The prospect of privatization of Mexico’s energy industry underits President-elect Vicente Fox has California interests salivatingbecause already robust demand and infrastructure activity in NorthBaja and along the other northern states promises to get evenhotter under the new political leadership in the next few years.

San Diego-based Sempra Energy has already committed to about $150million in natural gas distribution and transmission pipeline projectsthrough 2005, aside from its joint venture North Baja Pipelineproposal with PG&E Corp. (see Daily GPI, Nov. 3). While the company’s officialsinvolved in Mexico are reluctant to speak for attribution, theyconfirm that the general prospects for opening up Mexico’s energyindustry are considered very good under the new administration comingto power next month.

“The realities of the marketplace seem to be indicating thatMexico is headed toward privatization,” said one California-basedsource familiar with northern Mexico’s energy projects. “Privateparticipation seems like it will be necessary to meet the futuredemand in Mexico.”

Last week Mexican business reports talked about a new effort byComision Reguladora de Energia (CRE), Mexico’s FERC equivalent,begun Nov. 1 to solicit ideas from industry and consumer sources onhow the government can improve the nation’s natural gasinfrastructure to make it more “efficient and competitive.” At thesame time, other reports are estimating that industrial demand inthe northern states is expected to require that a new 500 MW powerplant be built every four years.

Nationally, Mexico is currently estimating that just for itselectric industry alone to keep pace with projected new economicactivity some $25 billion of investment will be needed in powerplants and transmission lines. That means a lot of natural gas,too, to fuel the new plants.

In the North Baja region, the new demand and infrastructure willbe fulfilled from the U.S. side of the border, and particularlyCalifornia, because the state of Baja is essentially an “energyisland” not connected with Mexico’s gas pipeline or electrictransmission grids, but instead hooked into the western U.S. systemthat is increasingly being taxed on the electric side because of aregional shortage of generation.

As proposed in a new U.S.-backed 750 MW power plant at Mexicali,new generation in northern Mexico can send supplies to customers onboth sides of the border. Intergen, a joint venture between Shelland Bechtel, which has approvals to build the new Mexicali plant,intends to sell a third of the plant’s output (250 MW) in the U.S.through the California Power Exchange (Cal-PX) and marketers,according to sources familiar with the deal.

“Natural gas is the fuel of choice for these plants, and withgrowth that large, the government will not be funding the projectsthemselves,” said the California source involved in Mexico. “So wedo expect to see increasing participation for both the gas andelectric side.

“A lot of these new plants will be built, and in order to buildthem on time and not bankrupt the government, they are going toneed increasing private participation.”

Sempra Energy is already moving ahead with its projects,according to a spokesperson who indicated they don’t have any newprojects pending other than the North Baja pipeline, for which thecompany hopes to get approvals before the end of the year.

The new natural gas transmission pipeline serving Rosarito Beachpower plants south of Tijuana in North Baja provides an average of50-75 MMcf/d, according to Sempra sources. The distribution systembeing built in Mexicali already has 7,000 customers hooked up witha goal of 25,000 by 2002. Two other local gas distribution systemsare being developed in population centers in north-central Mexico— Chihuahua and La Laguna-Durango.

“In the future, we’ll be looking at the pace with whichelectricity deregulation might be taken up by Congress,” said a SanDiego-based Sempra spokesperson. “Electricity is an area we wouldbe looking to get involved in the future. Our main concentration isnorthern Mexico. That is the most industrialized segment of thecountry with higher demand and has the possibilities ofinter-connections with the U.S.”

Pressure for privatization is coming from projected growth ofMexico’s natural gas demand by about 9% a year while electricityneeds rise by about 6% a year. Critics have charged that withoutprivate investment, Mexico will face blackouts and energy shortagesin the near future. Recently, one of the president-elect’s topadvisers said Mexico would have to pump about $60 billion into newoil and natural gas production, refining and exploration projectsand electricity generation if the incoming government wanted toachieve the goals it set for the next six years in office.

There are some roadblocks to privatization, however,particularly in the upstream oil and gas sector. Many Mexicansconsider the state-run energy system, Petroleos Mexicanos or Pemex,part of their national sovereignty. “Privatization does notguarantee efficiency or lower prices for the population,” saysMexico Senate Energy Commissioner Oscar Canton, a member of theleft-leaning PRI (Institutional Revolutionary Party), which hasopposed privatization.

Mexico’s oil industry accounts for more than one third of thegovernment’s income and about 7% of total export earnings, mostlythrough Pemex. The country has 28.4 billion barrels of proven oilreserves, and is the third largest producer outside of OPEC.

Although Fox, whose background is in business, has in the pastruled out privatization for Mexico’s oil and gas industry, advisersare urging him to consider it again. He already has announced plansto change Pemex’ current tax status so that it will be “equivalentto those of other companies it competes with.” Pemex’s CREofficials have openly criticized the tax system because they saythat it prevents the country from having enough money to reinvestin new projects or to create new jobs.

In another note of change, Mexico’s Senate last week presented arequest to the Finance and Energy Secretariats and Pemex toreformulate the country’s natural gas price policies by notindexing prices to the South Texas market.

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