Reports related to this article:
Project(s): View 18 related projects in PECWeb
Plant(s): View 10 related plants in PECWeb
Released August 04, 2015 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Mexico's effort to reform its energy markets had a disappointing start last month, as few companies bid on shallow-water Oil & Gas blocks offered by the country. But experts predict Mexico will make changes so that future offerings will be more attractive for foreign companies.
Mexico is in the process of opening its Power and Oil & Gas Production and Pipelines industries to non-Mexican companies, reversing decades where those companies were shut out of Mexico. During the next few years, non-Mexican companies could have the opportunity to bid on tens of billions of dollars of projects in those industries. For more on those potential opportunities, see May 18, 2015, article - Cross-Border Pipeline Projects Link U.S. Producers with Mexican Consumers; and March 18, 2015, article - Mexican Electricity Liberalization: Promising Yet Perilous.
Doing business in Mexico is not for the faint-hearted. And unless law and order is restored in the country's troubled areas, overseas bidders may not be willing to take the risks of operating there, one leading expert on Mexico told Industrial Info. For more on Mexico's security situation, see June 9, 2014, article - Will Security Concerns Undermine Mexican Oil & Gas Liberalization?
"The security situation in Mexico has been deteriorating very quickly," said Tony Payan, the Françoise and Edward Djerejian Fellow for Mexico Studies and director of the Mexico Center at Rice University's Baker Institute for Public Policy (Houston, Texas). "The country is in enormous chaos now--things are pretty bad. And the Mexican government is acting like an ostrich, putting its head in the sand. It will not discuss the security situation publicly, which I don't understand."
Payan told Industrial Info that Mexico's security situation briefly improved after its previous president, Felipe Calderon, launched a concerted effort to crack down on drug lords, gangs and organized crime. But Calderon left office in late 2012, and his successor, Enrique Peña Nieto, has not spoken publicly about his plans to take to restore law and order, the professor observed. Payan said the rate of crime and murder briefly declined after Calderon began his crackdown, but in the 30 months since he left office, the rate of extortion, kidnapping, fuel theft and murder all are higher than they were under Calderon.
Aside from well-founded concerns about personal and corporate security inside Mexico, Payan said the country's first foray into competitive bidding for offshore oil & gas leases was a failure. Mexico offered 14 offshore oil & gas blocks in shallow water, but only two successful bids were submitted, well under expectations.
"I'm puzzled why Mexico wanted to offload its shallow-water properties first," Payan said. "Why not offer a mix of shallow-water and deep-water leases? The properties offered for bidding were not particularly attractive, and the process didn't work."
Like many people in the Oil & Gas Industry, Payan said Mexican officials were caught off-guard by the dramatic decline in global oil prices over the last 12 months: "Their expectations were based on $100 per barrel oil, and they didn't adjust when the geopolitical situation shifted and oil prices fell. They were not quick on their feet when the market changed."
Mexico's legal environment also served to discourage bidders, the Rice University professor continued. Mexican law prohibits adjudication of contract disputes in a neutral overseas forum. "That doesn't go over very well with foreign companies, particularly because the Mexican judicial system is a disaster: It doesn't have the expertise to arbitrate or adjudicate complex commercial disputes that could arise in large oil & gas deals. Mexican law also allows the government to cancel any contract it wishes for any reason it asserts."
When the next Mexican legislature is seated, Payan predicted, it would begin to fix the legal system that today tilts the playing field so dramatically in favor of the home team.
Another reason the first round of bidding failed is that the Mexican government didn't incentivize producers to produce above a certain level, Payan told Industrial Info. The contracts allowed Mexico to capture all of the incremental production above a certain level, he said.
Offshore May Prove to be Safe Ground
"Overall, the government made some mistakes in the bidding process--they were relatively inflexible on their contracts and there were other uncertainties as well. But I think these will be short-term setbacks that will be addressed in future rounds" of bidding, he predicted.
With a laugh, Payan said liberalization of Mexico's energy markets and that country's dire security situation made it "a good time to be a Mexicanologist," albeit on this side of the border. Looking forward, he said international oil companies probably won't have significant security concerns when deep-water blocks are bid.
"Operators will be on the water, away from population centers, unless the government requires companies to have an onshore presence. Security is going to be more of a problem if onshore development takes off. Those operators are expected to face greater threats" from gangs and organized crime, unless the government succeeds at restoring law and order. Today, Payan said onshore development of unconventional resources like shale formations has been postponed due to low crude-oil prices.
Major Projects in Need of Providers
Providers of industrial equipment and services probably hope Payan's predictions come true. In addition to Oil & Gas Production leases the country hopes to bid, there are an enormous amount of Power and Oil & Gas Pipeline projects that are scheduled to kick off over the next two years. Experts believe Mexico will need outside expertise to get even a fraction of those projects completed according to schedule.
Earlier this summer, the Mexican Federal Electricity Commission (CFE) announced it would bid 24 power and pipeline projects worth $9.74 billion. Officials said the projects would benefit 24 of Mexico's 32 states, adding nearly 1,429 miles of new gas pipelines, 1,442 megawatts (MW) of new generating capacity and 1,839 miles of new electric distribution line. The five pipeline projects that will be bid reportedly include:
Industrial Info does not expect all of those projects will begin according to schedule. Unless Mexico takes steps to improve its security situation and make it more attractive for overseas companies, it seems doubtful that more than a small fraction of those projects will reach fruition.
Click on the images at right to see the Mexican states with the largest-dollar value of planned power and pipeline projects.
Some of the largest Power Industry projects scheduled to kick off construction over the next two years include:
Mexico is in the process of opening its Power and Oil & Gas Production and Pipelines industries to non-Mexican companies, reversing decades where those companies were shut out of Mexico. During the next few years, non-Mexican companies could have the opportunity to bid on tens of billions of dollars of projects in those industries. For more on those potential opportunities, see May 18, 2015, article - Cross-Border Pipeline Projects Link U.S. Producers with Mexican Consumers; and March 18, 2015, article - Mexican Electricity Liberalization: Promising Yet Perilous.
Doing business in Mexico is not for the faint-hearted. And unless law and order is restored in the country's troubled areas, overseas bidders may not be willing to take the risks of operating there, one leading expert on Mexico told Industrial Info. For more on Mexico's security situation, see June 9, 2014, article - Will Security Concerns Undermine Mexican Oil & Gas Liberalization?
"The security situation in Mexico has been deteriorating very quickly," said Tony Payan, the Françoise and Edward Djerejian Fellow for Mexico Studies and director of the Mexico Center at Rice University's Baker Institute for Public Policy (Houston, Texas). "The country is in enormous chaos now--things are pretty bad. And the Mexican government is acting like an ostrich, putting its head in the sand. It will not discuss the security situation publicly, which I don't understand."
Payan told Industrial Info that Mexico's security situation briefly improved after its previous president, Felipe Calderon, launched a concerted effort to crack down on drug lords, gangs and organized crime. But Calderon left office in late 2012, and his successor, Enrique Peña Nieto, has not spoken publicly about his plans to take to restore law and order, the professor observed. Payan said the rate of crime and murder briefly declined after Calderon began his crackdown, but in the 30 months since he left office, the rate of extortion, kidnapping, fuel theft and murder all are higher than they were under Calderon.
Aside from well-founded concerns about personal and corporate security inside Mexico, Payan said the country's first foray into competitive bidding for offshore oil & gas leases was a failure. Mexico offered 14 offshore oil & gas blocks in shallow water, but only two successful bids were submitted, well under expectations.
"I'm puzzled why Mexico wanted to offload its shallow-water properties first," Payan said. "Why not offer a mix of shallow-water and deep-water leases? The properties offered for bidding were not particularly attractive, and the process didn't work."
Like many people in the Oil & Gas Industry, Payan said Mexican officials were caught off-guard by the dramatic decline in global oil prices over the last 12 months: "Their expectations were based on $100 per barrel oil, and they didn't adjust when the geopolitical situation shifted and oil prices fell. They were not quick on their feet when the market changed."
Mexico's legal environment also served to discourage bidders, the Rice University professor continued. Mexican law prohibits adjudication of contract disputes in a neutral overseas forum. "That doesn't go over very well with foreign companies, particularly because the Mexican judicial system is a disaster: It doesn't have the expertise to arbitrate or adjudicate complex commercial disputes that could arise in large oil & gas deals. Mexican law also allows the government to cancel any contract it wishes for any reason it asserts."
When the next Mexican legislature is seated, Payan predicted, it would begin to fix the legal system that today tilts the playing field so dramatically in favor of the home team.
Another reason the first round of bidding failed is that the Mexican government didn't incentivize producers to produce above a certain level, Payan told Industrial Info. The contracts allowed Mexico to capture all of the incremental production above a certain level, he said.
Offshore May Prove to be Safe Ground
"Overall, the government made some mistakes in the bidding process--they were relatively inflexible on their contracts and there were other uncertainties as well. But I think these will be short-term setbacks that will be addressed in future rounds" of bidding, he predicted.
With a laugh, Payan said liberalization of Mexico's energy markets and that country's dire security situation made it "a good time to be a Mexicanologist," albeit on this side of the border. Looking forward, he said international oil companies probably won't have significant security concerns when deep-water blocks are bid.
"Operators will be on the water, away from population centers, unless the government requires companies to have an onshore presence. Security is going to be more of a problem if onshore development takes off. Those operators are expected to face greater threats" from gangs and organized crime, unless the government succeeds at restoring law and order. Today, Payan said onshore development of unconventional resources like shale formations has been postponed due to low crude-oil prices.
Major Projects in Need of Providers
Providers of industrial equipment and services probably hope Payan's predictions come true. In addition to Oil & Gas Production leases the country hopes to bid, there are an enormous amount of Power and Oil & Gas Pipeline projects that are scheduled to kick off over the next two years. Experts believe Mexico will need outside expertise to get even a fraction of those projects completed according to schedule.
Earlier this summer, the Mexican Federal Electricity Commission (CFE) announced it would bid 24 power and pipeline projects worth $9.74 billion. Officials said the projects would benefit 24 of Mexico's 32 states, adding nearly 1,429 miles of new gas pipelines, 1,442 megawatts (MW) of new generating capacity and 1,839 miles of new electric distribution line. The five pipeline projects that will be bid reportedly include:
- the Laguna-Aguascalientes pipeline
- the Villa de Reyes-Aguascalientes-Guadalajara pipeline
- the Tula-Villa de Reyes pipeline
- the undersea pipeline that will link south Texas with Tuxpan, and
- the Nueces-Brownsville pipeline, which will also connect to the network in the U.S.
Industrial Info does not expect all of those projects will begin according to schedule. Unless Mexico takes steps to improve its security situation and make it more attractive for overseas companies, it seems doubtful that more than a small fraction of those projects will reach fruition.
Click on the images at right to see the Mexican states with the largest-dollar value of planned power and pipeline projects.Some of the largest Power Industry projects scheduled to kick off construction over the next two years include:
- The natural gas-fired Noreste Combined-Cycle Power Station, a $1.4 billion grassroot project scheduled to be constructed in Nuevo Leon. This 889-MW project, being developed by the CFE, is scheduled to begin construction in April 2016 and to be operating by October 2018.
- The 475-MW Sierra Juarez Windfarm expansion, under development by a unit of Sempra Energy (NYSE:SRE) (San Diego, California). This $1.3 billion project is scheduled to be built in the Baja California Del Norte State. Construction is scheduled to begin in early 2016 and to be completed by early 2018.
- The 940-MW Polo Generador Power Station, a grassroot natural gas combined-cycle (NGCC) power plant scheduled to be built in the San Luis Potosi state. This $1 billion project, being developed by the CFE, is scheduled to begin turning dirt late next year, and to be operating by early 2021.
- The repowering of the Manzanillo Power Plant, in which an oil-fired power station will be altered to burn natural gas. This 750-MW project, with total investment value of $1 billion, is also being developed by the CFE. The project is slated to kick off in early 2017 and to be complete in early 2020. The plant is in Colima.
- Tataltepec De Valdes Paso De La Reina Grassroot Hydro Power Plant, a $980 million, 540-MW grassroot hydroelectric generator, is scheduled to kick off construction in late 2016 and to be operating by late 2020. This project, located in Oaxaca, is being developed by the CFE.
- Sur de Texas-to-Tuxpan Grassroot Natural Gas Subsea Pipeline, a $3.1 billion project that will stretch for about 500 miles under the Gulf of Mexico, specifically from Matamoros, Texas, to Tuxpan, Veracruz, where it will connect with the planned Tuxpan-Tula Pipeline. CFE is developing this project, which is scheduled to begin construction next summer and conclude in mid-2018. When completed, the 42-inch diameter pipeline will be capable of transporting up to 2.6 billion cubic feet of gas per day (Bcf/d).
- Samalayuca-to-Sasabe Grassroot Natural Gas Pipeline, an $800 million project that will stretch across Chihuahua. Also under development by CFE, this project plans to begin construction by yearend 2015 and to be in service by mid-2017.
- Altipan-to-Salina Cruz Grassroot Natural Gas Pipeline, a $600 million, 124-mile pipeline that would transport up to 250 million cubic feet of gas per day (MMcf/d) from Jaltipan to Salina Cruz city in Veracruz. CFE also is developing this project, which aims to begin turning dirt next summer and to be operating by late 2017.
- Salina Cruz-to-Ciudad Hidalgo Grassroot Natural Gas Pipeline, a 261-mile, $580 million project that will transport gas from Salina Cruz to Ciudad Hidalgo in Oaxaca. This project, being developed by Mexico's Secretaria de Energia (SENER), is scheduled to begin turning dirt this summer and begin service by yearend 2016.
