Authorities take steps to strengthen Mexico's energy infrastructure

Recent reforms have opened up Mexico’s energy markets with the promise of greater levels of investment, more competition and stronger economic growth. For these benefits to realise their maximum potential and reach all regions of the country, it is essential that infrastructure of sufficient quantity and quality is put in place.

To a large extent, Mexico has fallen behind in terms of developing its energy infrastructure. This is due to significant and prolonged underinvestment by the state monopoly providers, Petróleos Mexicanos (Pemex) and the Federal Electricity Commission (Comisión Federal de Electricidad, CFE).

Natural Gas

Recent years have seen growing demand for domestically produced natural gas as well as imports of both piped and liquefied natural gas (LNG). The advent of relatively low-cost shale gas imported from the US has been a particularly important development, spurring a big shift in CFE’s power generation mix. The Ministry of Energy (Secretaria de Energía, SENER) expects gas imports to increase by around 30% by 2030, from 3.5bn standard cu feet per day (scfd) in 2015 to 5.4bn, while domestic production is expected to halve from 6.4bn to 2.7bn scfd over the same timeframe.

Bringing gas from Texas to Mexico on this scale requires substantial investment in gas pipelines, a development that has already been under way for a number of years. The new 860-km Los Ramones pipeline will be used to import 2.1bn scfd of gas along this route when the second of its two phases becomes fully operational in 2017.

The project, which broke ground in 2014, is expected to cost $3.7bn, financed through public-private partnerships (PPPs). It is one of the largest infrastructure projects in Mexico’s history and will be capable of meeting 20% of the country’s natural gas needs when complete. Phase I is owned by Gasoducto del Noroeste, a joint venture (JV) between Pemex subsidiary Pemex Gas y Petroquímica Básica and IE nova, which is owned by Sempra International from the US. The infrastructure is being operated by Gasoductos de Chihuahua on a 25-year concession. Phase II South is a JV between Pemex and GDF Suez of France, which rebranded as ENGIE in 2015. ENGIE is on board to operate the pipeline upon completion. TAG Pipelines, another Pemex subsidiary in which private equity players BlackRock and First Reserve Corporation purchased a 45% stake in 2015, is the owner and operator of the final section to be completed – Phase II North.

A crucial aspect of this ever-expanding network is the successful control and monitoring of the system. David Madero, director-general of the state-owned gas pipeline operator Centro Nacional de Control del Gas Natural (CENAGAS), told OBG, “Operationally speaking, one of the biggest challenges is to develop and purchase the relevant IT applications to make the most out of the nation’s gas infrastructure. Implementing supervisory control and data acquisition as well as material requirements planning will not be a quick process but, in the long run, will play a significant role in the operational efficiency of gas operations in Mexico.”

Strategic Aims

Looking to the future, CENAGAS is working with SENER and the Energy Regulatory Commission to implement a five-year plan to develop infrastructure for the transport of natural gas, covering the period 2015-19. Upon the publication of the first annual review of the plan in July 2016, CENAGAS noted that 2400 km of pipelines had already been completed under the administration of President Enrique Peña Nieto, a further 1280 km were under construction and another 4000 km were at the planning stage. Together, these projects represented an investment of $12bn.

Seven pipeline projects, totalling 3000 km and $4.5bn in investment, are due to come on-stream by 2018. Compared to the original publication of the five-year plan, the 2016 review entailed a reduction in forecasts for supply, demand and imports due to a number of factors relating to the use of gas by the power generation sector.

Open Season

The year 2017 will see the opening of the country’s first temporada abierta (open season), in which private firms will be able to bid for the use of spare capacity – over and above the needs of Pemex and CFE – on the current gas and fuel pipeline network through CENAGAS.

In the first round, some 10% of existing capacity is to be made available. All owners of pipeline infrastructure are required to participate, while Pemex will progressively cede its market-dominating position. Following an open, competitive bidding process, the first contracts are expected to be signed in May 2017, becoming operational on July 1 for a period of one year. It is expected that this will contribute to making the gas market fully competitive by 2018 while at the same time supporting further development of the pipeline network.

With the progressive liberalisation of petrol and diesel prices over the course of 2017, the growing need for pipelines to transport these fuels has become increasingly apparent. Distributors will seek to compete on the basis of their efficiency in transport, with pipelines being a much more cost-effective mode than the road-based oil tankers that currently predominate in the sector. Existing pipeline infrastructure for combustibles will also form part of the open season for bidding.

Electricity

Following the long-term electricity supply auctions that got under way in 2016 (see analysis) private sector investment in power generation, particularly in renewables, is expected to be ramped up significantly from 2017 onwards. Published in June 2016 the country’s 2016-30 National Electric System Development Programme (Programa de Desarrollo del Sistema Eléctrico Nacional, PRODESEN) foresees investment totalling $120bn in power-related projects over a period spanning 15 years, of which a total of 75% will relate to generation, 12% to transmission and 13% to distribution, frontloaded over the 2017-20 period.

Already, a number of privately backed power generation projects are expected to come to fruition during 2017. These include three combined-cycle plants, the first of which is a 300-MW plant constructed by Spanish firm Iberdrola in Baja California; a 925-MW plant built by Abengoa – also from Spain – in Chihuahua; and a 615-MW plant under construction in Estado de Mexico by a consortium of Spanish and Mexican firms. Four wind farms are also expected to come on-stream in 2017; one in Zacatecas, two in Coahuila and one in Tamaulipas.

At the same time, efforts are being undertaken to attract private investment into electricity transmission and distribution infrastructure, with the results of the first tender scheduled for announcement in April 2017. As the first step in PRODESEN, CFE will solicit bids for a 1200-km, high-voltage power line connecting the states of Oaxaca and Morelos. The line will have a capacity of 3 GW and is expected to require a $1.7bn investment. The successful bidder will be awarded a 20-year concession on a build-own-operate-transfer basis, with the line expected to become operational by 2020.

Located in the south-east of the country, where renewable power resources are significant but where transmission infrastructure is limited, this project will ultimately both improve transmission to areas of high demand in the centre of Mexico and facilitate the export of electricity to countries across its southern border.

Another important transmission project that is expected to come onstream in 2017 is the 422-km, 400-KV Huasteca-Monterrey line located in the north-eastern states of Tamaulipas and Nuevo León. The project will add much-needed capacity to the existing line, which is already saturated, and represents a $257m investment.

Financing Methods

As part of the government’s fiscal consolidation efforts (see Economy chapter), capital expenditure has been scaled back significantly, by nearly 10% for both 2016 and 2017. At the same time, capital expenditure by Pemex in the oil and gas sector has fallen by more than half since 2014. As a result of both stricter financial controls and the ongoing reform programme, the government is turning increasingly to the private sector to finance infrastructure in general, and energy infrastructure in particular.

Underpinned by the 2012 PPP Law, partnerships between the state and private players are already used extensively in Mexico, notably through the government’s National Infrastructure Fund, and have been utilised to build high-profile infrastructure projects, such as the new Mexico City International Airport and the Los Ramones pipeline, built to bring gas from Texas to the centre of Mexico. PPPs will continue to play a substantial role in developing the necessary infrastructure, but the authorities have also been exploring new financing mechanisms, such as development capital certificates, project investment certificates and a new tradeable financial security known as a fideicomiso de inversión en energía e infraestructura (FIBRA E), that would mobilise the funds of institutional investors, notably domestic pension funds and insurance firms (see Capital Markets chapter).

Launch Of Fibra

Similar to the master limited partnerships used by US energy firms to exploit shale reserves, FIBRA Es, announced by the authorities in the third quarter of 2015, are modelled on the existing real estate investment trusts, known locally as FIBRAs. These trusts encourage investment in mature infrastructure assets by external entities through the use of tax breaks. While the issuer continues to operate the underlying assets, the revenue stream – yielding a coupon, in a similar fashion to a traditional fixed income security – will be secured against them.

The first FIBRA E, FIBRA Vía, was launched in October 2016 by Mexican infrastructure operator Promotora y Operadora de Infraestructura (Pinfra), securitising MXN12bn ($723.2m) against its holding in the Mexico City-Toluca highway. Further FIBRA E securities are expected to be issued by Pemex and CFE during the first half of 2017, with a combined total of $1.8bn of their assets (two-thirds by Pemex and one-third by CFE) initially in line for monetisation in this manner, after which they will be tradeable on the local stock exchange. Significant interest is predicted among domestic institutional investors looking for higher yields, as they have been major buyers of the existing FIBRAs.

Going forward, these parastatals are expected to make significant use of FIBRA Es if the initial issues prove successful. This will allow them to restructure their finances while freeing up funds for investment in new productive assets. In the case of Pemex, known to be by far the largest holder of assets qualified for financing through FIBRA Es, funds freed up by the securitisation of mature midstream and downstream assets, such as gas pipelines, could be used to finance exploration and production activities. Upstream activities are not, however, eligible for financing directly through the new FIBRA Es, nor are Pemex’s retail outlets. For its part, CFE has signalled its interest in securitising existing transmission towers and other electricity grid assets.

Talking Shop

The financing of energy infrastructure continues to be a hot topic in Mexico’s energy sector in early 2017, and the 13th annual Mexican Energy and Infrastructure Finance Forum set to take place in Mexico City in June 2017 will provide an important opportunity to explore emerging financing opportunities and the ways in which PPP mechanisms can be further improved going forward.