Mexico Is Ready to Power Up

With power consumption growing at twice the U.S rate and its leaders gradually opening up the country to foreign investors, Mexico has long been viewed as a promised land for a host of U.S. energy companies.

Now, after two years of interruptions caused by the presidential election, assassinations and an economic crisis, Mexico may finally begin to deliver. Billions of dollars in power plant, natural gas distribution and pipeline construction contracts are expected to come up for bid and Southern California energy companies are among the many interested.

The optimism is based on a Mexican law passed in November that, for the first time in 60 years, permits foreign investment in energy development and transmission. It allows foreigners to compete for a host of new energy projects impelled by Mexico’s energy shortages, impending clean air mandates, and a desire to develop its immense and relatively untapped natural gas reserves.

The initial interest lies in energy-short Baja California, where two key projects--a pipeline network to supply Mexicali with natural gas and conversion of an oil-burning power plant in Rosarito Beach to use cleaner natural gas--may go out to bid this year.

Mexican officials are also mulling a new $400-million power plant for Baja California, to be built in the Mexicali, Rosarito or Ensenada area. All three Baja projects would run off natural gas transported by pipeline into Baja from the gas reserves in the southwestern United States.

Among those interested are Enova Corp., the parent of San Diego Gas & Electric Co.; Pacific Enterprises, parent of Southern California Gas Co.; Bechtel Corp.; General Electric Co.; Tenneco Energy and numerous other power plant builders, pipeline companies and engineering firms.

The Baja projects will usher in a new competitive era, Enova Chief Executive Stephen Baum said. How they are awarded--and whether they are successfully and profitably completed--will say much about Mexico’s new open-market era.

Mexico’s market fundamentals make it appealing for anyone in the power business, said John Holcomb, Tenneco Energy’s project director for Latin American business development. Power consumption has grown by an average annual 5% rate in the last 10 years, compared with 2% in the United States. By 2005, Mexico needs to add 12,000 megawatts to its power grid, a 35% bump.

But several U.S. power companies remain skeptical about Mexico, remembering past failures and snafus, even as Mexico dangles an estimated $5 billion in natural gas pipeline deals before investors.

In 1993, Mission Energy--an Irvine-based unit of Edison International, formerly SCEcorp--wrote off $18 million of its investment when environmental and other problems prompted it to bail on plans to acquire a 49% interest in the Carbon II coal-burning power plant in the Mexican state of Chihuahua near Eagle Pass, Texas. Entering with high hopes of gaining a foothold in the Mexican power market, it left with its reputation besmirched by controversy over the plant’s pollution.

A venture of Public Service Electric & Gas of New Jersey, Canada’s Nova Corp. and the Mexican oil monopoly Pemex to triple the output of the Rosarito Beach generation plant ended in failure two years ago, with Public Service reportedly writing off millions in development costs. It still refuses to comment on the fiasco.

Some executives are fearful of the volatile political debate within Mexico that still surrounds the decisions to allow foreign companies to reenter the domestic energy market after being booted out by President Lazaro Cardenas in the 1930s. They fear the pendulum might swing back toward nationalization.

And executives such as Randy Wu, vice president of energy development at El Paso Natural Gas Co., wonder how new natural gas projects are going to make economic sense in Mexican markets as long as the government subsidizes up to half of the cost of liquid propane and fuel oil, the favored source of home energy in most of Mexico.

“That’s what the Mexican government needs to deal with,” Wu said. “It’s one thing for the market to be opened up. But having done that, the economic reality is, the projects have to make sense. Mexicans have to be able to afford the service, which will be measured against existing options.”

But Mexican officials insist they are committed to an open market, as demonstrated by November’s passage of a law that loosened Pemex’s monopoly on the natural gas industry and allowed foreign investors in. The law was passed and implemented in near record time, said Hector Olea, chairman of Mexico’s federal Energy Regulatory Commission.

Why is Mexico bound and determined to open its energy industry to foreign investors after decades of protectionist policy? First, it has a huge natural gas reserve--third largest in the hemisphere--that it cannot fully exploit because it doesn’t have the pipeline transportation infrastructure to deliver it.

About 20% of Mexico, including the entire Yucatan and Baja California peninsulas and about 20 “mid-size to large” cities including Tijuana, Mexicali, Merida, San Luis Potosi and Aguascalientes, have no access to natural gas, Olea said.

Once the pipeline infrastructure is built, Mexico sees gas as a major source of export sales. Currently, the country is a net importer of gas.

Second, Mexican environmental laws require cleaner air by 1998 that can only be accomplished in some areas by switching power plants from highly polluting fuel oil to cleaner-burning natural gas.

Although there is periodic talk of deferring the cleanup because of the high cost, each air pollution crisis stiffens the resolve of environmentalists in the government.

Third, Mexico faces energy shortages unless it can quickly increase its power generating capacity, especially along the U.S.-Mexico border in California and Texas, where rapid growth of population and the maquiladora industry have stretched resources to the limit.

Baja California now imports more than 10% of its daily electricity needs during peak summer demand days over transmission lines from Enova and Edison International, Enova’s Baum said.

Meanwhile, California energy companies such as Enova and Pacific Enterprises trying to compete in a new world of deregulated and competitive energy pricing are looking to Mexico for growth opportunities.

“We see Baja California as a natural extension of our service area,” said Baum, whose firm formed a partnership with Pacific Enterprises and the Mexican company Proxima to bid on both the Mexicali and Rosarito Beach contracts.