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The End of a Monopoly
Mexico’s ambitious oil and gas reform will put an end to 75 years of state energy domination and provide one of the world’s finest opportunities for energy investment—for those who make the most of it.
Most people would not guess that Mexico’s energy reform may lead to the creation of 4,000 new cities. Then again, most people are not Carlos Alvarez. As Chairman and CEO of Cava Energy, Alvarez possesses a uniquely informed perspective on the impact of the Reforma Energética, Mexico’s ambitious denationalization of the energy industry. Ranging from the tactical to the global, his predictions make a powerful case for the transformative power of one of the modern world’s biggest opportunities for energy investment.
A RARE OPPORTUNITY
According to Alvarez, this moment is unique not only within Mexican history, but in the development of global markets as well. Mexico’s state-run oil company, Pemex, once owned a monopoly in the nation’s oil and gas industry. Since 2014, thanks to market reforms, Pemex must compete with private ventures, many enjoying direct investment from major multinationals. Not only will the production of oil and natural gas be open to private industry, but a huge commodity trading market comprising natural gas, energy, propane, import fuels, and the like will escape state domination. And it’s about time: Mexico is badly in need of advanced infrastructure.
Despite its rich history of oil and natural gas production, Mexico only has about 14,000 kilometers of natural gas pipelines. By contrast, Texas has more than 150,000 kilometers. As Alvarez explains, this translates to “a higher cost of electricity because you are producing it with fuel oil instead of natural gas.” This in turn stifles the development of local economies as industrial projects wallow under exorbitant utility bills.
GLOBAL PARTNERS, LOCAL EXPERTISE
One of the major effects of the energy reform will be the creation of much-needed infrastructure. Mexico’s entire Pacific Coast lacks natural gas, and the total length of pipeline needed to bring gas to the region equals all current natural gas pipeline in the nation: 14,000 kilometers. Pemex does not have the funds to invest in such a project; indeed, it is unlikely that any domestic energy company will—and part of the regulatory framework of the Reforma stipulates that no company may build a 42-inch-diameter pipeline if they have not successfully constructed one before. This opens the door for foreign investment.
While he expects big things from foreign energy giants, Alvarez also cautions that to achieve success, they will need to take the right approach. Even projects with cutting-edge technology can stumble and fall on legal roadblocks and resistance from rural populations. Interested players will need to partner with a local company that understands the
CARLOS ALVAREZ
Chairman and CEO Cava Energy
ins and outs of the energy industry and its accompanying regulations and public relations. Pipelines will simply go farther with international investment and local expertise.
OVERCOMING OBSTACLES
Of course, finding the right local partner will be difficult in a country with no history of private energy production and distribution. Alvarez looks to the driving power of Texas’s oil barons and bemoans the lack of a similar strata in Mexico: “When you get into the energy sector, there aren’t going to be a lot of people who understand about energy because there’s no energy class, and the four or five that you find will not partner with you because you are their competitor.” Yet as the industry opens up, local expertise will grow to meet the demand.
Similar worries abound about the physical security of pipelines. Some of Mexico’s states still struggle with the rule of law, and organized criminals profit from decades of rampant corruption. The current government has promised to clamp down on bribery, which should bring some relief. Yet Alvarez thinks that even if cartels continue to operate, violence around pipelines should be minimal. As long as the Mexican government, in cooperation with the private sector’s security forces, assures that no black market will exist to trade fuels anymore, there will be no incentives for bribery activities.
RECORD RETURNS
While any major oil and gas project faces significant logistical, legal, and financial hurdles, the upside is rarely as high as it is in Mexico today. It may take years for dividends to come, but major players have already secured bids on lucrative onshore and offshore oil fields. A massive energy sector just opened up right next to the world’s largest economy—who’s ready to play?
Mexico will need at least US$500 billion of investment just to develop much-needed infrastructure—infrastructure that will catalyze growth in industries far beyond the energy sector.
INTERVIEW: CAVA ENERGY
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