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Mexico Profits Big from Natural Gas

Mexico's Energy Landscape

Written by Brian Hicks
Posted July 29, 2013 at 4:31PM

The U.S. boom in natural gas is giving the energy landscape south of the border the push it needs to make some big profits of its own.

It’s been 75 years since Mexico first nationalized its oil and gas sector, but little has been done in that time to make Mexico little more than a blip on the energy radar.

mexico mapBut the times, they are a-changin’.

With a changing of the guard and a declaration of new Mexican President Enrique Peña Nieto, along with his political allies, the proud nation is opening up to oil and gas exploration.

A natural gas compression station in Mexico’s Tamaulipas state is being offered by national utility CFE, with bids taking place as we speak.

The groups vying for the bid, according to BNamericas, includes Spain's Enagás (MCE: ENG) in consortium with Servicios de Compresión SLM; a consortium of Mexican firms Servicios Integrales de Compresión and Taylor Servicios Técnicos; and U.S. firm Sempra's (NYSE: SRE) local unit IEnova.

These proposals are under review and are scheduled to be awarded July 31.

Mexican Energy Production

Mexico has been an utter mess through the years. And I don’t need to remind you about all the headlines it’s been making more recently – none seem to be good. And its electricity generation is shoddy at best – there were 22 critical alerts last year that forced industrial users to reduce the use of natural gas, and it cost the country $1.5 billion.

That’s where Mexico stands right now. It couldn’t really get any worse, so things can only get better.

And you may not see it yet, but the U.S.-Mexico relationship grows stronger every day. We are neighbors, after all. A system of gas interconnections and pipelines are in progress to see Mexico unify with the U.S. as it turns away from costly oil-burning power plants.

A major natural gas line is under construction right now that runs from Arizona into the Sonora and Sinaloa states – regions that until now have suffered economically because of energy constraints.

What Mexico needs now are investors who are willing to overlook the pitfalls of power generation in the country and recognize the growth and its full potential.

Sempra's Role

One such company is Sempra Energy (NYSE: SRE) out of San Diego, California, which seems to be going for all the marbles. The company has operations in Mexico, Peru, Chile and Argentina, and it is more than eager to lead the way into the new Mexican frontier.

For the past 15 years, since it first entered Mexico in the 90s, it's seen the potential – licensing, developing, building, and operating pipelines. Now it's poised to see its success reach the entirety of the country and make the bond with the U.S. even stronger.

It was instrumental in transmitting natural gas between Baja California and the U.S. network with its Costa Azul natural gas terminal – its largest project to date – under contract with clients like Royal Dutch Shell (NYSE: RDS-A) and Russian giant Gazprom (MM: GAZP). According to U-T San Diego, it has contracts that extend through 2028.

Once hydraulic fracturing and horizontal drilling burst onto the scene, Costa Azul became a cornerstone to natural gas transport. It also delivers to Asian markets, where prices are much higher than in the U.S.

Sempra is the company heading the gas line project from Arizona with its Mexican unit, and to date Sempra has pumped $2.4 billion into energy assets in Mexico.

The Mexico unit, Infraestructura Energetica Nova, or Ienova (MEX: IENOVA), is a major player in Mexico’s rapid expansion of its natural gas transport network.

In March, it went public with its Mexican holdings on the Mexican stock exchange and was able to raise $600 million. Sempra retains an 81 percent interest in IEnova that is worth an estimated $3.7 billion.

IEnova is building a pipeline across Chiapas, Tabasco, and Veracruz that will ignite Mexico’s petrochemical industry.

Investing

Sempra and IEnova are positioned perfectly for any future bids in Mexico’s territory and will be able to hang with international competition, no problem. Their well-established footing already gives them the upper hand as big timers such as TransCanada (NYSE: TRP) and Kinder Morgan (NYSE: KMI) start to sniff around.

With Mexico at full throttle in exploration and development nowadays, IEnova is the early bird that gets the worm. It already has the resources and the infrastructure to get where it wants to go – north or south.

¡Viva México!

 

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