Building Mexico’s Energy Infrastructure

First Reserve entered into a partnership with oil and gas giant Pemex to build infrastructure following the country’s energy reforms. Managing director Mark Florian discusses how the mutual investment agreement came about.

Drawing on a relationship that goes back many years, First Reserve has entered into a $1B partnership with Mexico’s oil and gas exploration behemoth, Pemex, for infrastructure projects.

The largest global energy-focused private equity and infrastructure investment firm has owned companies that have operated in the service of Pemex, says managing director Mark Florian. First Reserve just inked a $1B agreement with Pemex to mutually invest in energy infrastructure for Mexico.

The relationship between the two entities includes a drilling company that has operated under Pemex for the past 10 years. “We’ve been in Mexico a long time,” Florian says. “We have a couple of wind farms in the south of Mexico. Pemex appreciated that we are an energy specialist.” A comprehensive set of energy reforms were passed in Mexico in 2014, opening the country to investments of foreign capital. First Reserve maintained a close dialogue with Pemex, which was interested in the firm’s capital and expertise in energy infrastructure, he adds.

Los Ramones pipelines—expected to consist of 744 kilometers of natural gas pipelines—are the first investment done via the mutual investment agreement. First Reserve got in on the ground floor of partnering with Pemex, with this being the first major investment that’s occurred with Pemex since the energy reform, Florian says.

“What we endeavor to do is create JVs with leading energy companies around the world,” he says. “This is right down the strike zone of what we do at First Reserve.”

Part of the aim of the Los Ramones pipelines is to aid in the transportation of natural gas around Mexico, as the country strives to replace fuel oil as a major source of power. Fuel oil is expensive and not as environmentally friendly. The pipelines will take a large amount of gas from the U.S. across the Rio Grande and will bring it to receipt points in Mexico.

Pemex saw an opportunity to bring in foreign investment for two pipeline segments under construction in the Los Ramones project, Florian says, which is how its partnership with First Reserve came about. “This fit well in our investments,” he adds. “A big part of what we do is midstream.” Despite the fluctuation of oil and gas prices and the long-term nature of investing in pipelines (the firm signed a 25-year contract), he says First Reserve has a lot going for it: steady revenues, a good regulatory environment, great partners building the pipelines, experience in Mexico, and a stable return for investors.

“This checks all of the boxes for investment in this country,” Florian says. “We do worry about currency and inflation, but contracts take in those factors. We can de-risk.”

That being said, Florian adds that this is a construction project, so there are risks related to that. He says there are generally “some things you scratch your head about. For example, it can be hard to get long-term fixed-rate financing. These are all things you worry about, and in this case Pemex and the Mexican [regulatory] structure is quite favorable.”

There are many needs for new energy infrastructure in Mexico and upgrades to what already exists. Florian estimates the amount of capital needed at “many tens of billions of dollars,” with more than $20B of that amount coming from the U.S. just related to Pemex. There are several different areas where infrastructure investments will be focused: pipelines like Los Ramones; cogeneration power plants that also produce steam; refineries to make other products from crude oil; tanks to store products; and building of port facilities.

With all of the activity in Mexico’s energy market, the need for capital to build infrastructure is vast. “There’s a lot going on,” says Florian. “There is also the CFE [Comisión Federal de Electridad] putting in a lot of pipeline for its power facilities, upgrading power facilities, and looking for investments.

“The energy reform that the current administration championed has opened a market really focused on the oil and gas side with Pemex and power with CFE,” he adds. “Now other [PE firms] such as ourselves can come in and make investments. And we’re very excited to be in partnership with Pemex.”