Pipelines and Profits: Mexico’s Energy Reforms Likely to Influence Regional Economics

iStock_000014930569SmallBy Ann All

The oil industry in Mexico, which has declined in recent years, is poised to make a major comeback with reforms proposed by President Ernique Pena Nieto. As reported earlier this month in mainstream press outlets, Mexico’s oil reserves have dropped from about 60 billion barrels to a bit more than 10 billion barrels over the past 20 years. And the country’s national oil company, Petroleos Mexicanos (Pemex), has neither the money nor the expertise to tap into potential new oil supplies.

Pena Nieto wants to change that, with reforms that invite foreign companies to team with Pemex to explore potential new sources of oil while sharing profits from exploration.

Experts say such partnerships will likely have the most positive impact on the United States, thanks in part to its geographic proximity to Mexico and already strong relations between the two countries. They could also have an impact on downstream industries such as manufacturing. “It will be interesting to see the effect it may have on manufacturing, not just in Mexico but also in the U.S,” said Roberta Gamble, a partner in Frost & Sullivan’s Energy & Environment practice, during a recent presentation on emerging markets.

The ambitious reformation plans in the energy industry are not the only big-impact projects on the Pena Nieto administration’s agenda. One of the first initiatives undertaken when the new president took office last year was to improve the performance of education, and specifically the adverse influence of education unions in the delivery of instructions. Further, the administration has introduced plans to more fully liberalize the telecommunications sector, which is likely to also unleash new opportunities for foreign investors into the country.

Many are seeing these reforms as ideal opportunities for the U.S. to capitalize on more cross-border partnerships, from transmission connections to movement of goods. As was reported recently in Nearshore Americas, over 6 million jobs in the U.S. are dependent on U.S.-Mexico trade. It is believed that millions of more jobs can be created through more focused alliances where both countries can yield benefits.

But, it is energy that seems to be transfixing the global investment sector – given the potentially windfalls for Mexico and its neighbors. Gamble observed that a big increase in shale oil coming from the U.S. has benefited manufacturing facilities in Mexico. “Natural gas in Mexico is about four times the price of what it is in the U.S.,” she said, noting that natural gas exports to Mexico hit a record in 2012. Natural gas from the U.S. meets about 20 percent of the country’s demand, she said, which helps facilitate rapid industrial expansion in Mexico.

Pemex plans to double that capacity with the cross-border Ramones pipeline project. When finished in 2015, the pipeline will span 750 miles, from Agua Dulce, Texas, to central Mexico, Reuters reports. Gamble called it “the biggest energy infrastructure development in 40 years.”

While reforms like those proposed by Pena Nieto will invite more foreign investment, Mexico is also looking to its private sector to help fund $200 billion a year in infrastructure investment, said Cristiano Zaroni, director of Latin American Operations for Frost & Sullivan.

Although Latin American economies are still largely dependent on commodities like oil, the country is seeing “a strong move” toward newer industries such as high tech and alternative energy, Zaroni said. Technology giants like Microsoft and Cisco are making steady investments in the region, and relative newcomers like Globant are garnering attention with moves like Globant’s plan to raise $86.25 million in an initial public offering in the U.S.

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Bloomberg, in a recent editorial, drew a connection between Mexico’s energy and the stalled immigration legislation in the U.S. The publication argued that immigration reform remains a significant ‘moral and economic’ necessity as Mexico begins to open up key markets. Clearly, the inter-relationships between the U.S. and Mexico is likely to be more pronounced – as potentially cascades of new investment arrive into Mexico, spilling into all kind of ancillary sectors, with IT consulting certainly being one of those key beneficiaries.