TOGY talks to
Certainty needed for Mexico’s infrastructure buildoutFebruary 7, 2019
José Pablo Rinkenbach, partner and chief investment officer of Ainda Energía y Infraestructura, talks to TOGY about the various investment opportunities available in Mexico and how the new government should carry out its aim of strengthening Pemex. Mexican firm Ainda is concentrating its efforts on making investments in infrastructure throughout the energy value chain.
On storage projects: “As mandated by government policy, companies need to have five days of capacity in store by 2020, but at the moment, there is zero capacity in the country. Developing this segment is going to be complex because there are factors slowing down investment. The first factor is the potential dumping of the price of fuel. The second is whether or not there is an offtaker, and that depends on the first factor.”
On risks in the midstream sector: “The social risk is one of the biggest. Probably all the recent projects have either been cancelled or postponed because of social issues, i.e. disputes with indigenous people. Some of the claims of local communities have merit, but a lot of them are extortion. That’s probably one of the main issues stemming from the last energy reform.”
On necessary investment: “The government will need the private sector to fund its investment projects. I see this as a great opportunity to increase our presence in Mexico. The main question is how to best finance all the projects for Pemex, which needs a significant amount of capital.”
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What is Ainda’s current investment focus?
In terms of infrastructure, there is a lot of movement to execute investments. Energy projects have been slightly postponed because of the prevalent uncertainty in the country at the moment with the new government taking over. Many within the industry do not know what is going to happen.
Ainda was mainly focused on shale developments onshore, especially in northern Mexico. However, due to the uncertainty of whether or not these developments will happen because of the government’s prohibition of hydraulic fracturing, we postponed the entire analysis for this area. Instead, we are now focusing on the farm-outs in southern Mexico, which are expected to take place in the coming months.
Besides farm-outs, our focus is also on infrastructure and all the M&A activity taking place as renewable energy projects come in. Many of these projects were greenfield two or three years ago, and right now they need subsequent capital injections. That’s where Ainda steps in.
What investment opportunities is the company considering in the power sector?
During the time we were raising funds, we saw a very weird investment environment. For us, many of the projects didn’t have attractive hurdle rates and, as a result, we didn’t participate in public bids. However, we’ll be participating more in bilateral agreements, because otherwise we’ll have an internal rate of return of one digit and not two digits, and we have a fiduciary responsibility to our investors. The time of cheap money has already passed. At the moment, the cost of capital is increasing.
We’re going to participate in wind projects, but not in solar projects. Some risks come with these types of projects that are hard to manage, such as weather or potential theft of solar panels. This happens in Europe and the United States, and it can potentially happen in Mexico, where there is comparatively less security.
Does Ainda see opportunities in developing midstream projects?
We are looking at two projects in midstream storage: one in Tuxpan and the other on the Pacific. As mandated by government policy, companies need to have five days of capacity in store by 2020, but at the moment, there is zero capacity in the country.
Developing this segment is going to be complex because there are factors slowing down investment. The first factor is the potential dumping of the price of fuel. The second is whether or not there is an offtaker, and that depends on the first factor.
How does the new government’s view of Pemex’s role in the market play into this?
The new government has stated its intent to eliminate all Pemex subsidiaries, which will result in having one big Pemex. If you have one big Pemex, then the natural question is, “What is going to happen with transfer prices?” As one entity, it will be challenging for Pemex to put up a market price if it interferes with transfer prices. This is the main problem the sector is facing at the moment.
For example, what’s the opportunity cost of the oil? Pemex can decide to make its net income on TRI [Pemex Transformación Industrial] instead of PEP [Pemex Exploración y Producción]. This can create a lot of problems for the market..
What are the main risk considerations in the midstream sector?
The social risk is one of the biggest. Probably all the recent projects have either been cancelled or postponed because of social issues, i.e. disputes with indigenous people. Some of the claims of local communities have merit, but a lot of them are extortion. That’s probably one of the main issues stemming from the last energy reform.
Does Ainda have a diversification strategy regarding the projects in which it invests?
My fiduciary responsibility is to present the best relationship of risk-reward, which could mean 100% brownfield or even 100% greenfield. The question of diversification is secondary to that fiduciary responsibility.
In terms of minimising risk, for example, on a greenfield project, it would be better to go with Pemex as a farm-out because you have the state as your partner. Or, you can choose to go offshore rather than onshore because it’s impossible to have a social problem in the middle of the ocean.
What is the main advantage of having Goldman Sachs’ Merchant Banking Division as a partner?
The global Merchant Banking Division of Goldman Sachs is the biggest private equity player worldwide.
However, Goldman doesn’t have the knowledge of the local market. That’s where Ainda complements it. We undertake the analysis and work the deals, given that some of the deals are so large.
In early November 2018, I was in California signing an alliance with an oil company specialising in mature fields. This company has twice as much wealth in one field than all the oil wells active in Mexico. We were looking at one farm-out that is a USD 8-billion investment. These investments are so big that we need a complement, and that’s where Goldman comes in.
What is Mexico’s infrastructure investment outlook over the next two to three years?
Colombia and Brazil already witnessed this market environment five or six years ago. At the beginning, there were many greenfield projects, and then they stopped, they upgraded and they continued.
The big question now is how much time this transition will take in Mexico. Since 2014, we have seen a lot of bidding rounds for greenfield projects. In the next two to three years, we’re not going to see more greenfield projects, but instead more brownfield projects.
In this context, how do you expect offshore upstream investment to develop?
A lot of those greenfield projects are coming on stream and there’s going to be a lot of M&A activity. Take as an example the large discoveries offshore. A large portion of the existing blocks that have been awarded need to be cut into smaller areas. You need to have at least four or five companies developing each area.
Mexico is going to be seeing a lot of those types of transactions. Companies awarded deepwater blocks, such as CNOOC [China National Offshore Oil Corporation] and Eni, have 100% working interests. You’ll never see arrangements of this type in other markets They need to sell. As a result, there’s going to be a lot of M&A activity and there’s going to be a lot of activity in terms of forging strategic alliances with Pemex.
It’s a switch. Right now, the new energy model through 2021 is going to be more focused in terms of doing more joint ventures with Pemex.
Do you see a good environment for private equity funds to invest in the sector?
It could be a good opportunity for Mexican private equity funds, given that the international ones are starting to redirect their investments to South America
That gives Ainda an advantage as a domestic fund, if you consider that at the same time, the amount of money from the pensions going into CKDs [development capital certificates] is growing continuously.
What is the role of private investment in supporting the government’s development objectives for the energy industry?
There is a lot of uncertainty in the market at the moment. The government will need the private sector to fund its investment projects. I see this as a great opportunity to increase our presence in Mexico. The main question is how to best finance all the projects for Pemex, which needs a significant amount of capital.
At the moment, the amount slated to increase production to achieve the goals the government has set for 2024 is not sufficient. The government needs at least USD 24 billion, which is six times the amount announced at the beginning of its term in December 2018.
What was the biggest oversight by the previous government in the implementation of the energy reform?
The biggest mistake was not to reinforce Pemex. There is no single energy reform worldwide that doesn’t involve the NOC. Look at Colombia, Brazil and Norway. The state company is the major player and holds a solid position. It leads alliances and joint ventures. In Mexico, Pemex experienced budgetary constraints and a loss of human capital during the energy reform.
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