Constitutional reform and enabling legislation has ended the Mexican government's 76-year-old oil, gas and electricity monopolies, cracking open its domestic energy markets to foreign capital and technology, unleashing what experts predict will be tens of billions of dollars in new offshore and land exploration, well drilling, pipeline construction and refining.
Former Mexican President Vicente Fox, who now serves on the board of the private equity firm Energy and Infrastructure Mexico (EIM) Capital, delivered a speech in San Antonio, saying the time is now for the world – especially Mexicans – to invest in their home country. Until now, private equity funds didn't exist for energy projects because the government controlled production.
The key to success in this new market, he said, will be transparency – there will be no room for corruption. Many potential foreign investors undoubtedly will wait to see if Mexico can live up to that challenge.
According to the state-owned oil company and former monopoly Petróleos Mexicanos (PEMEX), Mexico has about 55 billion barrels of oil in conventional reserves, and more than 60 billion in unconventional reserves. Reform means that domestic and international companies can now access some portion of that total.
Fox said the reform also has the potential to bring immigrant workers living in the U.S. back home to take advantage of the American dream in Mexico, even as the country's birth rate continues to drop.
"My grandfather was born in Cincinnati, Ohio and he came as an immigrant down to Mexico without a penny in his pocket. He came down to Guanajuato looking for his American Dream," Fox said, foregoing the stage and podium to walk among the tables at the Pearl Stable.
Fox spoke at the "Investment in Energy Infrastructure Development"luncheon, the second such event in the Red McCombs Bilateral Lunch Series put on by the Asociación de Empresarios Mexicanos (AEM). The audience included many successful Mexican national business owners who now live in San Antonio while tending business interests here and in Mexico. Fox, the former leader of the conservative Partido Acción Nacional (PAN) now out of power, had a captive audience and he did not disappoint.
The 55th president of Mexico, known for his personable, charismatic approach to public speaking, gave an almost defiantly optimistic speech about the future of Mexico and its relations with the U.S. and the world as it opens it energy market.
Mexico Entering the Market as Oil Prices Drop
The timing of reform, unfortunately, has proven to be less than ideal, missing oil's long run at $100 a barrel and more. Mexico will be launching its new energy economy at a time when oil prices have reached a six-year low at $43 per barrel. In 2013, the average price was about $95. Still, oil and gas are commodities and industry watchers take such swings in stride.
"Energy is a long-term investment," Fox told the sold-out crowd.
Fox was confident that a substantial rebound will drive prices back up in the coming years and that Mexico's production, once investment in infrastructure and business is fully realized, can compete with OPEC nations.
EIM Capital is not the first nor the last firm to set up shop in Mexico's new energy economy. Many other new and established energy companies have done so – and more are planning to enter the newly opened market south of the border. The advantage that EIM Capital may have is that it's a Mexican company, said EIM Capital CFO Patrick Hoogendijk.
This year, the Mexican government is hosting Round One of licensing auctions for proven fields. The public bidding process for the 25-year licenses are what firms like EIM Capital will be purchasing and then developing through its 10 partner companies that will work in the exploration and production, power, midstream and "special situation" sectors.
PEMEX took the majority of Mexican reserves, 83%, in Round Zero.
Just to get started on a major energy project – anywhere in the world – costs about $500 million, Hoogendijk said. "Ultimately, it can cost about $2.5 billion." That's where private equity firms come in.
Energy and Immigration
"I don't know who came up with the idea of building a wall between two friends, between two neighbors, between two partners," Fox said. "We are very proud to have the (strongest) trade (economy) between Mexico and the United States."
Building this economic bridge through the energy, manufacturing, and technology sectors instead of fortifying the border wall will mean more jobs and a better quality of life for families living on both sides, he said, which will in turn lessen the strains on the U.S. Immigration office.
"Why invest in Mexico?" asked EIM Capital founder and CEO Francisco de la Concha Hamdan. "Because we hope and believe in a better mexico."
"Today we are separated ... by a wall – a great fence that separates daughters from their mothers, sons from their fathers, and workers from their dreams," he said. "There are over 13 million Mexicans that were born in Mexico that live here today. If they did not leave their families, they left their hearts. I think it is a dream of any of them ... to come back so long as they are offered what is offered here in this nation: life, liberty, and the pursuit of happiness.
"What is stopping us from offering the same?"
Fox, in particular, has a keen understanding of how events unrelated to Mexico led to the militarization of the border. After his election, then-President George W. Bush broke with protocol and made President Fox the first head of state to be invited to the White House. The two had been close when Bush was governor of Texas, and Fox was invited to address a joint session of the U.S. Congress, at which he joined Bush in calling for comprehensive immigration reform and a new relationship of equality between the two neighboring nations. The prospects for both looked promising. That was Sept. 6, 2001. Five days later the 9/11 attacks changed everything. U.S.-Mexico relations cooled amid charges by some in Washington that Mexico did not respond vigorously enough in its condemnation of the attacks, charges unsupported by any real evidence. The border and migrant crossings, once an immigration issue, became a national security target.
Mexico's energy reform is a step in the right direction and with that prosperity from investment comes education and with education comes exponential prosperity, de la Concha Hamdan said, addressing the Mexican business owners in the crowd, "Investing in Mexico is the most simple and effective thing to do to help your country and your countrymen."
The key is to keep further business dealings transparent and responsive, he said. Rumors of corruption certainly spread faster than stories of success in the business world and in the media.
Some say Fox, a former Coca-Cola executive and Governor of Guanajuato, won the 2000 Presidential election in Mexico by promising to end the corruption that flowered during 71 years of rule by the Partido de la Revolución Institucional (PRI). He left office in December 2006, still popular, and a historic figure simply by the nature of his election and success in ousting PRI from the presidency, but he was unable to reform the PEMEX (oil and gas) and Federal Electricity Commission (electricity) state monopolies. Despite appointing a CEO with the express mission to make PEMEX as efficient as its publicly traded counterparts, little changed in terms of Mexico's energy sector during his tenure.
Mexican President Enrique Peña Nieto introduced the constitutional reform to open up the oil and gas market in 2013.
*Featured/top image: Former President of Mexico Vicente Fox speaks at the Mexican Business Leaders Association luncheon as an EIM Capital board member on March 16, 2014. Photo by Al Rendon.