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Last Updated: 28 September 2014
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Yzaguirre: Mexico's energy reforms can succeed

By Steve Taylor
[Mexico
Mexico energy analyst George Baker and former Enron Mexico President Max Yzaguirre both testified at a joint Texas House Committee hearing at Edinburg Conference Center at Renaissance on Friday.

McALLEN, September 28 - Former Enron Mexico President Max Yzaguirre says he is optimistic that Mexico’s energy reforms will work and will provide much greater prosperity for the nation.

Yzaguirre was the keynote speaker at South Texas College’s Inno’ 2014 binational innovation conference, held Friday at STC’s technology campus in south McAllen.

“I'm optimistic with the energy reforms and other reforms in Mexico will usher in an era of increased foreign direct investment, GDP growth and prosperity but it would be naive to assume that there won't be challenges that will have to be overcome and risks that will have to be monitored,” Yzaguirre said, in his opening remarks.

Yzaguirre is president and CEO of The Yzaguirre Group, an Austin, Texas-based business and public affairs advisory firm. An attorney, Yzaguirre has 28 years of leadership experience in domestic and international business, government and law and was president of Enron’s Mexico operations. He is also a former chairman of the Public Utility Commission of Texas.

Prior to founding The Yzaguirre Group, Yzaguirre served in various capacities for the group of companies headed by Ray L. Hunt of Dallas, Texas. His primary role was serving as president of Hunt-Mexico, Inc., an investor in energy, real estate and private equity opportunities, and as President of Hunt Resources, Inc., an investor in energy production and transportation opportunities.

In his speech at the STC conference, Yzaguirre said the primary challenges that may affect profit margins for companies involved in petroleum production in Mexico include geological risk, real estate title uncertainty, especially in the areas where there are ejidos,, which are like communal farms, water access issues, infrastructure limitations, and security concerns.

Yzaguirre said the geological risk primarily concerns whether the oil and gas reserves, whether shale or conventional, are more difficult to exploit than currently expected. He said that under current market conditions areas that are rich in liquids or oil are going to be more profitable than areas that don't have those.

Water development, water management, and water access issues will be important also, Yzaguirre said. He said it is expected that water regulation will encourage fracking and the development of shale resources by centralizing the jurisdiction over extraction methods at the federal level.

“Development of the shale deposits in Burgos in particular will require significant infrastructure and Mexican government support. I think that northeast Mexico is going to require road construction, and maintenance, worker housing, medical and educational facilities, electric generation and the provision of public safety,” Yzaguirre said.

The energy sector expert also discussed security issues.

“Of course, there is a risk that the drug violence in Mexico may scare away some investors because some of the biggest shale reserves are in areas that have been affected by cartel violence. And although some of the bigger companies, such as the Exxons or the Chevrons, of the world are used to working in dangerous places, some of the smaller companies, including a lot of the Texas-based shale gas firms are not as experienced dealing with some of those issues,” Yzaguirre said.

“In reality, for some of the bigger companies, I think Mexico will represent a lower risk profile than some of the world's other top producing countries. But, notwithstanding all those challenges and risks, I do think that the opportunities are going to outweigh the risks and the reforms should help Mexico significantly expand its economy.”

Yzaguirre said he believes President Enrique Peña Nieto “pulled off a political masterstroke and demonstrated real political courage” with his energy reforms. But, he said, the president has also taken a gamble politically. “He's promised that the reform will reduce natural gas and electricity prices within two years of approval, boost oil production by 20 percent by 2018, boost natural gas production by more than 25 percent by 2018 and allow for the construction of over 6,200 miles of new natural gas pipelines,” Yzaguirre said.

Yzaguirre then recommended a column by the Miami Herald’s Andrés Oppenheimer. He said he found Mexico’s Big Oil Reform Gamble to be a very intriguing article. “Mr. Oppenheimer is a supporter of President Peña Nieto’s historic energy reform but he nevertheless wonders in his column whether, if the energy reform fails to produce good results, could it lead to an equally historic leftist victory in the 2018 election? That is what is at stake, I believe,” Yzaguirre said. “Mr. Oppenheimer points out that the opposition to energy reforms will likely become the leftist party's biggest rallying cry over the next three years and there is a risk that they are going to continue pushing their referendum to overturn the reforms or worse that the current administration be tempted to water down the reforms in order to avoid protests.”

Nonetheless, Yzaguirre said because reforming the energy sector is the “jewel” in President Peña Nieto’s overall reform process, it is important to him that it succeed. “If it does, as most commentators believe that it will, it will be a defining moment for Mexico because if it is able to attract the capital and technology that it hopes, the economic well-being and quality of life of its citizens should, of course, increase.”

Yzaguirre reiterated that most market experts believe that Peña Nieto’s “political gamble” will pay off.

“BBVA Research estimates that Mexico's direct foreign investment inflows will increase by $20-$30 billion a year. Banorte also projects similar investment amounts. The Mexican government estimates that energy reform could create 500,000 jobs during the current administration and 2.5 million jobs by 2025. Earlier this month, I think it was on September 2, the President gave a State of the Union address and he made it clear that now that the energy reform has passed the next few years will be spent implementing the reforms and continuing to build out the infrastructure,” Yzaguirre said.

Yzaguirre said much of the president's political legacy rests on successfully securing meaningful foreign investment in the oil sector. He said that because quantifiable results won't manifest themselves for several years, some of the near-term steps, especially those with special symbolism, like the auction of the 169 blocks, will take on an even greater importance as they start the process of fortifying the energy sector in Mexico.

“So, for now, I think the future looks bright for Mexico's economy during the rest of President Peña Nieto’s term,” Yzaguirre said. “Continued trade with the U.S. should help Mexico's economy in the short term and higher levels of foreign direct investment should start to flow in the medium term. So, assuming that the energy reform succeeds, as most believe it will, both the central government and private firms should benefit from significant revenues by the end of this decade.”

In addition to speaking at the STC conference, Yzaguirre testified at a Texas House hearing at the Edinburg Conference Center at Renaissance on Friday. The hearing was hosted jointly by the Energy Resources and the International Trade & Intergovernmental Affairs committees.


Write Steve Taylor

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