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Mexico's Historic Energy Reforms Promise to Spur Investment

For the First Time in Generations, the Country's Long-Sheltered Oil, Gas, and Power Sectors Are Opening Up to Investment and Competition; A New BCG Report Identifies the Potentially Massive Opportunities

MONTERREY, MEXICO -- (Marketwired) -- 04/09/14 -- Mexico, the world's fourteenth-largest economy, is about to get a major shot in the arm. Historic reforms will shake up and open its underperforming energy sector and "go a long way toward modernizing Mexico's economy," according to a new report by The Boston Consulting Group (BCG). The report, titled The Promise of Mexico's Energy Reforms, is being released today.

The pervasive and persistent shortcomings in the country's nationalized oil, natural-gas, and electricity systems spurred the passage of far-reaching constitutional reform in 2013. Local production, distribution, and transmission systems have been unable to keep up with the underlying growth in domestic demand. To reverse years of declining oil production and lagging investment, Mexico is setting up a regulatory infrastructure that will invite and attract new participants. The report systematically analyzes the major sectors in oil, natural gas, and electricity and lays out the potential opportunities.

"These reforms, while still in their opening stages, represent a significant departure from recent history," said Iván Martén, a BCG senior partner and coauthor of the report. "The government recognizes that it needs hundreds of billions of dollars of investment to modernize the energy sector."

A Revolution at Pemex

The most urgent reforms surround Pemex, the national oil company, which has held a monopoly on hydrocarbon production in Mexico since 1938. Mexico's oil production, which helps fund a large chunk of the national budget, has been falling in recent years, as Pemex's most prolific oil wells have matured. In an effort to boost production sharply, Pemex will begin to engage in licensing, profit-sharing, and product-sharing arrangements with private oil companies. "Pemex needs outside partners to help it reach the deepwater oil resources in the Gulf of Mexico," said Eduardo León, a BCG partner and coauthor of the report.

As Mexico's middle class has grown, domestic demand for refined oil products has risen steadily. But Pemex hasn't built a refinery since 1979, and Mexico imports large quantities of gasoline from the U.S. For the first time, Pemex will engage in joint ventures to build new refinery capacity, and permits may be granted for independent refineries. Major changes are also coming to the oil pipeline, transmission, and distribution businesses. Private investors will be able to participate in the pipeline business, and competition could finally arise in the gasoline station sector.

Tapping into Natural Gas

Even though natural-gas distribution has been open to foreign investors in Mexico for nearly 20 years, the sector still presents a huge opportunity. Natural-gas demand has risen at an annual rate of 5.6 percent. But Pemex has not yet begun to exploit the shale gas reserves in the north, which are adjacent and similar to the booming shale formation of Texas. As part of its effort to boost natural-gas production by 82 percent by 2025, "Mexico will need significant new investments in gas exploration and production," said Martén.

In line with the larger regional trend, energy producers in Mexico often prefer clean-burning, cheaper natural gas to coal. That means Mexico needs to significantly expand its gas storage and distribution systems as well. "At present, Mexico has no underground natural-gas storage facilities," notes the report, which was coauthored with EnergeA, a Mexico-based energy consulting firm.

Powering Up the Power Sector

Mexico's power sector is poised to undergo a similar transformation. Modernizing the grid and increasing the nation's generating capacity will require investment of about $93 billion through 2026. In order to boost capacity to cope with growing demand, upgrade reliability, and stimulate renewable-energy production, CFE, the state-owned power agency, is embarking upon a host of reforms. A new regulatory regime aims to create a single free market for power regulation and will permit the sale of energy directly to large commercial users.

The reforms affecting the energy sector are in their early stages. In the coming year, new regulations and enabling legislation will provide a clearer picture as to how companies can proceed. By 2015, Martén said, "we could see the first bidding round for exploration and production in oil and gas."

But it's not too early to start thinking and learning about how these reforms will alter Mexico's landscape. As León noted, the changes won't just bring Mexico's energy industries into the twenty-first century; they will provide a spur to energy-intensive industries -- and to the Mexican economy at large.

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit bcg.com.

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