Pemex has secured its first major investment since overhauling energy reform was passed last year that opened the country’s energy sector to foreign and private investment for the first time in more than 75 years. US-based BlackRock Inc and First Reserve Corp put up approximately $900 million for a 45% stake in a pipeline project that will transport US natural gas to central Mexico, the companies said Thursday afternoon.
The project consists of two natural gas pipelines: Los Ramones Phase II North and Los Ramones Phase II South (“the Los Ramones II Projects”). Upon closing, these will be the first major Pemex-sponsored midstream assets to be built in partnership with foreign capital since the approval of Mexico’s historic Constitutional Energy Reform in 2013.
The agreement gives BlackRock and First Reserve a 25-year gas transportation agreement for the Los Ramones II Projects. The Projects consist of the construction and operation of 462 miles of natural gas pipelines which will serve as critical energy infrastructure and is part of a broader plan to transport natural gas from the Eagle Ford shale in South Texas to meet central Mexico’s growing demand for natural gas. Construction of the Projects commenced last year. Full commercial operations expected in mid-2016.
Specifically, the first phase of Los Ramones- from Texas’ Eagle Ford to Los Ramones in Nuevo León, was inaugurated last December. The second phase – a 462 mile pipeline down to the central Mexico city of Guanajuato – is planned to be inaugurated by the middle of 2016.
President Nieto has spearheaded Mexican energy reform
Officials with Pemex said the investment will help alleviate the impacts of a planned $4 billion in budget cuts at the state-run firm this year due to lower oil prices. In an interview with the Wall Street Journal, José Manuel Carrera, head of PMI, Pemex’s international subsidiary, noted, “This is certainly a landmark…It’s the first material implementation of the energy reform in Mexico. This is the start of what we believe is going to be a long series of investments by these and other investors who might follow.”
BlackRock, the principal investor in the deal, is one of the largest money managing companies in the world, currently managing over $6 billion of invested and committed assets globally. Meanwhile, the investment will expand First Reserve’s existing Mexican infrastructure investment footprint. First Reserve is the largest global private equity and infrastructure investment firm exclusively focused on energy, currenlty with over $4 billion dedicated to energy infrastructure globally.
Pemex CEO Emilio Lozoya said that this project shows that international investors have confidence that the energy reform proposed by President Enrique Pena Nieto in December 2013, and implemented via “secondary legislation” starting last year, is delivering benefits to the Mexican people.
Here is a closer look at the secondary legislation, per the terms of which the Energy Reform passed in December 2013 is being enacted:
- The constitutional energy reforms were passed by the Mexican Congress in December 2013. On April 30, 2014, President Enrique Pena Nieto submitted the secondary legislation to Congress that is enacting these reforms and bringing about an overhaul to the nation’s O&G, petrochemical, and power generation sectors. The secondary legislation includes nine new laws and amendments to several laws already on the books.
- The foundation of energy reform will be the implementation of the proposed Hydrocarbons Law and the Hydrocarbons Revenue Tax Law. These laws will regulate 1) the types of E&P contracts that will be awarded to domestic and foreign companies as well as JVs between specific state-run companies such as PEMEX and private entities; 2) the regulations for the granting of these contracts and execution by the National Hydrocarbons Commission (CNH) via a public bidding procedure; and 3) the regulations for downstream and midstream operations.
- Private entities will be allowed to enter a variety of contractual arrangements with the CNH for the E&P of the country’s oil resources. These contracts will be subject to Mexican law.
- In the midstream and downstream sectors, permits will be given for natural gas processing, oil refining, manufacturing petrochemicals, and transportation, storage, and distribution of hydrocarbons and petroleum products, which will be completely open to private investment via the granting of permits.
- It will be required that all energy projects be comprised of 25% national content by 2025. This requirement will be gradually phased in beginning in 2015. Transparency of the awards process for these contracts will also be mandated. In order for the public to review the contracts’ content, they must include a transparency clause.
- Private entities will be permitted to book for financial and accounting purposes their E&P contracts, as well as the anticipated benefits from these contracts. However, at all times, the hydrocarbons situated in the subsoil will be considered property of Mexico.
For Pemex, the agreement provides financial relief in the low oil price environment and amid falling output. Earlier this month, the company said that this year’s crude oil production could drop by 100,000 bpd from last year to 2.3 M/bd due to the budget cuts. However, officials told the WSJ that alliances with private companies could prevent that slippage, as it would cushion the impact to its investment budget.
Pemex CEO Emilio Lozoya
The deal represents BlackRock’s first infrastructure in Mexico. “Private sector participation in infrastructure is going to be crucial in Mexico and around the globe– I’m excited about prospects in Mexico for BlackRock and our clients, and we are pleased to partner with PEMEX on these initial projects” said Jim Barry, Global Head of BlackRock Infrastructure Investment Group. “The opportunity for infrastructure in Mexico given recent reforms, positive demographics and economic stability and resilience in Mexico has definitely drawn our attention and we look forward to exploring other opportunities in the near future.”
Mark Florian, Managing Director and Head of Infrastructure Funds for First Reserve, said, “For First Reserve, this investment is a continuation of our model of working with strong counterparties under long-term capacity contracts on behalf of our investors. We value our direct relationship with Pemex and are pleased to be partnering together to contribute to the expansion of Mexican energy infrastructure, which should drive substantial benefits for the broader Mexican economy.”