Mexican energy industry ‘full of development gems’, expert says

“There’s been a lot of talk about a slowdown in the Mexican energy industry, but I don’t necessarily see it that way. There are many gems to discover in Mexico if you know where to look, ”said Dino Barajas, partner at DLA Piper law firm. “As a potential investor, it’s like going to a big sale. If you get there first, you’ll get the first shot at whatever you want. It’s really about knowing where to look for opportunities and having someone who knows the industry to advise you on that process.

Barajas added that “a lot of companies entered Mexico looking to develop projects during the gold rush period following energy reform. Many of them have since left the country while the smartest, those who understand that energy is a long-term game, have stayed behind. ”

Barajas, who has been a partner and co-lead of US infrastructure and projects and energy mergers and acquisitions at DLA Piper LLP since last year, has been working on energy deals in Mexico and Latin America since 1993. An industry veteran energy in the Americas, he was previously a partner at Akin Gump Strauss Hauer & Feld LLP from 2010 to 2020 and worked on transactions in Argentina, Brazil, Chile, Colombia, Costa Rica, Curaçao, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico and Nicaragua. , as well as several other international sites.

Barajas has also been a Partner and Co-Head of Latin American Group at Morgan Lewis & Bockius LLP, Partner and Co-Head of Latin American Projects at Paul Hastings and Senior Counsel at Milbank Tweed Hadley & McCloy LLP.

He received a JD from Harvard Law School in 1993 and received his BA in Communication Studies from the University of California, Los Angeles (UCLA).

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Editor’s Note: NGI Mexico Gas Price Index, a leader who follows reform of the Mexican natural gas market, offers the following question-and-answer (Q&A) column as part of a series of regular interviews with experts in the Mexican natural gas market. Barajas is the 63rd expert to participate in the series.

NGI: As someone who keeps an eye on the whole region, in your opinion, which country (ies) are currently the most promising in terms of developing energy projects?

Barajas: Brazil is still a market with good development potential given its size, vast needs and demand. The population is large and there are good development opportunities across the country, whether in renewable energies or other technologies. The risk with Brazil is that historically it operates on boom or bust cycles. Sometimes the doors are wide open and project development is rampant, although historically there are slowdowns and times when the country is less investor friendly. For any investor considering Brazil, it is important to understand the boom and bust cycle, prepare for it, and know how to deal with it when it occurs.

Another is Chile, where energy projects are often linked to commodity development projects. With so much energy required for the development of raw materials, as in the mining industry, there are many opportunities for renewable projects to act as an energy source for these projects. The risk, however, lies in commodity prices. If the prices of raw materials fall, for example, demand falls and therefore less energy production is needed. With the dramatic fluctuations in commodity prices, developers of energy projects need to understand this risk.

Central America is also an attractive market, albeit much smaller. The region has vast and diverse energy sources, such as wind, solar or geothermal power, and most countries in the region have good opportunities for the development of smaller-scale projects. Generally, the development processes of a project can be slow in these countries, where there are sometimes issues that can complicate the progress of the construction of a new factory, so it is important to be able to be flexible and creative.

NGI: How does Mexico compare to other regional peers?

Barajas: Mexico is still an attractive energy market. There is such an important relationship with the United States, especially in northern Mexico and along the US border, and there are always opportunities on both sides to strengthen ties and improve energy efficiency. There is also a large population in Mexico with high demand for energy and lower prices.

There has been a lot of talk about a slowdown in the Mexican energy industry, but I don’t see it that way. There are many gems to discover in Mexico if you know where to look. Even during difficult times, Mexico is an attractive market for energy development.

NGI: You mentioned that there are gems in the Mexican energy industry to develop if you know where to look. What, in your opinion, are these nuggets that could be developed in Mexico?

Barajas: One would be the construction of a pipeline to relieve congestion. Construction of pipelines to ensure redundancy. And the reason is that with redundancy there is less risk to the industry and it also provides additional capacity, so that’s a double benefit.

In addition, the more natural gas one can import into the northern part of the country, which would obviously come from Texas, the more Pemex’s production of associated or unassociated natural gas could be used for other parts of the country where it is really needed. . There are other parts of the country that could make real use of Pemex gas production due to the scarcity of supply. With greater importation into the north, the natural gas supply would spill over to the rest of the country and ultimately ease congestion pricing further south. So that’s a possibility for natural gas.

On the electricity side, I think if you are a large company and especially if you are an industrial company, you had better start looking for opportunities for your own power supply. Simply because you need to get ahead of the wave of insufficient government investment in the electricity sector over the past three years, and likely there won’t be much over the next three years. . So if energy use is affecting your business, you might want to be able to help when the market – in terms of policies and lack of investment – won’t be able to meet your needs.

Also, from a private equity perspective and especially from an opportunity fund perspective, there are tons of projects that I know of that you can take on right now that are of the “little to no” type. money down “because the original investors wrote down the investment. When you think about it from an accounting perspective, when you need to close the books at the end of a fiscal year, you need to determine the true value of an asset. So if you have an asset that has been depreciated, there are financial reporting requirements that will require you to reassess the true value of an asset on your books. And, now that López Obrador, or AMLO, has been in power for three years and has adopted some of his policies that have depreciated the country’s assets, that is reflected in your books.

For the owners of these businesses, you’ve already taken a hit. However, as a potential investor, this could be an opportunity. Assets have been written down, in some cases to zero, and owners are looking to sell to recoup something from their initial investment. So, as a potential investor, it’s like going to a big sale. If you get there first, you’ll get the first shot at whatever you want. Right now it’s really about where to look for opportunities and having someone who knows the industry to advise you on that process. There are a lot of rough diamonds out there if you know where to look, and in my opinion those are the opportunities in Mexico.

NGI: In terms of developing private energy projects, do international companies still see Mexico as a viable option?

Barajas: The smartest do. When it comes to international companies, the smartest will stay in Mexico because they play for the long haul and know the market will come back. They are the ones who should assess future opportunities in the market.

What I tell clients is to start looking at the opportunities now. It is important to start assessing the challenges now, as they must be ready before the new administration arrives. As for the current administration and AMLO policies, because Morena lost the majority in Congress, they now have to work with other parties to get anything passed, which means some of the laws which he defended previously will have to be recalled. because more negotiations will now be necessary before passing anything. I think it’s a less volatile environment for investors going forward because you won’t have the massive shifts from pro-business sentiment to anti-business sentiment in the proposed legislation. Ultimately, the other parties, as well as AMLO, do not want to harm the Mexican economy as this would ultimately affect the working poor in terms of higher food prices and widespread inflation.

NGI: What do you expect from the Mexican energy industry over the past three years of the current administration?

Barajas: What has happened as a result of some of the anti-business and anti-foreign investment legislation and sentiment is a halt to the introduction of new technologies, new efficiencies and improved services on all fronts. Prices were falling and the Mexican energy industry was improving.

In the short term, when the economies return as the pandemic slows, hopefully you will find that Mexico has high energy demand and may not have the full capacity to meet that demand, whether on the natural gas side. or on the power side. This is simply because, during the first three years of this administration, there was not the necessary investment to maintain what existed, let alone create additional capacity and redundancies to improve services. And then there will be increased demand for energy that can only be met by paying for it, making Mexican businesses less competitive on the world stage. So, if the Mexican government does not start investing more in the energy sector now and demand increases as the pandemic subsides, this will have effects on both prices and quality of service. . So, this is definitely a concern for the future over the next few years.

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