OPIC Funding For Latin America [NGW Magazine]

While plans are being put in place to build the country’s first liquefied natural gas terminal on its west coast, Mexico has no natural gas storage facilities and few domestic pipelines.

An initiative by the US Department of Energy (DoE) and the Overseas Private Investment Corporation (Opic) could kickstart such projects, according to attorneys that advise energy companies investing in Latin America.

US energy secretary Rick Perry announced at the World Gas Conference in June the joint initiative between the DoE and Opic to support American energy companies investing in Latin America. As part of the initiative, Opic plans to invest $1bn in Mexico’s energy industry over the next three years. In addition to the financial commitment to Mexico-centred projects, the energy department will identify regions and sectors in Latin America that present opportunities for US energy companies, while Opic will provide financing and insurance if it is unavailable in the private sector. 

“The spirit of this financing is to support and to foster those projects that would otherwise not have been able to be funded, or to be completed,” Benjamin Torres-Barron, partner at Baker Mackenzie, told NGW. Torres-Baron leads the law firm’s mining and infrastructure practice in Mexico and has advised a number of energy companies on the development and construction of, among other things, natural gas projects.

Potential projects include transportation infrastructure, such as pipeline projects, Torres-Baron said. Other projects that will benefit from funding include those related to oil and natural gas exploration.

“Natural gas production and transportation is a key engine for the Mexican economy,” Torres-Baron said. “The natural gas will make the country competitive, by all means, in manufacturing and power generation with low environmental impact as well.” 

The infusion of capital also aligns with the country’s membership to the International Energy Agency (IEA), he said. Mexico joined the IEA in February 2018 and is the first Latin American member of the group. The agency’s focus includes making sure there is sustainability and security of supply of energy. 

“Mexico today does not have natural gas storage facilities,” Jose Valera, partner at Mayer Brown’s Houston office, told NGW. “Mexico has a very, very, small number of natural gas processing plants, and has a very small number of domestic pipelines, gathering lines.”

Valera is the law firm’s co-head of the oil and gas practice. He focuses his practice on domestic and international energy transactions and project development. 

While the financing could help companies across the board, it will mostly benefit medium and small size companies, Valera said.

“The larger companies, depending on the size of investment, have less of a need to resort to external sources of financing,” Valera said. “They can just dip into their own financial resources. But it is the medium and smaller size companies that will be mostly in need of this and most directly benefit from this.”

For example, Sempra Energy recently announced that it has signed agreements for LNG produced at its proposed Energia Costa Azul plant near Ensenada, Baja California, Mexico. Large projects like Sempra’s LNG plant has access to funding from different sources, Torres-Baron said.

Continued Investments Amid Political Change

In 2014, Mexico enacted changes to its energy law, which radically changed the country’s energy sector. Since then, there have been substantial investments made and committed to energy infrastructure in Mexico, Valera said. This includes cross-border pipelines to supply American natural gas to Mexico – imports which are averaging more than 4bn ft³/day.

While there is enough stability in the country for many projects to attract needed debt and equity financing, Valera noted that the July election of left-wing candidate Andres Manuel Lopez Obrador as president clouds the issue of whether his administration, which takes over December 1, maintains that stability.

Other Challenges

While an additional funding source will be the necessary push many projects need to get going, companies face other challenges, Torres-Baron said.

Some of the challenges include getting the rights-of-way, particularly for pipelines and interconnection to power plants, access to surface, social impact assessments and indigenous consultations.

“All these things present a challenge and often delay projects and add higher costs to projects,” Torres-Baron said. 

“This is not a way to cure all ills,” Mayer Brown’s Valera said of the initiative. “Because there are other issues that investors and supplies face in these countries not related to financing.”

In addition to the obstacles Torres-Baron mentioned, Valera said that companies also face issues related to local taxation, to labour issues, and to environmental regulations.

“This is not a way to offer solutions for all of the issues, but at least the financing, which is a big aspect of it, is covered,” Valera said. “Countries also need to do their part in ensuring that legal and contract works are relatively accommodating to foreign investment.”

Rest of Latin America

While the joint initiative sets aside $3bn for Mexico, Valera said the initiative could have a significant impact for projects in other Latin American countries, including Argentina and Brazil.

“There are many countries in Latin America where it is very difficult currently to obtain market-based financing,” Valera said. “The idea here is to offer resources that the US government may provide to supplement or make up for the availability or lack of availability of financing resources.”

In Argentina, for example, it is extremely difficult to obtain financing to develop the country’s large natural gas resources, Valera said.

“Argentina, if it develops those resources to its true potential, will not only substitute all the gas that it is currently importing, but it is going to become an exporter in its own right,” Valera said. “But to get to that level, Argentina needs billions and billions of dollars in capital investment.”

Because of currency devaluation, perceived political instability, large budget deficits and a number of other reasons, commercial financing is not up to par to meet those capital requirements, Valera said.

“If you ask me the difference between Mexico and Argentina, I will say that commercial financing is a lot more available in Mexico than Argentina,” Valera said. “Opic-type systems would be needed a lot more in Argentina than Mexico today.”

Brazil could also benefit from the new initiative. While Brazil is the largest economy in South America, it has gone through a very deep economic recession and a damaging political crisis, resulting in the impeachment of a president, Valera said.

“All those three things almost happened in the same time,” Valera said. 

With a new election, the expectation is that things will change with the new administration, Valera said.

“The country being as large as it is, it needs a lot of investment,” Valera said. “The new president said he intends to privatise companies on the electric side and portions of Petrobas that is not upstream.” 

This will open up the country to more private investment in energy, Valera said. Opic can really jumpstart these projects.