Energy reforms spur foreign interest in oil and renewable energy

January 22, 2014

One of the most crucial aspects of manufacturing is having inexpensive and reliable access to energy. Without sustainable and competitively priced sources of energy, companies will have a difficult time pursuing manufacturing projects regardless of how cost-effective or skilled the labor market is. Mexico is representative of a country with an increasingly educated and talented pool of employees, but has historically experienced setbacks in courting foreign investment in their manufacturing sector because energy costs are relatively high compared with competing regions that also offer offshoring benefits.

Energy sector will likely see a boost stemming from reforms 
However, this is rapidly changing as the Mexican government has begun implementing reforms aimed at improving access to and the price of fossil fuels, such as oil, as well as alternative sources. Reuters recently reported President Enrique Pena Nieto signed into law legislation that would allow outside experts into the nationally-run oil and gas company Pemex and foreign enterprises to compete in the energy sector. The Mexican president has implemented these reforms with the hopes of opening up opportunities for international companies interested in installing production or exploratory projects inside the country, which will likely benefit other businesses looking to manufacture in Mexico.

Fluvio Ruiz Alercon, an independent director at Pemex, told Oil & Gas Journal that the most recent legislation will allow the state-run company to pursue research and development more effectively, negotiate contracts with greater flexibility and develop hiring methods that improve the nation's energy outlook.

"Pemex, as it becomes a profit-making national oil company instead of a government agency, will be able to enter into partnerships," explained Diana Villiers Negroponte, a nonresident foreign policy senior fellow in Brookings' Institute's Latin America Initiative. "It won't have to pay such high taxes, but it will need to keep enough of its revenue to reinvest in new wells."

Energy reform motivates foreign companies to invest
To achieve these benchmarks, Ruiz mentioned that Mexico will have to intensively invest in infrastructure and will have to seek out foreign stakeholders to make use of increased capital. Already, the energy reforms put forward by the Mexican government have led to increased interest in expanding in Mexico, as Reuters indicated Italian Prime Minister Enrico Letta has demonstrated a vested interest in expanding Italian involvement in the country. After witnessing other reforms involving Mexico's telecommunications industry and financial sectors, Prime Minister Letta said there are many opportunities for Italian businesses to establish a presence in the region.

Interest in renewable energy
During a trip to Mexico, Prime Minister Letta was joined by partners from the renewable energy enterprise Enel Green Power. Operating as Italy's largest alternative energy firm, the company agreed to inject $160 million in a wind farm last year, and has set a tentative completion timeframe for the latter half of 2014. Meanwhile, domestic renewable energy firms have made progress in pushing for sources of power independent of fossil fuels.

The Sacramento Bee reported that Mexico has a promising wind energy market and organizations like Grupo Eolico Mexico have developed workshops and other outreach programs to create a more informed population and generate interest in sustainable development. The California newspaper indicated the Mexican government established a benchmark for renewable energy, hoping to generate 35 percent of electricity in the country from renewable sources by 2024. While current wind energy output is about 2 gigawatts, it is forecasted that that number will increase by 600 percent within the next six years.

With greater investment in energy reform, manufacturers in Mexico will likely benefit from lower prices to operate in the country. At the same time, this improves the outlook for foreign interests looking to offshore operations to a location closer to their consumer markets.



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