InterviewAPLA '13: Mexican energy reform tied to energy revamp

18 November 2013 18:09  [Source: ICIS news]

Mexican energy reform tied to energy revamp: consultantCARTAGENA, Colombia (ICIS)--Mexico's proposed energy reform is tied to proposals to revamp its fiscal policies, a consultant based in the country said on Monday.

Energy reform is crucial for the nation's petrochemical and manufacturing industry, said Roberto Guzman, director of Mexico-based Pipa Consulting, a plastics consultancy.

Guzman made his comments on the sidelines of the annual meeting of the Latin American Petrochemical Association (APLA).

Mexico lacks the feedstock to increase its petrochemical capacity, which is not large enough to meet domestic demand.

In 2012, Mexico’s petrochemical trade deficit was $8.15bn (€6.03bn), according to the Instituto Nacional de Estadistica y Geografia (INEGI), a government agency that keeps economic statistics. For products that originated from petrochemicals, the deficit reached $5.24bn.

Much of Mexico’s remaining ethane will be consumed by the upcoming Ethylene XXI project, the Braskem Idesa joint venture. The ethane will be used by a cracker that will supply raw material for the site’s polyethylene (PE) production. Once Ethylene XXI starts operations, Mexico will not have enough ethane to build a new cracker, although it could have some to expand existing plants by a total of 200,000-300,000 tonnes/year.

Guzman estimates that Ethylene XXI would be unable to eliminate Mexico's PE deficit, which would stand at 350,000 tonnes/year for linear low density polyethylene (LLDPE).

The country's deficit in polypropylene (PP) will also persist, he said. He estimates that PP demand stands at about 1m tonnes/year, with an estimated 500,000 tonnes/year produced domestically.

Mexico's trade deficit extends beyond petrochemicals. The country imports about a third of the natural gas it consumes, despite Mexico's substantial reserves of natural gas.

Mexico's shortage in natural gas has already hurt its robust manufacturing sector, which is an important consumer of plastics and other petrochemicals.

To secure more feedstock for future chemical plants, Mexico has to increase energy production, the goal of the proposed reforms. The reforms would allow outside companies to participate in oil, gas and natural gas liquids (NGLs) production in Mexico. Right now, production is limited to the state energy producer, Pemex.

If Peña Nieto’s reforms pass, then Congress would draft secondary laws that would determine who could participate in Mexico’s energy sector and under what terms.

If the reforms are successful, then they should have an important and significant effect on Mexico's economy, Guzman said.

The reforms could further boost Mexico's manufacturing base by providing it with low-cost raw materials, he said. Mexican manufacturers could thus become more integrated, since they could produce parts as well as assemble them into final products.

"This is the mother of all reforms," Guzman said. "It would have a tremendous impact on the economy."

In addition to opening up Mexico’s energy sector, the reforms would also lower the amount of money Pemex contributes to the federal government. Pemex's contribution amounts to about 30% of the federal budget.

Those transfers have been so large, they have limited how much Pemex could spend on exploration and production.

But if Pemex reduces its contributions, then the government would have to find money to replace the loss. That is why fiscal reform is so closely tied to energy reform, Guzman said.

However, these fiscal reforms may not be ambitious enough, he said. For the most part, the reforms would increase taxes on the relatively small number of people who already pay them to the government.

Guzman said that Mexico needs to broaden its tax base, which is much too small for the country.

Raising taxes could drive more companies into Mexico's large underground economy, he said.

Guzman also warned that the energy reforms themselves might not be ambitious enough to attract investment.

Exploration and production companies now have choices among attractive countries, such as the US and Colombia, Guzman said.

There are concerns that the resulting reforms would not offer concessions for energy production in Mexico, he said. Instead, the reforms could rely on profit and risk contracts to attract private investment.

There had been talks that such contracts would award no more than 50% of the profits, Guzman said. This might not be enough to attract outside investment.

Ultimately, the nature of the reforms would be determined mostly by the secondary laws that the Mexican Congress would adopt.

Adopting these secondary laws would require a majority to pass.

The APLA conference ends on Tuesday.

($1 = €0.74)

By: Al Greenwood
+1 713 525 2645

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