CA Interests Bullish on Mexican Energy Prospects

The prospect of privatization of Mexico's energy industry under its President-elect Vicente Fox has California interests salivating because already robust demand and infrastructure activity in North Baja and along the other northern states promises to get even hotter under the new political leadership in the next few years.

San Diego-based Sempra Energy has already committed to about $150 million in natural gas distribution and transmission pipeline projects through 2005, aside from its joint venture North Baja Pipeline proposal with PG&E Corp. (see Daily GPI, Nov. 3). While the company's officials involved in Mexico are reluctant to speak for attribution, they confirm that the general prospects for opening up Mexico's energy industry are considered very good under the new administration coming to power next month.

"The realities of the marketplace seem to be indicating that Mexico is headed toward privatization," said one California-based source familiar with northern Mexico's energy projects. "Private participation seems like it will be necessary to meet the future demand in Mexico."

Last week Mexican business reports talked about a new effort by Comision Reguladora de Energia (CRE), Mexico's FERC equivalent, begun Nov. 1 to solicit ideas from industry and consumer sources on how the government can improve the nation's natural gas infrastructure to make it more "efficient and competitive." At the same time, other reports are estimating that industrial demand in the northern states is expected to require that a new 500 MW power plant be built every four years.

Nationally, Mexico is currently estimating that just for its electric industry alone to keep pace with projected new economic activity some $25 billion of investment will be needed in power plants 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 will be fulfilled from the U.S. side of the border, and particularly California, because the state of Baja is essentially an "energy island" not connected with Mexico's gas pipeline or electric transmission grids, but instead hooked into the western U.S. system that is increasingly being taxed on the electric side because of a regional 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 on both sides of the border. Intergen, a joint venture between Shell and 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 with growth that large, the government will not be funding the projects themselves," said the California source involved in Mexico. "So we do expect to see increasing participation for both the gas and electric side.

"A lot of these new plants will be built, and in order to build them on time and not bankrupt the government, they are going to need increasing private participation."

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

The new natural gas transmission pipeline serving Rosarito Beach power plants south of Tijuana in North Baja provides an average of 50-75 MMcf/d, according to Sempra sources. The distribution system being built in Mexicali already has 7,000 customers hooked up with a goal of 25,000 by 2002. Two other local gas distribution systems are 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 which electricity deregulation might be taken up by Congress," said a San Diego-based Sempra spokesperson. "Electricity is an area we would be looking to get involved in the future. Our main concentration is northern Mexico. That is the most industrialized segment of the country with higher demand and has the possibilities of inter-connections with the U.S."

Pressure for privatization is coming from projected growth of Mexico's natural gas demand by about 9% a year while electricity needs rise by about 6% a year. Critics have charged that without private investment, Mexico will face blackouts and energy shortages in the near future. Recently, one of the president-elect's top advisers said Mexico would have to pump about $60 billion into new oil and natural gas production, refining and exploration projects and electricity generation if the incoming government wanted to achieve 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 Mexicans consider the state-run energy system, Petroleos Mexicanos or Pemex, part of their national sovereignty. "Privatization does not guarantee efficiency or lower prices for the population," says Mexico Senate Energy Commissioner Oscar Canton, a member of the left-leaning PRI (Institutional Revolutionary Party), which has opposed privatization.

Mexico's oil industry accounts for more than one third of the government's income and about 7% of total export earnings, mostly through Pemex. The country has 28.4 billion barrels of proven oil reserves, and is the third largest producer outside of OPEC.

Although Fox, whose background is in business, has in the past ruled out privatization for Mexico's oil and gas industry, advisers are urging him to consider it again. He already has announced plans to change Pemex' current tax status so that it will be "equivalent to those of other companies it competes with." Pemex's CRE officials have openly criticized the tax system because they say that it prevents the country from having enough money to reinvest in new projects or to create new jobs.

In another note of change, Mexico's Senate last week presented a request to the Finance and Energy Secretariats and Pemex to reformulate the country's natural gas price policies by not indexing prices to the South Texas market.

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