¡Si! - The Mexican Senate and Energy Reforms in Mexico!

sourcefile: PEMEX

The Mexican government is currently engaged in a debate on ideology, and the winners and losers in this debate have a lot at stake.  From the outside looking in, it's evident that Petroleos Mexicanos (PEMEX) has operated without the benefit of private efficiency.  To compare PEMEX with Statoil, they both drive approximately the same sales figures, but PEMEX delivers these sales with 153,000 personnel compared to Statoil's 23,000.  While this is just a quick comparison of an employee to sales, it underscores the well-known issues of state-run oil companies in general... they're not the most efficient entities around.

PEMEX has been boosting exploration budgets significantly since 2006 without a corresponding boost in production, in fact, the numbers have been deteriorating.  The larger picture, for our Mexican cousins, is the evolution of Mexico as a market with a rapidly advancing skilled workforce strategically placed with new land bridges connecting Atlantic and Pacific shipping lanes through powerhouse ports like Lázaro Cárdenas and Veracruz.

Mexico is growing quickly and Mexico needs to pay for infrastructure to underpin a rapidly growing economy.  The trend to on-shore is gaining momentum and I see very bright days ahead for North American manufacturing.  Mexico's manufacturing sector is gaining steam and Nissan's CEO recently announced that Mexico would soon overtake Japan as an export base for Nissan vehicles.  The trade growth of Mexico has seen investments in rail, roads, and inland port infrastructure to support the rapidly growing economy.  A fine example that defines both the economic growth and global integration of Mexico is its container traffic growth.

Port of Lázaro Cárdenas

Mexican container traffic, at the port of Lazaro Cardenas alone, handled about 43,000 twenty-foot equivalents (TEUs) in 2004 and expanded to 270,000 TEUs by 2007, a 527% increase in three years. In 2012, five years later, it handled 1.24 million TEUs, a 359% increase, and has a capacity of 2.2 million TEUs annually, an expansion likely to be reached in a few years' time.  The expansion was driven by the investment of Hong Kong's Hutchison Port Holdings Ltd. and the expansion created berths and channels that allowed Lázaro Cárdenas able to receive container vessels up to 12,500 TEUs. The expansion of Mexican port TEU capacity has been largely driven by these investments. Here's a comparison of the growth compared to Canadian TEU growth since the turn of the century.  It's obvious that Mexico is growing its capacity at a faster clip than Canada.

Mexican & Canadian TEU Growth 2000 - 2011
source: Port Alberta

None of this should come as a surprise as the port has direct rail connections to inland ports that service Mexico City's greater market, which boasts in excess of 20 million people.  The inland port initiative of Mexico has resulted in tremendous connections to the entire North American marketplace through rail connections and inland ports like the Guanajuato Interior Port (Puerto Interior Guanajuato).  The Guanajuato inland port, a.k.a. GTO, is an example of what a well-thought-out inland port can become for a region and an entire nation.  I have noticed the design, location, and relative advantages of GTO capture the infrastructure that parallels numerous other inland ports, including the advantages proposed by Port Alberta... but that's another story for another day.

Guanajuato Inland Port 

Crossing back to the privatization of Mexico's oil industry, we understand that Mexico requires billions to ramp up production.  Large shale plays like Eagle Ford exists in Mexico, but the financial and technological capacity to ramp up production on their side of the Eagle Ford shale play is limited by capital resources.  This, of course, is exacerbated by the ever-pressing need to satisfy tremendous infrastructure requirements to support the scope and scale of Mexico's growth.

The dialogue in Mexico is not related to the ownership, per se, of the petroleum resources themselves, but rather, it is an accommodation that allows private companies to partner with PEMEX, which allows the private partners to declare reserves for the purpose of stock valuation while the citizens of Mexico retain their "ownership" of the actual hydrocarbons.  Sounds a bit complicated, but it's not complicated.  At the end of the day, the private interests that would invest heavily in Mexican oil are simply looking for a fair deal before they start pumping billions of dollars into Mexican investments.

I believe the parties can come to a political settlement, but it won't be without some discussions and concerns.  To start with, there is a huge legacy where oil is concerned in Mexico.  Lázaro Cárdenas, the President who nationalized Mexican oil is considered a political and social reformer and is widely lionized as a hero of the Mexican people.  He occupies a very important part of Mexican history, and it is his legacy that is linked with land reform, the rights of industrial workers, unionization rights, and the nationalization of the railway.  Perhaps one of the most important legacies of President Cárdenas was the expropriation of equipment and declaration that the petroleum reserves of Mexico were nationalized.  Over seventy years later, PEMEX, the state-run Mexican oil company, still stands as a legacy of President Cárdenas.

President Lázaro Cárdenas

The legacy of President Cárdenas still holds enormous sway in the history of Mexico and is greatly amplified by his own son, Cuauhtémoc Cárdenas remains a political force in Mexico and is revered as a senior leader of one of Mexico's major political parties.  His voice, and the legacy of his father, will be part of the dialogue that shall come to a vote.  That vote shall have a long-term impact on Mexico that can change the face of Mexico's economy, shift an entire hemisphere into high gear, and return manufacturing prowess to the North American continent at precisely the moment when the continent is becoming energy sufficient.  In short, the new structure allows the changes PEMEX needs in order to facilitate the expansion of Mexico's vast oil resources and Cuauhtémoc Cárdenas is leading the opposition to this reform by calling it a "privatization" of the industry.

Cuauhtémoc Cárdenas

The changes may create a more agile oil industry in Mexico, something that could bring great benefit to the country at precisely the correct point in history when it is needed most.  It won't be the sweeping "privatization" people think it is... instead, one might characterize it more as a sharing of risk and the ability to partner with external corporations and investors, all while maintaining the purview of government approval for any contracts.  In short, the people of Mexico will not lose their control over hydrocarbons under President Nieto's reforms, but what they very well may gain will be summed up in economic growth, jobs, and a strong drawback to a great country that has lost so much intellectual capital over the last few decades as people have emigrated to find their way.

Senate of Mexico

If Mexico enacts these reforms, they may unwittingly encounter a different problem altogether... there could be a reversal of immigration issues on the U.S. / Mexican border as Americans seek to improve their ability to earn a decent living, have great weather, and enjoy all the richness of the amazingly beautiful Mexican culture.  Unfortunately for those Americans, they're likely to have to battle to get into Mexico once the race is on and the exploration starts to ramp up in Mexico's Eagle Ford shale and offshore in the Gulf.  Mexicans should keep in mind that if their citizen is undocumented in the United States, they are documented in Mexico and they'll be bringing back new skills, new jobs, the English language skills, and a rich appetite to earn good wages and live at home with families they left behind.
The Mexican oil and economic boom I sense could be right around the corner.  Before Christmas, Mexicans should know the type of reform their President will sign.

If there is any predictability in the stock markets, the Mexican Peso was up today almost 1% as we move into the decision time frame.  But even if the decision to reform the energy sector emerges and is signed by the President, the Mexican Senate was given 1.7 million signatures, a threshold dictated by the Mexican Constitution that would call for 2% of signatures of registered voters to be required in order to bring public consultation.  And just as the roll call was being taken on the debate, I lost my feed from the Senate that was streaming beautifully from the Canal de Congreso.  I thought the debate was very thoughtful, there was a minimum of emotion, and the leaders of the great nation are debating some of the most critical legislation I have ever, in my entire life, witnessed in the history of Mexico.  And as much as I would love to stay until the very end of the session... actually, they're voting now.  I'll stay.  If it's a yes vote, then the title of the article will be Si!  And I'm pleased to note that a few minutes ago, the legislation to reform elections, the main "political deal" that will allow energy reform to go forward, was passed by a vote of 106-15.

Citizens protest the reforms

NASCO : North American Strategy for Competitiveness

The North American Strategy for Competitiveness (NASCO) is a fascinating organization. The economic trading partnership represents nearly a quarter of the global Gross Domestic Product (GDP). We are blessed with strong connections in terms of land, people, culture, and economy. This was my first time as the newly minted President and CEO of Port Alberta attending the NASCO 2013 conference in the Great State of Texas. I pushed a number of things off my plate to meet with industry and government leaders from across Canada, the United States, and Mexico in San Antonio.

My thoughts quickly drifted back to a time when I lived only 25 minutes from the Mexican border in Arizona when my home was in the Sonoran desert. We all shared the same desert, the same weather, the same food, and the same culture. There was an international border, but it wasn't difficult for us as we could drive to "la Frontera", grab a parking spot, and just walk across the line. For us, it was like walking across the street. Not much changed except for the number and type of stores set up at the border for the tourists. 

I knew there would be plenty of Mexicans at the conference and looked forward to meeting them and speaking Spanish.  One of the first orders of business was to register for the conference.  While looking for the registration desk, I was greeted by very nice people from Mexico speaking Spanish.  We immediately engaged in conversation and a lady from the State of Michigan joined the group. I grew up near the Windsor/Detroit border, so we had a lot to talk about.  Having spent most of my life 15 minutes from the Canadian/US border or the Mexican/US border, I was in my element.

As we continued to chat, I was graciously escorted into a room with a couple dozen people. We all exchanged business cards and I noticed these people represented their respective governments at a pretty high level. After a quick reference to the event schedule on my iPhone, I realized the seat I occupied was for "invited only" government leaders for the NAFTA countries!  Inadvertently, I wound up at the meeting of ministers.

I thought to myself, “maybe this is meant to be”, after all, I have the heart of a Latino and citizenship of Canada and the United States.  My participation and opinions were welcome in the discussion on how the three NAFTA countries might best move forward on a variety of levels. It was a thrill to observe and collaborate with such brilliant international thought leaders instrumental to the fate of the NAFTA region.

Canada, the United States, and Mexico account for nearly a quarter of the global GDP.  That fact, in and of itself, is staggering.  The United States imports nearly twice as much oil from Canada as Saudi Arabia.  Canada has invested over $230 billion in NAFTA partners and our trading relationship has blossomed to over a trillion dollars.  The combined GDP of Canada, the United States, and Mexico were about $19.2 trillion last year.  The Government of Canada has been keenly aware of a shifting multi-polar world and what that means for Canadian trading and competitiveness.  

Mexican reforms seem to be gathering momentum as indicated by considerable capital starting to pivot from Latin American markets into Mexico.  Initial Public Offerings (IPOs) and add-ons seem to be shifting capital from Brazil toward Mexico. Over 10 billion in IPOs have been racked up this year to date. While the Asian IPOs have retracted, North American IPO proceeds have gained.  Mexican President Enrique Peña Nieto is considering changes to the Constitution of Mexico, in particular, articles 25, 27, and 28 of the Constitution. 

President Enrique Peña Nieto

The potential reforms in Mexico would radically change the Mexican economy and shift foreign investment back into high gear.  It is thought that Petróleos Mexicanos (PEMEX), the state-run oil company, could ramp up exploration in dwindling oil fields.  But the alteration of the Mexican Constitution requires a 2/3 vote, and it is unlikely to pass unless President Nieto's PRI party can secure the support of the conservative PAN party which is not entirely opposed to the idea, but in order to secure their support, they are asking to have electoral reform which would allow a run-off between first and second place candidates in Presidential elections according to Jose Maria Martinez, deputy leader of the PAN in the Senate.  

Over 11,000 trucks move across the border crossing between Laredo, Texas, and Nuevo Laredo, Tamaulipas every day.  If you're going to cross the US/Mexican/Canadian border, here's a handy link for real-time data that shows the best time to cross for passengers and commercials.  Between Canada and the United States, over 1.4 million worth of goods and services cross the border from the United States every minute of every day. That's a $710 billion dollar market between the U.S. and Canada alone.  It's no wonder the Government of Canada is going to build a new bridge across the Detroit river because it is Canada's largest trade corridor with over 25% of U.S. and Canadian trade.

New Bridge from Windsor to Detroit - designed by Ted Zoli

Canada will pick up the tab for the construction of the bridge at several billion dollars (estimated between 3 and 4 billion).  That bridge represents what every person from the Detroit / Windsor corridor knows... the trading relationship sends more value in cargo across the Detroit river every day than we trade with many countries all year long.  In short, it's the single largest trading corridor in North America and it's growing.

The bridge in Laredo is also tremendously important too.  The Laredo bridge is called the World Trade International Bridge, and it carries about 10,000 (or more) trucks a day delivering cargo between the United States and Mexico. This Laredo bridge spans the Rio Grande. You can check out the bridge cams at this link.

World Trade International Bridge - Laredo

When people start talking about NAFTA, I have a whole new perspective on just how important it is for our three countries.  NAFTA matters and the key relationships we have with Mexico, Canada, and the United States are incredibly important to our economies and to our people.  Suffice it to say, I've always believed in free trade and I've always felt the relationship between Mexico, Canada, and the United States is enormously important.  Between the three countries, we can claim continental energy independence.  There are many reasons why the trading relationships of NAFTA are critical to all three countries, but the sheer size and velocity of goods and services are simply unmatched anywhere else.

Mexico, the United States, and Canada represent about a quarter of the World's GDP, over 14 million jobs depend on this relationship, and it is a 19 trillion dollar market, larger than the European Union and twice the size of China.  The message I gave the meeting of the leaders was very simple. The problems for the supply chain and logistics between Mexico, the United States, and Canada began on one particular date, September 11, 2001 a.k.a. 9/11.  That's when the borders started to become difficult to negotiate.  Only I was able to say that in no uncertain terms. Everybody else had to be restrained in their choice of words because they were high-level political representatives... I was the guy representing the industry and was not bound to the same requirement to dance around the heart of the issue.  Naturally, I put it right out there on the table and I think very much to the relief of the government officials present.

We must leverage our advantages as technological leaders and thought leaders to make make our borders easier to cross for our trade, and we can do it by leveraging technology for more intelligent border systems, cooperating more closely on these matters, and focusing on our ability to leverage these things while approving energy infrastructure, like Keystone, to create a strong energy security policy that benefits all three nations.  These recommendations, in a slightly different form, were put forth on my birthday, October 3rd, from the Canadian Council of Chief Executives and addressed to President Obama, President Nieto, and Prime Minister Harper.  

I believe President Nieto is leading a visionary change that will bring increased prosperity to Mexico.  The Eagle Ford shale play extends into Mexico and there is so much more.  But PEMEX will require the kind of expertise Canadian and U.S. companies can bring to the table in order to unleash the enormous potential of Mexican natural resources.  The United States must also consider the importance of completing the Keystone project, which in and of itself does not create a complete solution to the breadth of North American energy security that all of us want, but it will certainly help.  And to be clear, the majority of U.S. citizens want Keystone to move forward.

We recognize that business leaders and the United States Congress join the majority of the people in their desire to see Keystone move forward.  North American energy independence allows us to apply our own technologies and innovation in our marketplace instead of pushing global energy production into the hands of nations where environmental controls are nowhere near our environmental control standards.  Democratic stability and decades of harmonious relations across the NAFTA countries support continued policy development that will benefit North America.

President Nieto and President Obama

President Nieto and Prime Minister Harper

If we apply our technologies and make a genuine attempt to work more closely to harmonize our security and enhance the flow of goods and services across the North American supply chain, we will advance our economies and move forward together.