INTERNATIONAL BUSINESS : Gas Firms Get Ready to Deal With Mexico

Mexico is desperate to capitalize on its immense natural gas reserves and modernize its polluting power plants so they can use the clean-burning fuel. But it doesn’t have the billions of dollars those efforts would require.

So the hard-pressed nation is offering up a big portion of its natural gas industry to foreign bidders.

San Diego Gas & Electric Co. and Southern California Gas Co., a unit of Los Angeles-based Pacific Enterprises, are among many international energy firms poised to take advantage of Mexico’s privatization of its gas industry--if the deals make sense and if considerable political problems and bureaucratic obstacles can be overcome.

Natural gas is only one of several state-owned monopolies that Mexico is putting on the auction block. But Mexico has placed particular importance on its natural gas development efforts because those are crucial to the nation’s economic recovery.

Mexico, the hemisphere’s fourth-richest country in natural gas reserves, believes that its energy resources in particular are being wasted because it does not have enough pipeline to deliver gas to all the homes and factories that want it.

Mexico also wants to improve its pipelines because environmental laws taking effect in 1998 will restrict the use of high-sulfur-content fuel oils and liquid propane gas.

Gas privatization passed a milestone earlier this month when President Ernesto Zedillo signed a law that legalized foreign investment in Mexican pipeline systems and enabled foreign producers to import gas and sell directly to Mexican industry and consumers.

Bidders are now preparing “statements of purpose” due by January that put forward their blueprints for natural gas development in Mexico. Then will come the bidding process, with contracts on some projects to be awarded as early as next year.

Mexico’s Petreleos Mexicanos (Pemex) oil monopoly will retain control of natural gas exploration, drilling and refining, but essentially will sell off the distribution side of the business in hopes that investors will expand delivery to unserved areas.

During a talk Wednesday before the American Chamber of Commerce in Mexico City, Mexican Energy Minister Ignacio Pichardo said Baja California rates a high priority for natural gas development because of increasing energy demand from its fast-growing population and the booming maquiladora industry.

That was good news to SDG&E; and Southern California Gas, which have joined forces with Proxima, a Mexican construction company, in an effort to introduce natural gas into Mexicali and Tijuana, burgeoning cities with more than 2 million people between them and with thousands of maquiladoras , or foreign-owned factories.

The partners also want to land the contract to gasify the smoke-belching power generation plant at Rosarito Beach by building an 18-mile gas trunk line connecting the SDG&E; network at the U.S. border to the Rosarito power plant. The $18-million line would provide the main artery from which the utilities would later deliver gas to Mexican factories and homes.

SDG&E; Chairman Thomas Page attended the privatization bill-signing ceremony on Nov. 8 along with top executives of various U.S. energy and utility companies.

SDG&E; and the Gas Co. expect competition to be tough for Baja gas business. Any and all natural gas projects are open to the highest bidder. Pichardo said Wednesday that a preference will be shown to financially strong bidders that present broad plans for investment in various areas of Mexico.

Attending the energy minister’s talk were representatives of several U.S. energy companies, including Amoco and Tejas Gas International, who said afterward that the oil industry worldwide has its eyes on Mexico. European firms are also thought to be preparing bids for Mexican pipeline projects.

Despite the country’s rich gas reserves, an estimated 85% of Mexican homes use liquid propane gas for cooking and heating, a health and fire hazard.

More than 51% of Mexican industry uses fuel oil for power, and only 37% uses natural gas, Pichardo said.

U.S. government officials warn of red tape with Mexican deals, mainly because Pemex will have to become accustomed to dealing with competitors on its home turf. But a U.S. Energy Department source expressed optimism that development will go forward because it is in Mexico’s interest.

“American firms will be highly reliant on Pemex to deliver gas as agreed to, to keep the resource coming and to be able to pay all those costs,” the official said. “I assume Pemex will operate in good faith and accept the role of competitors. But that’s yet to be demonstrated.”

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Gas Reserves

Mexico ranks fourth in proven natural gas reserves among Western Hemisphere countries. The rankings, in trillions of cubic feet:

(Country: Reserves)

1. United States: 162.0

2. Venezuela: 129.0

3. Canada: 95.0

4. Mexico: 69.7

5. Argentina: 26.5

Source: U.S. Energy Department