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Mexican energy reform may lead to opportunities in San Diego

In a move experts are calling this hemisphere’s energy story of the decade, Mexico modified its constitution to denationalize its energy sector in December, opening up the nation to foreign oil, electricity and gas companies, and leaving holes to be filled throughout the supply chain.

Although San Diego is no big-oil state such as Texas or Louisiana, those in the field say there are still pieces of the pie for local companies and entrepreneurs.

The Mexican congress is hammering out the rules and regulations to govern this massive shift, with a June or July approval date for the final legislation widely expected.

When these changes might start to affect companies on this side of the border, however, will depend on the finalized rules.

“That’s the $64,000 question,” said Jeremy Martin, director of the energy program at the Institute of the Americas at the University of California, San Diego. “When it comes to oil and gas operations, we’ll probably see opportunities to partner with Pemex [Mexico’s state-owned petroleum company] toward the end of 2014 -- that’s going to mainly be on the upstream, so the exploration side of the equation. I don’t know how much of an impact it will have for companies locally, more for larger oil and gas companies, but again, ancillary supply companies will benefit from the increase in development. We’re probably talking about a three- to five-year range.”

San Diego-based Sempra Energy (NYSE: SRE) already has a Mexican subsidiary, IEnova, which is publicly traded on the Mexican stock exchange and has been funded for roughly two decades.

Sempra already has $2.4 billion in assets in IEnova’s gas and energy infrastructure, with an additional $1.8 billion under contract in the gas and power segment, including the first cross-border wind project from Baja California to the East County substation.

Tania Ortiz, vice president of business development and external affairs for IEnova, said this investment won’t be shrinking, as the company sees increasing opportunities south of the border.

“There have been a lot of opportunities to date, but what we see coming is the entire sector is being opened to private investment,” Ortiz said. “So areas where private investment was previously not allowed -- oil and gas production and refinement, as well as fuel distribution and the important power sector, which were again prohibited until December of last year -- are now open.”

Ortiz said IEnova is projecting a lot of growth in its core business areas, including gas infrastructure and refined products transportation and storage. She said the company also is looking into opportunities on the power generation and distribution side of things.

She and Martin both hit on a separate but simultaneous occurrence: President Enrique Peña Nieto’s ambitious rollout of a roughly $590 billion plan for public and private investment in infrastructure over the next few years, much of which is earmarked for energy projects.

“Two weeks ago, the Mexican government announced their national infrastructure plan, which is a list of projects they want to see happen quickly and focus on,” Ortiz said. “They’ll ensure the conditions are there for specific projects to happen, so we think there will be short-term opportunities, as well.”

Martin said it’s not clear whether the plan will be able to succeed at all, but even if it does, he doesn’t predict too large of an immediate impact.

“The jury’s still out on if that’s possible, because oil projects are seven- to nine-year horizons, and his term is up in 2018,” Martin said. “Realistically, it would be three to five years before we really start to see the results of some of these important changes, but there will be partnership opportunities this year, and next year more bidding on rounds from the government on upstream production operations in power. This year is important, but I don’t think we’ll see huge things -- more just getting ducks in a row.”

Aside from these opportunities for larger companies or strictly petroleum or gas entities, there will be a need for renewable energy sources, not to mention all the transportation, distribution and storage infrastructure needs, which may put Mexican companies trying to enter the market at a disadvantage.

“Mexican companies will not necessarily have an advantage, because they may not have all of the technology needed to grow the energy industry in Mexico -- so I think there’s certainly room for everyone,” Ortiz said. “Mexican companies are hopeful they’ll benefit, but I think also there’s a need for foreign capital and technology to make sure that we get the best technologies at the most competitive prices.”

Martin said he predicts Solar Turbines, a San Diego company that he said has been a huge supplier of oil field service equipment and gas ancillary equipment to Pemex, will continue this relationship, and would also be in a position to supply to new private companies entering the space.

Representatives from Solar Turbines were not immediately available for comment.

Christian Luhn, executive director of the Cali Baja Bi-National Mega Region, said this need for state-of-the-art technologies puts San Diego in a good spot.

“Once the secondary laws are passed, the dust will settle and big oil and gas producers can start signing agreements,” Luhn said. “It’s going to take awhile to sort out what’s missing in Mexico, what kind of technologies they have just not invested in. …There could be a real gain for a lot of small and medium-sized companies that manufacture high quality, sophisticated, second-tier type of goods that in theory they could convert or add to their repertoires.”

Though there’s much optimism on both sides of the border surrounding what this means for not only Mexico’s energy sector but its entire economy, Martin cautioned that there is also unease among some Mexicans.

“There are a lot of concerns still,” Martin said. “The banking and telecom sectors were opened up, and they didn’t go so well, so there’s lots of shadows cast there about the transparency of the process.”

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