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Introduction - Alliances & Investments - Expanding frontiers - Free market -
Telecom and transport - Banking - Energy sector - Tourism - States of Opportunities -
Agro Industry - Multinationals - Industrial States 
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Interview of
Dr. Luis Tellez,
Minister of Energy
December 23rd, 1999
| The privatization of the electricity sector and the petrochemical plants are two of the major projects of your Ministry. As far as the electricity sector is concerned, why has the privatization not taken place yet and do you think that with the new administration it will finally happen?
With regard to the electricity sector I would like to specify that we are not talking about the privatization of the whole industry. The proposal President Zedillo sent to Congress considers the transfer of some assets in the generation area from the public to the private sector, but the rest of the industry would remain under public ownership. The privatization of electricity is a major endeavor, it implies the creation of a competitive electricity market and the possibility of establishing private generating units and distribution companies. It is also about establishing a public transmission company and the possibility of having bilateral financial contracts between the generating units and distributors and large consumers. It is a significant technical and regulatory challenge. There is an enormous potential for private participation in the Mexican electricity sector. Mexico’s electricity sector is one of the fastest growing electricity sectors in the world. As one of the corner stones of national development, there are important historical and political reasons that have led to an intense debate on Congress about President Zedillo’s proposal to restructure de electricity sector. Legislators are aware of the strategic importance this sector has for the future development of Mexico and therefore I am confident that the debate will result in the approval of the constitutional amendment needed to open up of the industry to private investment. My impression is that we will be able to have the reform approved before the Zedillo administration ends. There is a very good chance that it will happen in the period between the time of the elections in July and the new government taking office the 1st of December. It is a good opportunity to pass it and I think it would give the new administration an enormous boost in terms of economic expectations and credibility. It would clearly have a positive impact over the investment grade and status of Mexico. If the initiative does not pass in September it will have to pass anyway sometime in the near future because the amount of required investments in the sector is huge. During the year 2000, the Mexican government will be investing around 4.5 billion dollars in the different areas of the electricity industry, from the generation to the distribution of electricity. Today, these investments are being financed through the leveraging of the national monopoly, CFE, and there are limits to the amount of debt the government can subscribe. A large part of the projects contemplated in the investment budget are carried out through the Independent Power Producer (IPP) scheme in which companies install a plant and sell electricity to CFE through a power purchase agreement, where the Mexican government assumes the financial risk of the investment. Thus, at the end of the day this situation is not sustainable. President Zedillo’s reform would bring private capital into the sector that in turn would increase the efficiency of the industry and, very important, it would increase substantially the availability of public resources to be destined to social expenditure.
As far as the proposed alliance between the private sector and Pemex is concerned, where the private sector wants to invest in Pemex’s plants to modernize them, can you tell us a little bit more, about it. What are the exact specifics of this alliance and how will it boost the production?
The Mexican Constitution establishes that Pemex, the State owned oil monopoly, must produce all the hydrocarbons that are produced in Mexico. Natural gas is produced by Pemex both under the associated gas facilities and the dry gas facilities. President Ernesto Zedillo got the support needed to modify the law and opened up a small part of the oil industry: the transportation, distribution and storage of natural gas. This has been quite a successful reform. Since 1995 the amount of private investment in the sector has exceeded two billion dollars and these resources are allowing Mexico’s main industrial centers and cities to be gasified. That is going to be a great impulse for the competitiveness of the Mexican economy. I think that today the natural gas sector constitutes a clear demonstration that there can be a joint effort between the public and the private sector in certain areas and that it works very well, it is contributing to the growth of the Mexican economy. Also, Pemex has been working with the private sector at some stages of the development and engineering of fields but always keeping the wells and fields managed and operated by Pemex itself.
As you know, Forbes Global is mainly distributed in Europe. What is going to be the impact of the Free Trade Agreement with Europe in terms of future investments in the energy sector?
Many private companies are investing today in the Mexican electricity sector. At present there is a possibility, although limited, to invest in generation, not so in distribution or other area of the industry. The IPP scheme gives private generators the possibility to sell their electricity, through the national grid, to the state monopoly, CFE. Many of the companies I’m referring to are European, mainly Spanish and French, but I hope that with this new Free Trade Agreement, once it is ratified by the Mexican Senate, we will have more companies interested in the development of new projects. We already have a lot of American and Canadian developers but I hope we will get more from Germany, Italy, U.K and some of the Scandinavian countries to develop plants in Mexico. I think that it is very important for the energy sector that this Agreement has a special section on investment, which shall provide incentives for companies to bring capital into Mexico, in the energy areas, just as the Spanish and French companies are already doing.
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This section of the agreement represents a lot of advantages, and there is a lot of potential for investors, but what would you say are still gray areas for foreign investors, to invest in Mexico.
I think that there are some areas that remain closed, or partially closed, to private participation, such as the electricity industry. As I mentioned before, President Zedillo sent an initiative to Congress to open up the industry to the participation of private capital. When this reform is approved there will be very interesting business possibilities in the country. This is an area that investors from all over the world should be looking at very carefully, once we have changed things we will move rapidly. In the gas and oil business won’t be any new initiative to open up new areas to private capital, apart from the storage, transportation and distribution of natural gas. " Gas de France " is very much involved in Mexico as well as " Gas Natural ", which is a Spanish company. There are also several U.S and Canadian companies involved in this area. " Westcoast " of Canada together with other companies just built a very important pipeline which goes from Tabasco which is a state in the south of Mexico up to Yucatan. It is a 700 km pipeline that will bring natural gas to Yucatan. I think structural reforms bring large benefits to the national economies in terms of new investment, job creation, economic growth and competitiveness, and therefore the Mexican government must continue with its strong commitment in this area.
Mexico has also participated in OPEC talks. As far as, the agreement is concerned to cut production to increase international prices, what is the next step in terms of pricing and production and is there a danger that oil prices will become too high?
We can not participate in OPEC talks, we have talked to some of the OPEC countries and reached an agreement with some of them and other countries like Norway. Mexico is an independent producer and we are not part of the OPEC. The production reduction agreements that have taken place have allowed the price to recover from a period of crisis. Mexico's main concern is market stability and even though there has been a favorable response to the supply restraint agreements it is still premature to conclude that the desired stability has been achieved. Continued cooperation among producers after March 2000 will be essential for achieving stable market conditions that benefit both oil producing and consuming nations. With respect to oil prices I don’t think they will become too high. The recent price evolution reflects that the market is coming back to its equilibrium, on the supply side Iraq is back on the market and on the demand side the continuation of oil demand recovery is expected given that current world economic situation is promising. Therefore I think that prices will stay at a moderate level, we have to monitor the evolution of market fundamentals before determining the optimal oil production level. World economic performance, oil demand growth and stocks levels will determine the actions that producers need to take in the near future.
Could you tell us a little bit more about your personal background and what would you say has been your biggest personal achievement as the Minister of Energy?
I got a PHD in Economics at MIT, I have worked at the Treasury Department and also at the Ministry of Agriculture where I played a role in the reform which modified the land tenure system in the country. I also had the opportunity to work as Chief of Staff for President Zedillo, there I was involved in the negotiation, with US authorities, of the financial rescue package at the time of the 1995 crisis in Mexico. As the Minister of Energy I think of two concrete issues as having special importance: First, Mexico played an important role in developing the architecture of international cooperation to stabilize the world oil market after the 1997-1998 crisis. Second, President Zedillo’s firm commitment towards structural reform within the energy sector has been maintained. With regard to the electricity industry, I think that today the Mexican people understand the great challenge ahead of us and, more important, a reform proposal for the industry constitutes one of the main issues of the current legislative agenda in Congress. I think that is a great achievement of this administration because it constitutes a solid first step for the restructuring of the electricity sector.
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© World INvestment NEws, 2000.
This is the electronic edition of the special country report on Mexico published in Forbes Global.
July 3rd 2000 Issue.
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MEXICO
