© 2017 The Texas Lawbook.
By Claudio Rodriguez Galán and Katherine L. Coleman of Thompson & Knight
(July 17) – Mexico has seen an extraordinary 71 percent growth in energy-related investments – from US$1.98 billion in 2013 to US$3.39 billion in 2014 – while power sector M&A transactions closed in 2016 were valued at US$6 billion, an increase of 343 percent over 2015. From these statistics alone, it is clear that Mexico’s power sector is growing at a high rate, which most believe is likely to increase.
Mexico’s government has put a significant emphasis on the creation of a Mexican power and energy industry, and the recent laws that are driving Mexico’s energy reform contain varying degrees of national content requirements. Thus, transnational companies will generally be well served by partnering with local players, which will promote the strategic growth of Mexico’s newly opened markets while satisfying these national content requirements. This trend will likely also result in further consolidation of the market through increased activity on both the M&A and strategic alliance fronts.
In addition to opportunities within the new competitive private sector market, both CFE and PEMEX will need to form strategic alliances with private sector players in order to compete and stay relevant, if not dominant, in the market. To that end, legislators enacted a new organic law for each of them that allows them to contract with private sector players in more than just a servicing capacity.
These new organic laws allow CFE and PEMEX to enter into commercial agreements, creating a new set of possibilities in which both CFE and PEMEX, which formerly operated under very restrictive legislative frameworks, can enter into contracts and various forms of alliances with both domestic and foreign companies. Indeed, both CFE and PEMEX have recently announced “that alliances, associations, and joint agreements with private investors will be [the] way [we] face the future.”
Whereas before both were limited to playing within their respective fairways, CFE may now look for more efficient feedstock capacity and delivery channels to optimize its generation activities, while PEMEX may look for power generation alternatives to optimize its exploration and production operations.
As state productive enterprises, CFE and PEMEX are not only entitled – but obligated– to create value through their operations. To do so, both will need to enter into alliances with private companies that have the necessary experience, capabilities and financial strength, making such alliances the norm rather than the exception.
For the reasons stated above, all power players in Mexico (including CFE and PEMEX) will now look more and more to strategic alliances to help them achieve their objectives. To understand the opportunities presented by the new, more flexible, statutory frameworks under which CFE and PEMEX now operate, investors will need to understand both the needs and the aspirations of the power companies in the market, as well as those seeking to invest.
For example, traditional fossil fuel-oriented companies are looking for investments in renewables; old standing photovoltaic players have entered into alliances for the development of wind farms; experienced power traders are combining their experience with that of developers; and power utilities have joined forces with international players to develop gas storage facilities.
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