Mexico Energy: Now The Big Money

Investor-friendly energy reform likely to attract more than $50 billion in near term.

BY LATINVEX EDITORS

While Brazil’s President Dilma Rousseff is busy blaming foreign banks and foreign media for the country’s problems and Argentina’s President Cristina Kirchner is playing games with US courts, Mexico’s president Enrique Peña Nieto made history this week by achieving congressional approval of his liberalization of the country’s energy sector.

Guess which strategy will bring the big money?

Mexican officials expect to see more than $50 billion in investments the next four years as a result of the country’s energy reform, which Peña Nieto signed into law on Monday. To put that in perspective, Mexico attracted an average FDI of $21.5 billion in the five year period 2009-13, according to a Latinvex analysis. In other words, reform will likely double that.

Officials also estimate that state oil producer Pemex (Latin America's second-largest company) will see profits increase by $6.9 billion within five years as a result of tax cuts provided by the reform.

“August the 11th 2014 will always be remembered for the beginning of a new kind of Perseid shower in the Northern hemisphere: that of energy generation in Mexico,” says Beatrice Rangel, CEO of US-based AMLA Consulting Group who has worked and lived in Mexico. “The enactment of the law package that gives legal existence to energy reform is a game changer for Mexico and our hemisphere.”

US business leaders also praise Peña Nieto for his energy reform. “We commend President Peña Nieto and the Mexican Congress for this momentous achievement,” Robert Mosbacher, Jr., former President and CEO of the Overseas Private Investment Corporation (OPIC) and Chair of the Energy Action Group of Americas Society/Council of the Americas, said in a statement.  “Development of the energy sector will boost growth, create jobs, and improve livelihoods throughout Mexico, while contributing directly to building the economic competitiveness which all three North American nations seek.

As a result of the reform, the Mexican government estimates that energy costs will decrease, 2.5 million new jobs will be created by 2025, and Mexico’s GDP will increase by 2 points by 2025, the Council of the Americas points out.

"Through these reforms, Mexico is taking critical steps to boost its competitiveness,” John Negroponte, Chairman of the Council of the Americas and Former U.S. Ambassador to Mexico, said in the statement. “We believe that Mexico will take advantage of this opportunity to deepen investment and growth, which will have far reaching effects on the Mexican economy. We look forward to our continued engagement with Mexico on these matters.”

Meanwhile, Fitch Ratings says that the landmark energy reforms should be positive for Mexico's energy sector by boosting investment and potentially spurring Petroleos Mexicanos (Pemex) and Comision Federal de Electricidad (CFE) towards greater efficiencies. But they also create challenges for Pemex and in particular for CFE. The degree to which the reforms increase foreign direct investment and growth will depend on implementation and how market participants respond to liberalization, it warns.

Mexican companies expected to win from the reform include IEnova, a unit of US-based Sempra; Grupo Alfa, the diversified conglomerate controlled by Mexican mogul Carlos Slim and petrochemicals company Mexichem. In addition to the big US oil companies, other major foreign winners are expected to include oil service companies like Schlumberger and Halliburton. Meanwhile, firms offering services to these companies are also expected to benefit. They range from international and local law firms to technology giants like SAP.

Despite traditional opposition against liberalizing the energy sector – then-president Carlos Salinas rejected US proposals to include it in NAFTA – Peña Nieto took a major risk in using early political capital to pass the reforms. He did so while also launching a daring move to curtail Slim’s telecommunications dominance, which experts say have kept telecom rates among the highest in the world.

To pass both the energy and telecom reforms, Peña Nieto needed support from opposition party PAN and the two in the end surpassed traditional bickering to reach agreements.

“This feat is directly attributable to President Peña Nieto’s style of conducting business that sets him apart from almost all his colleagues in the region,” Rangel points out.  “From the beginning of his political career he has placed a high value to team building and team work. He is a very focused  person who is almost obsessive on meeting targets. Targets for his administration were set many years before being elected and they are pursued with effectiveness and enthusiasm. Finally, he is charming. And this quality of being able to sugar coat the strong medicine claimed by the Mexican economy is not only a talent but a blessing. This in essence is what many media professionals are beginning to dub as the Peña Nieto touch.”

Peña Nieto’s reforms will cement Mexico’s position as a star among foreign investors in Latin America and once again show the value for other countries in the region of providing investor-friendly policies to boost investments, economic growth and jobs.

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