LatinFinance - July/August 2015 - 31

December.
"The fact that there is a large group of
players and a lot of interest shows that a
lot of people are thinking the same thing,"
Álvarez says. "Different types of investors are
showing strong trust in Mexico and what will
happen in the long term and that's good."
Evolving cast
Competitive tenders are crucial to the development of Mexico's midstream sector and
Cenagas says that interest in the projects is
mounting.
"There is a lot of interest from companies
like Energy Transfer [Partners] and William
[Partners], big companies that currently are
not operating here. That's a sign that we are
getting competition," says Madero.
"TransCanada is currently working in
Mexico, and there is another Canadian
company, Atco, which is building a pipeline
that is very important for gas power generation," he adds.
Cenagas is expected to announce more
details of the future of the midstream sector
when it unveils a five-year plan in July. The
vast majority of the gas will be shipped to
factories and power plants.
"Power generation will always be the
main consumer. We have a great challenge
in Mexico now because a large part of the
power is generated with liquid fuels and we
want to turn it to gas, which is a cheaper and
cleaner fuel," Madero says.
Hence, CFE's role is crucial: it is expected
to sign long-term transportation agreements
with pipeline operators that guarantee
steady revenues, helping investors to reduce
the risks associated with investing in infrastructure in an emerging country. This was
as illustrated by Kinder Morgan's Sierrita
Pipeline, which came on-stream in October
after entering into a 21-year supply agreement with CFE.
The project was built in partnership with
MGI Enterprises, a wholly owned affiliate of
Pemex and MIT Pipeline Investment Americas, a subsidiary of Mitsui.
The future of Mexico's natural gas pipeline network is intertwined with the future
of its power generation and some investors
are looking at participating in both sectors.
CFE's power generation monopoly is also
coming to an end, and pipeline operators
expect that in the medium term they will be
able to sign supply deals with other power
companies. Yet for the time being, CFE will
continue to be the main off-taker, followed
by Pemex, investors say.
"There has been a strong focus on natural

gas for good reason. Making natural gas
more available throughout Mexico should
help lower electricity prices, enhance manufacturing capacity, create new jobs and boost
economic growth," says Blum. The energy
reform is expected to create 500,000 new
jobs by 2018 and 2.5 million by 2025, while
adding 1% to the country's economic growth
rate by 2018 and 2% by 2025, according to
the Mexican government.
And a myriad of opportunities could open
up in the medium term to extend the natural
gas grid and supply fuel to private power
companies or to consumers.
"We expect there will be more pipelines
after Los Ramones and CFE's projects, even
privately-run ones. Those [main] pipelines
will have to branch out to reach other areas
and activate more industries and more
power plants," Álvarez says.
Some of the investment funds looking into
the midstream sector are also likely to tie up
with some of the power companies bidding
for the construction of new power plants,
LatinFinance heard. CFE in late June also announced tenders for the construction of four
power generation plants.
The energy reform is set to attract billions
of dollars of investment into exploration and
production and once new fields come on
stream more pipeline infrastructure will be
needed, investors say. The government sees
oil output increasing to 3 million barrels a
day in 2018 and 3.5 million in 2025 from 2.5
million in 2013. Natural gas output should
also increase to 8,000 million cubic feet in
2018 and 10,400 million in 2025, from 5,700
million at the end of 2013.
"The first step hasn't even been taken,
which is investment into upstream, but as
that happens and more production comes
out of offshore areas that would need to be
gathered, shipped, transported, distributed,
processed. We see a lot of opportunity
there," Javier Chavarría, senior vice presiMARIO BEAUREGARD, PEMEX

"IF THERE IS
SOMETHING THAT
PEMEX HAS
ACCUMULATED, ALONG
77 YEARS OF BEING A
MONOPOLY, ARE
ASSETS THROUGHOUT
THE COUNTRY"

dent for private infrastructure at Partners
Group, says.
Pricing, execution worries
Despite the excitement, investments
in Mexican pipelines face a number of
hurdles.
The drop in commodity prices is the
most obvious. The lower price of oil could
dampen interest in energy investment, at
a time when Mexico's growth continues
to disappoint. The country's economy
expanded 1.4% in 2013 and 2.1% in 2014
and, with growth tied to oil prices and a
sluggish US economy, investors are concerned about the country's medium-term
prospects.
Construction risks also hover. Pipeline
companies need to obtain right-of-way
permissions from landowners, which can
be tricky. Spanish companies Enagás and
Elecnor are running behind schedule in the
construction of a 170 kilometer pipeline,
due to strong opposition from landowners.
"All these tenders include development
and construction phases as well as the
operational phase," says Partners Group's
Chavarría. "Obviously, there is more risk
on the construction side, you need to deal
with obtaining the rights of way, constructors, staying on time and on budget. I would
say that's by far the most risky part of these
projects."
Corruption, and the government's
failure to crack down on drug violence in
border areas also concern the market, one
source says, especially because some of the
new pipelines will be built in areas near the
border where drug cartels are known to
operate.
Attacks on energy infrastructure by
armed groups are rare in Mexico, but they
are not unheard of. US energy company
Key Energy Services took a pre-tax charge
of $2.2 million in the first quarter this year
in relation to an arson attack that destroyed
some of its assets in the country.
Whether secondary legislation on the
energy industry will be passed as planned
is also worrying some. Yet overall, investors
are upbeat.
"I'd say that these peripheral noises have
slowed things down, but the macro story
and the fundamentals are so strong that we
still think we've got a lot of momentum,"
says Perarnaud. "The fact that you have
one side of the border the cheapest gas in
the world and in the other side the second
most expensive market for gas in the world.
I think that's pretty compelling." LF

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