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Tuesday, December 3, 2013

¡Si! - The Mexican Senate and Energy Reforms in Mexico!


sourcefile: PEMEX
The Mexican government is currently engaged in a debate of ideology, and the winners and losers in this debate have a lot at stake.  From the outside looking in, it's evident that Petroleos Mexicanos (PEMEX) has operated without the benefit of private efficiency.  To compare PEMEX with Statoil, they both drive approximately the same sales figures, but PEMEX delivers these sales with 153,000 personnel compared to Statoil's 23,000.  While this is just a quick comparison of employee to sales, it underscores the well known issues of state run oil companies in general... they're not the most efficient entities around.

PEMEX has been boosting exploration budgets significantly since 2006 without a corresponding boost in production, in fact, the numbers have been deteriorating.  The larger picture, for our Mexican cousins, is the evolution of Mexico as a market with a rapidly advancing skilled workforce strategically placed with new land bridges connecting Atlantic and Pacific shipping lanes through powerhouse ports like Lázaro Cárdenas and Veracruz.

Mexico is growing quickly and Mexico needs to pay for infrastructure to underpin a rapidly growing economy.  The trend to on shore is gaining momentum and I see very bright days ahead for North American manufacturing.  Mexico's manufacturing sector is gaining steam and Nissan's CEO recently announced that Mexico would soon overtake Japan as an export base for Nissan vehicles.  The trade growth of Mexico has seen investments in rail, roads, and inland port infrastructure to support the rapidly growing economy.  A fine example that defines both economic growth and global integration of Mexico is their container traffic growth.

Port of Lázaro Cárdenas
Mexican container traffic, at the port of Lazaro Cardenas alone, handled about 43,000 twenty foot equivalents TEU's in 2004 and expanded to 270,000 TEU's by 2007, a 527% increase in three years. In 2012, five years later, it handled 1.24 million TEU's, a 359% increase, and has a capacity of 2.2 million TEU's annually, an expansion likely to be reached in a few years time.  The expansion was driven by the investment of Hong Kong's Hutchison Port Holding's Ltd. and the expansion created berths and channels that allowed Lázaro Cárdenas able to receive container vessels up to 12,500 TEU's. The expansion of Mexican port TEU capacity has been largely driven by these investments. Here's a comparison of the growth compared to Canadian TEU growth since the turn of the century.  It's obvious that Mexico is growing their capacity at faster clip than Canada.

Mexican & Canadian TEU Growth 2000 - 2011
source: Port Alberta
None of this should come a surprise as the port has direct rail connections to inland ports that service Mexico City's greater market, which boasts in excess of 20 million people.  The inland port initiative of Mexico has resulted in tremendous connections to the entire North American market place through rail connections and inland ports like the Guanajuato Interior Port (Puerto Interior Guanajuato).  The Guanajuato inland port, a.k.a. GTO, is an example of what a well thought out inland port can become for a region and an entire nation.  I have noticed the design, location, and relative advantages of GTO capture the infrastructure that parallels numerous other inland ports, including the advantages proposed by Port Alberta... but that's another story for another day.

Guanajuato Inland Port 
Crossing back to the privatization of Mexico's oil industry, we understand that Mexico requires billions to ramp up production.  Large shale plays like Eagle Ford exist in Mexico, but the financial and technological capacity to ramp up production on their side of the Eagle Ford shale play is limited by capital resources.  This, of course, is exacerbated by the ever pressing need to satisfy tremendous infrastructure requirements to support the scope and scale of Mexico's growth.

The dialogue in Mexico is not related to the ownership, per se, of the petroleum resources themselves, but rather, it is an accommodation that allows private companies to partner with PEMEX, which allows the private partners to declare reserves for the purpose of stock valuation while the citizens of Mexico retain their "ownership" of the actual hydrocarbons.  Sounds a bit complicated, but it's not complicated.  At the end of the day, the private interests that would invest heavily in Mexican oil are simply looking for a fair deal before they start pumping billions of dollars into Mexican investments.

I believe the parties can come to a political settlement, but it won't be without some discussions and concerns.  To start with, there is a huge legacy where oil is concerned in Mexico.  Lázaro Cárdenas, the President who nationalized Mexican oil is considered a political and social reformer and is widely lionized as a hero of the Mexican people.  He occupies a very important part of Mexican history, and it is his legacy that is linked with land reform, the rights of industrial workers, unionization rights, and the nationalization of the railway.  Perhaps one of the most important legacies of President Cárdenas was the expropriation of equipment and declaration that the petroleum reserves of Mexico were nationalized.  Over seventy years later, PEMEX, the state run Mexican oil company, still stands as a legacy of President Cárdenas.

President Lázaro Cárdenas
The legacy of President Cárdenas still holds enormous sway in the history of Mexico and is greatly amplified by his own son, Cuauhtémoc Cárdenas, remains a political force in Mexico and is revered as a senior leader of one of Mexico's major political parties.  His voice, and the legacy of his father, will be part of the dialogue that shall come to a vote.  That vote shall have a long term impact of Mexico that can change the face of Mexico's economy, shift an entire hemisphere into high gear, and return manufacturing prowess to the North American continent at precisely the moment when the continent is becoming energy sufficient.  In short, the new structure allows the changes PEMEX needs in order to facilitate the expansion of Mexico's vast oil resources and Cuauhtémoc Cárdenas is leading the opposition to this reform by calling it a "privatization" of the industry.


Cuauhtémoc Cárdenas
The changes may create a more agile oil industry in Mexico, something that could bring great benefit to the country at precisely the correct point in history when it is needed most.  It won't be the sweeping "privatization" people think it is... instead, one might characterize it more as a sharing of risk and the ability to partner with external corporations and investors, but all while maintaining the purview of government approval for any contracts.  In short, the people of Mexico will not lose their control over hydrocarbons under President Nieto's reforms, but what they very well may gain will be summed up in economic growth, jobs, and a strong draw back to a great country that has lost so much intellectual capital over the last few decades as people have emigrated to find their way.

Senate of Mexico
If Mexico enacts these reforms, they may unwittingly encounter a different problem altogether... there could be a reversal of immigration issues on the U.S. / Mexican border as Americans seek to improve their ability to earn a decent living, have great weather, and enjoy all the richness of the amazingly beautiful Mexican culture.  Unfortunately for those Americans, they're likely to have to battle to get into Mexico once the race is on and the exploration starts to ramp up in Mexico's Eagle Ford shale and offshore in the Gulf.  Mexicans should keep in mind that if their citizen is undocumented in the United States, they are documented in Mexico and they'll be bringing back new skills, new jobs, the english language skills, and a rich appetite to earn good wages and live at home with families they left behind.
The Mexican oil and economic boom I sense could be right around the corner.  Before Christmas, Mexicans should know the type of reform their President will sign.

If there is any predictability in the stock markets, the Mexican Peso was up today almost 1% as we move into the decision time frame.  But even if the decision to reform the energy sector emerges and is signed by the President, the Mexican Senate was given 1.7 million signatures, a threshold dictated by the Mexican Constitution that would call for 2% of signatures of registered voters are required in order to bring public consultation.  And just as the role call was being taken on the debate, I lost my feed from the Senate that was streaming beautifully from the Canal de Congreso.  I thought the debate was very thoughtful, there was a minimum of emotion, and the leaders of the great nation are debating some of the most critical legislation I have ever, in my entire life, witnessed in the history of Mexico.  And as much as I would love to stay until the very end of the session... actually, they're voting now.  I'll stay.  If it's a yes vote, then the title of the article will be Si!  And I'm pleased to note that a few minutes ago, the legislation to reform elections, the main "political deal" that will allow energy reform to go forward, was passed by a vote of 106-15.

Citizens protest the reforms


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