Mexico midstream investment is needed now

According to a recent report by EY, Mexico’s midstream sector represents an often overlooked investment opportunity. A recent study by the Binational Center Library at Texas A&M International University suggested that capital investments in Mexico’s midstream segment could total US$ 17 billion over the next five years.

EY suggests that the issue extends beyond a lack of facilities, as the transportation and storage business in Mexico is fragmented and unsophisticated. For example, Pemex’s existing transportation network, which connects production centers with domestic refineries and export terminals, includes just over 3000 miles of pipeline, mostly in southern Mexico, compared with the US total of approximately 57 000 miles. In addition, Mexico’s crude oil infrastructure is aging, and many parts of the country are unserved.

For Mexico, Mexico has approximately 5500 miles of pipeline, while Texas alone has more than 58 000 miles of natural gas pipelines. The Mexican electric utility, Comision Federal de Electricidad (CFE) is currently looking to expand natural gas import capacity substantially in the coming years. CFE is expected to seek bids in the near future for the construction of five pipelines in northern Mexico, expected to cost more than US$ 2 billion.

SENER, Mexico’s national energy ministry, recently projected that US pipeline exports to Mexico will double over the next five years, reaching 3.8 billion ft³/d in 2018. SENER also recently lowered Mexico’s crude production forecasts. However, EY highlights that as new liquids production is brought online by foreign investment in E&P, significant investment in transportation and storage facilities will be required in locations that are underserved or currently not served at all.

According to EY, without proper investment in the next few years, the transportation challenge that US producers faced in rapidly growing US shale plays may repeat itself in Mexico, with new production stranded from refineries and markets. In the US this challenge has been met in part by rail transportation, however rail is underdeveloped in Mexico, and rail isn’t an option in some parts of the country. Hence, lack of midstream infrastructure could quickly become an issue for E&P companies working in Mexico.

Structuring midstream investments

EY explains that Mexico opened up a portion of its midstream sector in 1997, allowing private investors to build and operate natural gas pipelines. However, the mood did little to encourage new capital flows to the country, and the natural gas pipeline industry is still largely controlled by Pemex and CFE.

Mexico’s tax structure is arguably to blame for the lack of investment. There is little evidence that the Mexican Government would be amenable to a corporate tax free, master limited partnership (MLP) structure.

Currently, a number of interests in Mexico are lobbying the government to allow a foreign MLP to form a FIBRA, a type of Mexican real estate investment trust (REIT), that would own midstream assets in Mexico. The MLP’s unit holders would then pay a withholding tax on distributions, perhaps 10 – 30%, but the entity itself would pay no corporate tax in Mexico, depending on the tax residency of the investor. It remains to be seen whether this effort will be successful.

Adapted from a report by Emma McAleavey.

Read the article online at: https://www.oilfieldtechnology.com/exploration/18072014/mexico-midstream-investment-961/