Is Mexico’s Energy Industry Ready To Boom?
A few months ago, a Fortune 500 client asked for our views on gas and power investment opportunities in Africa and Asia. At the end of the presentation they asked which developing market I thought has the most potential for its gas and power sector. Without hesitation I said ‘Mexico’ and, despite having just spoken about Asia and Africa for the past hour, they agreed.
The Mexican energy reform is a big deal. While foreign companies are chomping at the bit to gain access to Mexico’s upstream acreage , the more immediate opportunity is in its gas and power sector. The lead times to develop gas and power infrastructure are generally shorter and, unlike in the upstream sector, foreign companies are already active here. As a result, there is considerably less regulatory change needed to attract more investment
Over the next 15 years we expect Mexican gas demand to increase by over 74% and US imports to grow by more than 200%. As impressive as these numbers are, they probably underestimate Mexican gas demand. While there are several reasons why that demand could be higher, the single most important is a by-product of the energy reform. End-user power prices are falling, especially for the industrial sector.
The energy reform is changing how wholesale power prices are auctioned and how the state-owned power company – and de facto monopoly – CFE is administered. The new wholesale power market will foster competition and has already encouraged CFE to accelerate plans to build gas pipelines to displace fuel oil in the power sector. Even with the crash in oil prices, it is much cheaper to generate electricity with gas rather than oil. Furthermore, Mexican gas prices are linked to cheap US prices. As a result, the increased use of imported US gas reduces generation costs and allows regulated power prices to decrease.
