Five Things Mexico Can Do to Boost its Energy Reform

Initial excitement over the country opening to foreign investors, including PE, has waned because of poor execution in some areas. SAP’s Ken Evans outlines some remedies.

When Mexico opened its doors to foreign energy investors in 2014, many private equity players cheered. Then, oil prices plunged. Since then, the initial excitement has cooled—but pricing is only one of many reasons why.

As Ken Evans, senior vice president at SAP explains, the Mexican government has been struggling to execute the outside investment process on several fronts. But, Evans says, some short-term adjustments could help get things moving.

Make a “Leapfrog” in Technology

The future of the digital economy is also the future of the digital energy network, Evans says. And the early stages of the country’s energy reforms is an opportune time for Mexico to take a leap.

“It’s the perfect storm,” he says. “They could take a leapfrog in technology.”

Evans likens the country’s current lack of digital energy technology to a country that’s lacking telephone infrastructure. Instead of installing landlines, the country would likely be better off “leapfrogging” and focusing on mobile.

“[Mexico’s energy sector] could use new technologies for networks and exchanges,” he notes. “[But] no one’s been able to share that vision effectively.”

Protect Physical Assets

The country’s energy gatekeepers have struggled with the notion of sharing resources, says Evans. That not only includes Mexico’s vast oil and gas reservoirs, but physical infrastructure like pipelines, terminals, and tanks.

For instance, some countries, such as the U.S., have a mandate and the ability to offer logistics services to anyone operating in the country.

“Mexico wants to do the same thing,” says Evans. “How do they still protect their interests from the business perspective and still allow access to others coming in? The only way to do that is through physical ownership of the assets.”

Offer Attractive Investments

Mexico sent the wrong message with its first round of bidding.

“All that Pemex offered up was the bad properties,” says Evans. “That did not attract big-money investors—they didn’t have the big internationals knocking on the door to invest. The good news is for a lot of those PE investors, it leaves the door open for a lot of small investments.”

Loosen the Grip

Because Mexico’s Pemex had a monopoly on the country’s oil and gas assets for so many years, it makes sense that it would be hard to loosen their grip. But Evans says that loosening is essential.

“They need to become a little bit more externally focused,” he says. “They’re sort of waiting for the profit to come to them. My sense is they’re a little nervous, trying to protect their interests. They’re afraid they’re going to get run over and taken advantage of.”

Fill Knowledge Gaps

Another challenge that Mexico needs to address if it is going to attract high-quality outside investors in its energy assets is finding people outside of the country to fill knowledge gaps in processes new to those handling the foreign investment process.

“There’s a disconnect on some topics,” Evans explains. “They’re asking us to bring on international experts, and the gap is like sending a professor in to talk to a kindergarten class.”