach to investing in Mexico currently, building exposure broadly across Mexican asset classes while looking for positive knock-on benefits from the ongoing energy reform.

What You Should Watch

However, to stay in front of the curve and to build knowledge and awareness of how the game is evolving, the playbook, and an understanding of the roster of players, a brief overview follows.

The Players:

  • Secretaría de Energía de México. SENER will have the responsibility to select fields and define contracts in the bidding process.   The Secretariat’s website has video and other material covering recent and future efforts in the reform process.
  • Secretaría de Hacienda y Crédito Público de México. The Finance Ministry will determine the fiscal regime related to any bidding process.
  • Comisión Nacional de Hidrocarburos. CNH is a technical body dealing with the implementation of Mexico’s hydrocarbon policy. It will supervise and regulate exploration and production which will include opening the bidding process and awarding contract.
  • The state owned petro company established in 1938 whose mission and business model will change significantly going forward.
  • The state owned electric utility whose dominance is second only to Pemex.

Recent Regulatory Changes

  • CFE and Pemex are now “State Productive Companies” with budgetary autonomy as well as economic, administrative, and technological independence. Both are free to partner with private entities through a process managed by SENER.
  • CFE can engage in contracts with private companies for the operation of the distribution and transmission network. Private companies will be able to generate electricity for self-consumption.
  • SHCP will slowly migrate from collecting taxes on CFE and Pemex to dividends starting in 2014.
  • Expropriation of private land will cease. Land owners will get rent or 3% of project earnings.
  • The Mexican government will assume a percentage of the Pemex and CFE’s pension liabilities.
  • CNH will regulate and grant contracts through auctions in which private and state companies can participate.
  • SENER will determine the technical conditions of the contracts to be awarded.
  • CNH will receive all geological and technical information held currently by Pemex.
  • Private companies can distribute gasoline with impendent franchises in 2016 and import gasoline from 2017.

Opportunities for Foreign Investors

  • Investors can participate in gasoline commercialization and petroleum gas distribution.
  • Investors can own up to 49% of companies dedicated to offshore activities in exploration.
  • Pipeline construction is possible for foreign investors.

Future Steps: