Mexico needs to get serious about attracting energy sector investors, say experts

Mexico City — The Mexican government needs to get serious about bringing back much-needed investment in the energy sector, according to panelists and attendees at this week's Energy Mexico 2020 conference in Mexico City.

The comments were made as the Andres Manuel Lopez Obrador administration is expected to soon announce a swath of roughly 130 projects, including oil, natural gas, and electricity, that would include the participation of the private sector.

Mexico is expected to announce the projects in three weeks, said Abel Hibert, Lopez Obrador's deputy chief of information and analysis, who was speaking at the conference Wednesday.

The Lopez Obrador administration, which has not yet released details of the projects, has come under fire from private companies and some analysts, who are losing confidence in Mexico's willingness to attract investors.

Some have taken the announcement with a grain of salt.

"I'm very pessimistic," said David Shields, a private consultant, speaking on a panel Wednesday. "They say they are analyzing the reactivation of farm-outs, but they really don't want to."

In June 2019, Lopez Obrador cancelled a tender for upstream operating stakes, or farm-outs, in seven onshore areas held by state oil company Pemex.

Lopez Obrador has put a halt on energy projects that were conceived as part of the 2013 reform that opened the sector to private investment for the first time in over seven decades. Although the government has not officially changed the law, conditions are harder for private companies in gas, oil and power.

When investors in the US want to put their money into conventional oil resources, they have limited options, like California, or Alaska, which pose a number of challenges, said Ferris Hussein, managing director at the Carlyle Group, speaking on a panel Tuesday.

"Or you can look at the Gulf of Mexico. The Gulf of Mexico in the US side has established record after record over the last six months of production. And the resources don't stop at the US maritime border," Hussein said.

"What private capital needs is clarity of policy, consistency and credibility," said Hussein.

Hussein said Mexico is no longer a destination for investment, as it was just a few years ago.

Others agreed. According to a survey at the conference Tuesday, 62% of the attendees said Mexico was "not very attractive" to foreign investment in energy.

"The longer Mexico waits to allow for private investment to participate, the further down the queue Mexico will be and the harder it will be to catch up," said Hussein.

OIL MIDSTREAM LACKING

The oil midstream sector is the most attractive sector for investment, said John Auers, chief economist at Turner Mason & Co, speaking on a panel Tuesday.

"There is an opportunity given the rich, efficient low-cost production of refined products in the US that are looking for a market, and Mexico is there, and it is growing," Auers said.

The US is already one of Mexico's main suppliers of refined products. In October, the US exported 1.19 million b/d of refined products to Mexico, according to the most recent US Energy Information Administration data.

However, there seems to be a disconnect between what the government is saying and what the government is doing, said Auers.

"On the one hand, they are saying 'yes we are open to investment,' but at the same time they are not making it easy for companies that are already trying to do business," Auers said.

Mexico should take advantage of the abundance of light crude in the US and build infrastructure to bring it to feed its refineries, which are currently using heavy crude, Auers said.

Pemex has long used the strategy of running its refineries with heavy oil when it runs short of lighter grades, although it produces high levels of fuel oil.

Mexico has announced it will build an $8 billion refinery to meet its refined products demand and reduce its dependency on imports.

"Someone bought into the idea that Mexico should increase its ability to produce its own gasoline and diesel instead of importing it from the US, but I don't understand why," said Sarah Emerson, managing partner at ESAI Energy, during the same panel.

"It's a tough reach to bring on a brand new refinery and be competitive," Emerson said.

What the industry needs is "one or two good stories," in the upstream or midstream, to attract investors, said Hussein Tuesday.

There is around $1.7 trillion of cash in the hands of the private equity firms around the world ready to be deployed, and part of that could come to Mexico.

"Our hope is that there will be an investment opportunity in Mexico. At the time there isn't," Hussein said.