Leaders of Mexico’s main leftist party trekked to Washington this week with a warning for U.S. power brokers—investors could lose their shirts if they put their money in the country’s energy industry.
Jesus Zambrano, leader of the Party of the Democratic Revolution, or PRD, the main party of Mexico’s splintered left, and other leftist politicians are in the middle of an unprecedented pilgrimage to Washington. They are meeting with U.S. officials, legislators and businessman to explain that a referendum being pushed by the PRD could undo a historic constitutional change passed late last year that opens the country’s oil and gas industries to private companies and foreign investors for the first time in 75 years.
Their message: Mexico’s energy reform is not a done deal. Until the fine print is dry, the country’s oil and gas fields are no place to bet a bundle.
Zambrano, a former communist guerrilla who has referred to D.C. as an enemy, didn’t get the turnout he expected last year when protesting the energy reforms.
Since it’s unlikely that the PRD would gather at least 1.6 million signatures, and get the Mexican Supreme Court to approve a referendum, they tried the next best thing: a junket to Washington, D.C.
A federal judge ruled in favor of Chevron Corp. on Tuesday in a civil racketeering case, saying a record $9.5 billion environmental judgment in Ecuador against the oil giant was “obtained by corrupt means.”
U.S. District Judge Lewis Kaplan found that New York lawyer Steven Donziger and his litigation team engaged in coercion, bribery, money laundering and other criminal conduct in pursuit of the 2011 verdict.
Last month Locke Lord managing partner Jerry Clements told The Am Law Daily that the potential liabilities and “reputational aspects” of the Chevron matter were a key part of her firm’s due diligence efforts in evaluating a merger with Patton Boggs.
The leftist Partido de la Revolución Democrática (Party of the Democratic Revolution, or PRD) has pulled out of the Pact for Mexico, creating an acute crisis (link in Spanish), according to Mexican daily El País.
allowing Mr. Peña’s administration to secure passage of wide-ranging bills on telecommunications, tax increases and education.
Congress is taking up the issue next week. But lawmakers from the PAN and the ruling Institutional Revolutionary Party, or PRI, are expected to rewrite the president’s bill to give private oil companies a bigger role in the state energy sector, including contracts that allow them to share oil production. The president’s August initiative called only for sharing the profits from the oil, but not the oil itself.
“If they insist on an energy reform that privatizes Mexico’s oil income, the government is going to generate a situation of enormous social and political instability,” said PRD president Jesús Zambrano in an interview. “We’ll have a very hot Christmas, we’ll launch protests on all fronts.”
Together, the PAN and PRI have the two-thirds majority in Congress required to pass the proposed constitutional changes for the energy overhaul. And the president has already passed most of his major initiatives under the pact.
Mr. Peña Nieto regretted the PRD’s decision to leave the Pact for Mexico, but vowed to press on with reforms.
The ruling Institutional Revolutionary Party, or PRI, is hoping its energy reform will spur faster economic growth, and the departure of the Party of the Democratic Revolution (PRD) from the accord is likely to push the debate closer to a more business-friendly proposal backed by the center-right.
The Senate is expected to vote on the political overhaul as early as Tuesday, with a vote on the energy bill soon to follow.
What if you held an auction and there were no bidders for half of the assets? That’s what happened to Mexico’s state-owned oil monopoly—Pemex—last week when it opened the bidding for production at six exploration sites in the Chicontepec basin.
This is bad news for Mexico’s oil and gas industry, which suffers from declining production. Pemex crude output in 2012 was 2.5 million barrels a day, down from three million in 2007 and 3.4 million in 2003. Mexico needs private investors with the incentive to get oil out of the ground. President Enrique Peña Nieto couldn’t have asked for a better demonstration of the need for Pemex reform.
Pemex may think it scored big in the three blocks that were sold. The long-time monopoly was offering to pay “all the costs of production in the first ten years plus a fee-per-barrel to the [winning bidders], providing oil is produced in sufficient quantities to cover those costs,” according to Houston-based oil analyst George Baker. Pemex was ready to pay bidders $6-$7 per barrel. But the winning bids ranged from one cent to 98 cents a barrel, making Pemex officials look like geniuses—but only at first glance.
What if the companies bid so low because they aim to make their money by what they charge the Mexican monopoly for supplies, service and technology? In that case their profit depends only on producing enough oil to meet the costs as required by Pemex in the contract. They won’t focus on producing more because they will be paid very little for the effort. As Mr. Baker wrote in the Mexico Energy Intelligence newsletter, “There is little incentive for the contractor to increase production beyond the level at which profit margins are met through intra-firm commerce.”
The proposal by the Party of the Democratic Revolution, or PRD, comes as a reaction to an energy overhaul presented last week by Mr. Peña Nieto that seeks to increase private sector involvement in the state-run oil sector. Mr. Peña Nieto seeks to let private firms participate in the oil and gas sectors by sharing the risk and profit from exploration and production.
“The government’s initiative is a privatization, no doubt about it,” said Cuauhtémoc Cárdenas, the founder of the PRD and son of former President Lázaro Cárdenas, who nationalized the oil industry in 1938 by expropriating the private oil firms. Mr. Cárdenas said the government’s proposal opens the door to the selling of state-oil firm Petróleos Mexicanos, or Pemex.
Chances of Mr. Peña Nieto’s bill seem good in Congress. It is expected to have the support of the ruling Institutional Revolutionary Party, or PRI, and the right-wing National Action Party, or PAN, which between them can muster the two-thirds majority in both houses to change the Constitution. But the PRD, along with nationalist leader and former presidential candidate Andrés Manuel López Obrador, hope to stop the changes by mobilizing the Mexican people.
The leftist opposition seems to have most Mexicans on its side. In a survey published in July by the lower house, 54% of Mexicans disagreed with the idea of opening the state-oil monopoly to private investment. Other surveys show even bigger numbers against the overhaul.
In all, while Peña Nieto has certainly worked on getting his party’s support, reform in Mexico, from the foreign investor’s point of view, remains a roll of the dice.
Petroleos Mexicanos, Mexico’s state oil monopoly, will set up a new company to explore and produce shale gas and deep-water oil in the U.S. as part of an ambitious plan by its rookie CEO to turn around years of falling production.
The proposal, outlined by Chief Executive Emilio Lozoya in an interview, would push Pemex into complicated drilling techniques where it has no experience. It is a bold move abroad for the inward-looking company, which is the world’s fifth-largest crude producer but has never faced competition nor ventured far beyond its borders.
They’ll need a foreign partner,
especially in deep-water exploration and production where Pemex has no experience,
the CEO has no oil industry experience, and their unions are famous for featherbedding.
Mr. Peña Nieto’s proposal doesn’t go as far as it might to solve Mexico’s oil woes, and it certainly doesn’t privatize Pemex. It doesn’t even give investors ownership of a drop of Mexican oil.
Instead, the bill allows foreign and domestic investors to become partners with Pemex in exploration and production. Those partners would take their profits not in oil but in the cash equivalent of what they pump. Whether that’s enough of an incentive to entice a Chevron or a Shell will then depend on secondary legislation, particularly on contract terms and taxes. It would be a shame if Mr. Peña Nieto and his allies in Congress fail to follow through here, but at least their political incentive is to make the reform a success.
Peña Nieto’s energy reform contemplates changing three articles of the constitution to allow private companies to pump oil, not through concessions as in most other Latin American countries, but via profit-sharing agreements. That is, the Mexican government will pay private companies for the oil they produce, but the companies won’t have outright ownership of the oil.
Unfortunately, the reform doesn’t contemplate allowing the sale of Pemex shares, as proposed by Mexico’s conservative opposition party PAN. Not allowing the sale of Pemex shares will significantly limit the chances of improvement in corporate governance of that white elephant. As The Economist points out, Pemex is plagued by mismanagement and political meddling. Energy reforms in Brazil in 1997 and Colombia in 2003-2006—which the Mexican government is pointing to as successful examples—involved not only allowing concessions for private companies, but also limited private ownership in Petrobrás and Ecopetrol, respectively. These moves have been credited with improving the corporate governance of these oil companies.
Hidalgo concludes (emphasis added),
Peña Nieto’s efforts to bring more private investment to Mexico’s oil industry should be commended. However, even if his energy reform is approved, Mexico will still have the most tightly state-run energy sector in the Americas (even more than Cuba and Venezuela). That, in itself, should indicate how much room for further reform will be needed.
Additionally, the question remains on whether future Mexican government administrations wouldn’t nationalize whatever the foreign companies have.
Pattern Energy, which owns the wind farm, loses $1.5 million each month it can not sell electricity to the local utility, Autoridad de Energía Eléctrica (AEE).
The project has disappointed expectations. In addition to the above equipment problems and monetary loss, it is located in an area that is not windy, and it is serving 10,000 fewer customers than the 63,000 originally projected.
For decades, Mexico’s energy policy has largely boiled down to exporting oil for cash to fund state spending. Now the new government is negotiating with rival political parties to curb that practice and instead use state monopoly Petróleos Mexicanos to a different end: cheaper energy, said Pemex CEO Emilio Lozoya.
In an interview with The Wall Street Journal, the 38-year-old chief said the administration of President Enrique Peña Nieto was striving to overhaul tax and energy laws this year that Mr. Lozoya said would result in cheaper energy for consumers and companies that could drive a more competitive economy.
There’s also shale, too:
Mexico may hold the world’s fourth-biggest reserves of shale gas, according to the U.S. government. But Pemex has drilled only a few wells and not produced any gas. “Mexico ought to be producing more of its own gas, and eventually exporting it,” Mr. Lozoya, a lawyer and economist who got his master’s degree in public policy at Harvard said. “Clearly the geology that you have in some parts of the U.S. extends into Mexican territory. So it’s a matter of just investing and getting it done.”
Here in the USA, the government is holding up the Keystone pipeline, bans itself from off-shore drilling, and Obama pours money on “green” failures like Solyndra and other duds. Case in point:
President Barack Obama used his fifth State of the Union address to extol the virtue and job-creating power of federal investment in solar, wind and advanced battery development. Maybe he should have consulted his Department of Energy first.
In a scathing report issued Wednesday, the department’s Office of Inspector General said LG Chem Michigan Inc. misused most of $150 million in federal grants to build its battery cell manufacturing plant in Holland. The company used taxpayer dollars to pay employees to volunteer at local nonprofits, play games and watch movies.
Obama does not see how high-technology, industrialized economies run, grow, and thrive on cheap energy.
All in? Sixteen of the world’s top 20 most polluted cities are in China. The New York Times reported just a couple weeks ago that Beijing’s air quality ranked a “crazy bad” 755 on a scale of 0 to 500.
The country has been building a new coal plant almost every week and plans 363 more, and China now emits almost twice as much CO2 as the U.S.
Mexico has a long way to go to a de-nationalization of the oil industry sector, which would solve many of its problems. The US, however, is set on taking the wrong path.
Let me save you some time: There is nothing in there that will inform your opinion of Mitt Romney.
How do I know? Because I saw many of the exact same documents months ago, after requesting them from a Bain Capital investor. What I quickly learned was that there was little of interest, except perhaps for private equity geeks who want to know exactly how much Bain paid for a particular company back in 2006. Sure I would have loved the pageviews, but not at the expense of tricking readers into clicking on something of so little value.
Let’s go over what Gawker believes it found:
“Mitt Romney’s $250 million fortune is largely a black hole: Aside from the meager and vague disclosures he has filed under federal and Massachusetts laws, and the two years of partial tax returns (one filed and another provisional) he has released, there is almost no data on precisely what his vast holdings consist of, or what vehicles he has used to escape taxes on his income.”
There actually is plenty of data on Romney’s Bain-related holdings. For example, Bain’s own website lists most of its active private equity portfolio companies. Then there are third-party databases operated by such organizations as Dow Jones, Thomson Reuters and CapitalIQ — each one of which includes searchable lists of past Bain Capital deals (often with detailed financial information). And, finally, Bain isn’t really in the business of doing tiny purchases of unknown family businesses. When it buys something, there is almost always a press release and/or media coverage. Perhaps Gawker hasn’t yet discovered the magic of Lexis-Nexis. Maybe it should sign up for the daily Term Sheet email.
“Today, we are publishing more than 950 pages of internal audits, financial statements, and private investor letters for 21 cryptically named entities in which Romney had invested… Many of them are offshore funds based in the Cayman Islands.”
I get it. “Cayman Islands” is supposed to be code for tax avoidance or shady dealings. But the reality is that most private equity firms form Cayman-domiciled funds to accommodate investors based outside of the United States (particularly when those funds also are making some non-U.S. investments). One private equity fund formation attorney I spoke with says that the Caymans structure usually doesn’t have real tax benefit for the non-U.S. investors, but that they nonetheless feel more comfortable. He added that, for most U.S. private equity executives, the Cayman structure has little to zero impact in terms of personal taxes.
Gawker Media has been going through a big corporate revamp over the past year or so. The ultimate parent company has never been in the U.S.: it used to be Blogwire in Hungary, but now Blogwire Hungary has become a subsidiary of a Cayman Islands entity called Gawker Media Group Inc, which also owns various U.S. operations like Gawker Media LLC, Gawker Entertainment LLC, Gawker Technology LLC, and Gawker Sales LLC.
Then there’s this little tidbit of information; something regarding obscene profits, untaxed revenue, and side-stepping the IRS…
The Hungarian companies get all of Gawker’s international income, which flows in from 13 different salespeople in ten different countries and which, since it’s international income flowing to a Hungarian company owned by a Cayman Islands parent, is basically pure profit which never comes close to being taxed in the U.S. The result is a company where 130 U.S. employees eat up the lion’s share of the U.S. revenues, resulting in little if any taxable income, while the international income, the franchise value of the brands, and the value of the technology all stays permanently overseas, untouched by the IRS.
As Rusty says, “This is weapons-grade hypocrisy…” but what else can you expect?
State Grid Corp. of China said Tuesday it agreed to buy seven high-voltage electricity transmission assets in Brazil from Spanish construction firm Actividades de Construccion y Servicios SA ACS.MC -2.06% and its subsidiaries for 2.04 billion real ($1 billion), including debt.
The acquisition marks State Grid’s second investment in Brazil and its fourth major investment overseas, and is the most recent in a string of deals in which a European company has looked to exit an investment amid the debt troubles facing the continent.
State Grid’s latest deal involves seven electricity-transmission assets spanning eight states in Brazil, with a total length of about 2,792 kilometers. A majority of the assets to be acquired are currently in operation, with the remainder expected to begin commercial operation by the end of this year, the company said in a statement.
This continues the trend where China expands its reach in our hemisphere; this time, however, China is not acquiring a raw materials company.