 PETROCHEMICALS: CUTTING THE TIES TO BIG OIL |
Mexico has done well to end its dependence on oil. In 1982, 85 percent of government revenues originated from oil exports; nearly two decades later, however, oil accounts for only seven percent of export revenues. This about-face has been, in large part, thanks to the Zedillo administration’s efforts to cut the economy’s ties to volatile international oil markets.
Despite the fact that big oil in Mexico has come a long way in the last decade and weighs in heavily as a source of income for the Mexican government—which depended on oil for 30 percent of its revenue last year—the sector will not give investors much to crow about any time soon. Ironically, the need for private capital in this sector is beyond debate. The industry as a whole has suffered from years of inefficiency and wastefulness. Mexico imports most of its refined petroleum products simply because the national petrochemical monopoly Petroleos de Mexico (Pemex) lacks the resources, technology, and infrastructure to produce them themselves. Most analysts agree that opening up the sector will increase competition, which in turn will bring capital and technological innovation, reducing costs and allowing energy companies to offer higher-quality products at lower costs.
"I could say that private investment is going to be required in the future," admits Marcos Ramirez, general manager of Pemex Gas y Petroquimica Basica. "As a monopoly, the concept of having competition isn’t easy in that sense, we are now aware of what a market is, what competition is, and we are happy about it."
Nevertheless, the sector will not be privatizing any time soon. First of all, Pemex and the Federal Electricity Commission (CFE) are protected by the Mexican Constitution itself. Furthermore, many Mexicans feel certain patriotic ties to the oil industry, which was privatized decades ago by populist President Lazaro Cardenas in 1938. Just the number of employees tied to Pemex alone makes the company a considerable political force: Last year, Pemex reportedly employed more than 130,000 people.
"The priority for the national electric industry and PEMEX fiscal reform will be to find a mechanism that simultaneously guarantees the efficient delivery of electricity to the country", says President Vicente Fox, "while ensuring that the sector is competitive and capable of attracting investments."
All that said and notwithstanding his own campaign promises, Fox has recognized Pemex’s shortcomings all too openly and has promised to modernize, with the help of private investments, the company during his six-year administration. It remains to be seen, however, how long he will be willing to run against popular sentiment or, for that matter, how far Congress will let him.
There has been some foreign direct investment in the sector, most notably by Marubeni, a world-renown Japanese company engaged in international trade, financing, and investment projects. Marubeni is currently involved in two very important projects for Pemex related with the Cantarell oil field project. Marubeni has a third share in the first—the nitrogen Cantarell project (US$1 billion)—with companies from Canada (Westcoast Energy) and Britain (British Oxygen). The second is for the construction of a US$250 million gas-compression platform also associated with Canada’s Westcoast Energy.
"I think that Japanese companies have to look at Mexico not only for its domestic market size, but also as a base for the production and trade," says Marubeni de Mexico President Shiro Kobayashi. "For Japanese companies, the future is more promising to come to Mexico."
Mexico’s electricity sector will provide investors
with a little more elbow room, although it is still
more or less a state-owned monopoly divided between
two providers, the CFE and Central Light and Power
(Luz y Fuerza del Centro). The electricity sector,
put simply, is in need of a major overhaul. Mexico
must meet the needs of not only a growing economy,
but also a growing, disproportionately youthful
population that is already pushing 100 million.
That Mexico will meet those needs, however, is not
a foregone conclusion, which translates into myriad
opportunities for investors. |
The federal government estimates that the country will need more than US$25 billion in new investment over the next five years. Private investment is currently limited to independent power production, co-generation, and self-supply. Even though the government granted 149 permits in 1999 to companies for the generation of electrical energy that will eventually represent US$5.5 billion in investment, the private sector nevertheless produced just 4.2 percent of total electrical power generation.
Despite the currently reality of the Mexican electricity sector, it has huge potential for private investment in the immediate future. Many multinational companies are either already in the market or poised for the plunge once Congress passes expected reforms. Both industry representatives and government officials—perhaps foremost among them Fox himself—have openly acknowledged the urgent need to continue with reforms initiated by Zedillo that will further modernize the industry and open it up to more investment.
The CFE itself supports reform and is planning several independent power projects (IPPs) in 2000, which, under the current law, imply contingent debt for the government and a theoretical hand-over of new power plants to the CFE after 25 years of private operation. IPP programs that are already tendered and under construction account for about 3,000 megawatts of new capacity and investments of nearly US$2 billion.
The natural gas sector’s prospects are equally encouraging. Mexico, the 12th-largest natural gas producer in the world, has become an important provider of natural gas and forecasts a 10-percent increase in production over the next 10 years. Indeed, the Mexican gas market is expected to grow by an average of 5.4 percent annually over the next 10 years, with investment totaling around US$1.5 billion over the next five years. To say the least, such impressive capital injections have been encouraging for the federal government, whose target is to generate roughly half of the country’s electricity needs using natural gas by the year 2007.
Until just recently, Pemex was virtually the only natural gas provider. It had a transportation network and important industrial consumers, but only a small number of commercial clients in basic industries. The Mexican government opened up the sector during Zedillo’s administration, allowing foreign and private-sector investors to distribute.
In 1999, the Energy Regulatory Commission (CRE) granted 78 permits to private companies for the transportation and distribution of natural gas. Among the big players are European companies such as Spain’s Gas Natural, France’s Gaz de France, and smaller companies like Belgium’s Tractebel. The CRE was also created that same year, as well as a regulatory framework for transport, storage, commercialization, and distribution of natural gas.
Another example of investment opportunities in the sector can be found in the liquid-petroleum gas (LP) market. As the world’s third-largest LP market, Mexico offers a lot of potential. Several cities, including Guadalajara and Puebla, have sold concessions to companies to build LP gas networks.
Gas Natural Metrogas is a company that has every intention of expansion in the market. With seven government concessions to distribute natural gas, Metrogas currently supplies more than 550,000 clients. The company also plans to invest the tidy sum of US$40 million a year to move into untapped markets, especially Mexico City. Indeed, within Metrogas’ established distribution zone, there are more than four million households without natural gas.
"The most important thing is not the number of clients we have, but our development expectations," says Metrogas President Sergio Aranda Moreno. "The important thing is not that we have 550,000 clients, but that we have a potential market of four million." |
