Pemex to upgrade creaky infrastructure in $900m deal
The deal will work on a natural gas pipeline project to expand the company's infrastructure
Mexico's energy reforms have opened oilfields to foreign investors, so it was a bit of a surprise that Pemex's first deal was a $900m equity transaction with a pair of US private equity funds for a natural gas pipeline project. But it made sense. Mexico's energy infrastructure badly needs to be expanded and upgraded if the sector is to perform as the architects of the reforms hope it will. Billions of dollars in new funding will be necessary.
Pemex's deal with BlackRock and First Reserve to sell a 45% stake in the 460 mile Las Ramones II pipeline project, which will ship gas from Texas to central Mexico, is probably just the first of many such deals to fund new infrastructure, especially to import more cheap natural gas and create a more robust network within the country.
It has a long way to go. Mexico's 7,800 miles network of natural gas pipelines is barely bigger than New Mexico's, and not even a fifth the size of Texas's. The lack of natural gas supply has been a major constraint on the country's manufacturing industry. New pipelines could increase Mexico's natural gas imports from the US from 1.98bn cubic feet per day (cf/d) in 2014 to 3.8bn cf/d by 2018.
Better links between the Gulf Coast, home to most of the existing infrastructure, and the Pacific Coast is also part of the plan. It should represent a huge opportunity for private investors. The Energy Ministry expects 18 new gas transport projects to add more than 6,000 miles of new pipelines at a cost of $13.3bn by 2018. Pemex has even put forward a plan to build a $6bn liquefied natural gas export terminal on the Pacific coast to take advantage of export opportunities to Asia. The reforms also herald a revolution in the downstream oil business, which has for years been plagued by underinvestment. By 2018, the Energy Ministry envisions a total end to Pemex's monopoly on everything from oil imports to fuel sales, while fully liberalising fuel prices during the same period. That sets the conditions for private investors to set up their own independently operated fuel refining, logistics and retail sales networks for the first time.
New investment in the liberalised sector will correct many of its problems, believes the government. In spite of being a major oil producer, for example, Mexico is a net importer of fuel. The country hasn't built a new refinery since the late 1970s and demand is now 50% higher than supply. Ageing refineries need modernising and re-tooling to process the country's increasingly heavy crude slate.
The transport, storage and distribution system isn't in much better shape. As analysts at the Boston Consulting Group point out, although fuel demand has grown by a third since 2003, the pipeline network hasn't grown at all. Mexico has 3,000 miles of oil pipelines. The US has 60,000 miles. This has left Mexico relying on more expensive rail and trucking transport.
But before Mexico lures investors into the downstream business it will have to stop thieves stealing fuel. The country's criminal cartels have developed sophisticated schemes to tap in to Pemex's pipelines, siphoning off fuel for resale, sometimes at their own petrol stations. It has been a lucrative business for crime lords. Pemex said it lost more than $1bn from theft in 2014, more than twice what it lost in 2013.