Energy Reform is Underway

Petroleos Mexicanos (Pemex) has reached a $900 million deal with BlackRock and First Reserve, its first major investment since the country ended its 76-year resource nationalization, the companies announced on March 27, 2015. BlackRock and First Reserve receive a 45% interest in a natural gas pipeline project that will deliver United States gas to central Mexico. Construction of the project is expected to be complete in 2016, and the two investing firms will hold a 25-year transportation agreement for the 430 mile pipeline. The infrastructure will transport 1.4 Bcf/d from the Eagle Ford Shale.

Jim Barry, Global Head of BlackRock Infrastructure Investment Group, said, “The opportunity for infrastructure in Mexico given recent reforms, positive demographics and economic stability and resilience in Mexico has definitely drawn our attention and we look forward to exploring other opportunities in the near future.”

BlackRock and First Reserve have about $10 billion dedicated to international infrastructure, and both have a small position in other Mexico-based projects. About 3% of BlackRock’s 2014 revenue came from its Latin America sector. William Macauley, Chairman and co-Chief Executive Officer of First Reserve, told The Wall Street Journal that Mexico’s investment potential is huge. “If you take pipelines, for example, Mexico has 10% of the natural-gas pipelines that the state of Texas has,” he said.

Big Step for Pemex

Mexico’s national oil company opened the doors for private investment last year in an attempt to revive its struggling industry. Proved reserves fell by 3.1% in 2014 to 13.02 billion BOE as the company failed to replace production, which has been in decline for more than a decade. The National Hydrocarbons Commission says the industry is on pace to run out of reserves in ten years at its current rate, and only 47% of gas was recovered in its most recent year.

The $900 million investment provides some relief to Pemex’s $4.16 billion budget cut, made in response to the commodity downturn. Round Zero will occur later this year and offers about 17% of the country’s proved and probable reserves for potential partnerships. Pemex originally believed the bidding war would generate upwards of $50 billion, but the estimates were made at the peak of the oil market last summer.

Security concerns may also be an issue. A report from Reuters says the area along the Eagle Ford trend is “prone to lawlessness and drug cartel activity,” and a representative of Lewis Energy told the media in July that onshore Mexico development would be as much as 30% higher due to escalated security needs.

The resources are certainly in place. The Energy Information Administration believes the country holds roughly 117 billion BOE in resource potential (seventh most in the world), and analysts believe the country’s energy reform is headed in the right direction, even though it won’t happen overnight. “There are areas where we can say the progress has been slow but there is no doubting of the government’s intentions on paper,” said Deborah Byers, Managing Partner of Ernst & Young, in an interview with Forbes.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Legal Notice