Tania Ortiz Mena, vice president of external affairs and business development at Mexican energy leader IEnova speaks to Michael Washburn about Mexico’s vibrant and dynamic capital markets, competition and investment, energy, projects and infrastructure development.
The planned pipeline from Nuevo Leon to San Luis Potosi has gotten a lot of publicity, and some credit it with the surge of IEnova’s share value in the final quarter of 2013. Why is there so much interest in the project?
The pipeline project is a critical project for Mexico, because domestic demand for gas has grown very quickly as a result of low gas prices in North America.
The existing infrastructure was insufficient to meet the growing gas demand. Mexico is a net gas importer, and therefore imports a lot of gas from the United States. The bottleneck, in terms of supplying the increasing gas demand in Mexico, has had to do with the pipeline import capacity from the US.
So, Pemex decided to develop a project that would take gas from Texas to the Midwest region of Mexico. It was conceived as a 48 / 42 inch pipeline, and Pemex initially decided to divide the project into two segments. The first 114 km were awarded to a joint venture between IEnova and Pemex. That joint venture has existed since 1998, to develop gas infrastructure in Mexico. For the second segment, around 740 km, PEMEX decided it would begin a public bid process.
The construction of the first 114 km, from the Mexico-US border down to the interconnection point to the Pemex mainline, needed to be done urgently. This segment is already under construction and will begin service in December 2014.
Pemex then went ahead and began a bid process for the remaining 740 km, running down to the Midwestern part of Mexico. IEnova did not participate in the bid because we were not comfortable with the overall structure and the risk profile associated with it. Pemex eventually did not accept the single offer it did receive, so Pemex went back to the drawing board and decided to divide those remaining 740 km into two segments. We have been invited to participate in one of those segments.
Gasoductos de Chihuahua is a joint venture between Pemex and IEnova. We are still holding discussions with Pemex to determine what our role will be. But there is no question that these projects generally allow for industries to be more competitive and also foster a lot of investment in Mexico.
How did the IPO in March come about?
We had been working on this IPO for over a year. We decided to issue the IPO after 15 years of operating in Mexico, in order to have a more stand-alone company, to encourage Mexican investment in the company, and to have a greater capacity for growth. We knew we wanted to grow the company, and we were looking for Mexican investment. The beginning of this year was very important for Mexico in terms of momentum, partly because the internal market was anticipating several very relevant reforms in different areas, which would allow for a stronger rate of growth. I think the global market also saw great opportunities. The government has been successful in passing these reforms and the reform now being discussed is the energy reform.
That’s the story behind the IPO. As a result, IEnova today is the only energy company quoted on the Mexican stock exchange.
Was the market favorable or hostile to the IPO?
The results have been very successful. When the IPO commenced, we were at 34 pesos per stock, and we reached 55 pesos per stock in the first week of December 2013. It has been a very successful IPO, and I think it is reflective of the track record that we have in Mexico. We’ve been developing infrastructure in Mexico for over 15 years, in a highly disciplined way, but we also have shown very consistent growth.
As of early this year, we have invested $2.4 billion dollars in energy in Mexico. Right now, we have plans to invest over $1.5 billion in the next three years. We have a very solid growth strategy, and we have a proven track record that shows we can develop infrastructure. At the same time, we are very selective about the types of projects we develop. We like to have solid counterparties, not only Pemex and CFE (Comisión Federal de Electricidad), but also companies such as Shell, Gazprom, a mixture of Mexican and international companies. All of this led to a highly successful IPO. We don’t know everyone who’s buying our stock, but we have a good base with the Mexican saving funds, individual investors, and large international investors.
Three months after our IPO, we were included in the Mexican stock exchange index, and that shows in some part the liquidity that our stock is having; I also think it represents an environment where international investors are very interested in Mexico. There is a huge need for energy infrastructure, and that becomes a great opportunity.
Do you have a preference when it comes to developing projects with Pemex or independently?
We’ve developed a lot of projects in Mexico on our own, and we’ve also developed projects that have been, in different ways, associated with CFE and with Pemex. Each of these projects is evaluated on its own merits. In many cases, we develop pipelines for CFE in order to transport gas to CFE power plants. Obviously, there is a strategic interest here. In the case of the Ramones pipeline, Pemex required the additional infrastructure to take the gas to the market in Midwest Mexico. We’ve also developed many infrastructure projects that do not necessarily involve Pemex and CFE, so it’s really on a case-by-case basis.
What are some of the regulatory issues and complications that come up most often in Mexican energy and infrastructure operations?
I would say that Mexican regulation, with regard to gas and electricity, is very new, so in a way we are rather lucky. We’re not lagging behind in terms of regulatory practices; we’re not carrying on old practices that are no longer practicable. In the early 1990s, the government created the energy regulatory commission, known as CRE (Comisión Reguladora de Energía), and it adopted the best international practices. So, in my opinion regulations are pretty standard and straightforward. Regulators make an effort to strike a balance between the interests of both private companies and the general public; hence the existing balance between the priorities of having efficient service and promoting investment.
Of course, regulations could always be improved. But I would say that generally, current rules are appropriate to attract new investment. We are not the only company active in Mexico. There are Canadian, European, and Asian companies that have been working in Mexico for the last 15 years.
Let’s look beyond the current projects. You’ve already mentioned investments you are planning to make. What are some energy projects on the horizon?
Right now we’re working on several projects. We’re building a $1 billion pipeline network in Northwest Mexico, in the states of Sonora and Sinaloa, that will allow gas to flow from the Arizona border, i.e. gas from the US; this gas will undergo transformation on the Pacific coast from fuel to natural gas, making this gas not only cleaner but cheaper. This network will be 830 km and it will begin to go into service in the third quarter of next year.
We are also developing the first cross-border wind generation project, in Baja California, known as Energía Sierra Juárez. It’s a 150MW project, and we’ve already started construction on it. The project will begin operation in the first quarter of 2015. I should also mention the Los Ramones natural gas pipeline project. Pemex, CFE, and the whole energy industry have a lot on the table with regard to energy infrastructure. Many more pipelines and storage facilities are still needed.
If there were one law or regulation you could change or abolish in Mexico, what would it be?
For the general investment community, I wouldn’t say there’s anything that is seriously affecting business or discouraging anyone from investing in gas infrastructure Mexico. But I would say there are certain rules within the existing regulations, I’m referring to regulations of the energy regulatory commission that have been in the process of being enacted for a very long time. It would be good if those regulations reach their final conclusion and cease being in a transitory mode. These are very specific, technical issues.
Take one example. It’s what’s called a first-hand sale regime, which calls for the unbundling of the sale of gas to promote investment and competition. That’s something the regulatory commission has been working on, but has yet to reach a final conclusion or destination. That’s something that I know for a fact the regulators are working on trying to accomplish.
For IEnova, what is the division of internal/external legal work?
It is difficult to give you a percentage. We have grown over the years, but we initially did not have any in-house lawyers. Now we have a general counsel in Mexico and he’s been responsible for the normal course of business, and all of our commercial agreements. Then we do rely on some very specialised law firms – certainly there are some we use for environmental issues, others for competition issues, and special law firms dedicated to our IPO. We also use external law firms, but for our core energy business, we do all of that in-house and it’s much more efficient to do it that way.
What do you look for when choosing external counsel?
We look for their expertise in particular areas. We don’t necessarily look for a large law firm that provides all services; instead we look for specialised law firms and seek law firms where we will get very individual and focused attention from one of the partners. We also seek law firms that have an understanding of our business objectives and that integrate themselves as part of a team and part of a project and are not looking at a piece of the puzzle but instead offer a comprehensive view of what we’re trying to achieve. Finally, what’s also very important is the local experience – that’s extremely important.
What is your approach to maintaining good relations with communities where you build and operate projects?
Infrastructure projects obviously have an impact on the community where we´re building. We make sure first that we communicate very clearly what we’re doing and why we’re doing it. Communication is critical. We try very early on to understand what their needs and concerns are, and try to address those needs and concerns so that the impact on the community is as small as possible. We also try to give back to the community. In some ways, you are disturbing the community, so you need to be a good neighbor and contribute to the community. It depends on the needs that we identify in the different communities.
In Ensenada, in Baja California, we have a very large LNG (liquefied natural gas) terminal were we decided to form a trust. We have people from IEnova participating in the trust, but also people representing the local authorities and community leaders. This group jointly decides on how the funds of the trust are to be spent. Those funds are spent normally on things for the community, such as parks, schools, and scholarships. So that’s one way of making a contribution.
In other projects, when working in environmentally sensitive areas, we’ve been particularly careful about the impact to the environment, by preserving the environment, and creating environmental reserves. It varies from project to project and depends very much on the needs and concerns of a given community.
Tania Ortíz Mena López Negrete
Vice president of external affairs and business development
IEnova
Mexico City
About the author
Tania Ortíz has been vice president of external affairs and business development at IEnova since September 2012. Previously she served as our Director of Governmental and Regulatory Affairs from 2002 to 2009 and as general manager from 2000 to 2002. Before joining Sempra Energy in 1999, Ms Ortíz worked at PMI Comercio Internacional, a subsidiary of Pemex, as assistant commercial and refined products manager. Ms Ortíz holds a bachelor’s degree in international relations from the Universidad Iberoamericana and a master’s degree in international relations from the Boston University. Ms Ortiz currently serves as vice president of the Mexican Natural Gas Association (Asosciación Mexicana de Gas Natural)