Mexican Energy Reform: How Howard’s Projects Define Success

Mexico’s energy reform was swathed in doubt from its birth in 2013.

How could a country with a longstanding culture of reliance on monopolies to run its oil, gas and electricity sectors suddenly open up its markets to foreign ownership? Then again, given the needs of its growing economy and the inability of its storied institutions—Pemex and CFE—to deliver the necessary energy, how could it not?

The state-run monopolies lacked sufficient capital and technical expertise to bring Mexico into the new era, and the government’s arguments in favor of reform, while persuasive, were based on economic statistics. Somebody had to show that this thing could work.

Somebody like Howard Energy.

In 2013, San Antonio-based Howard Energy Midstream Partners LLC began its project to move Texas natural gas to Mexico via pipeline. The company filed for its presidential permit in 2014, received it in 2015 and expects the line to be in service in 2017.

As far as the Mexican government was concerned, Howard’s process was the model.

“The Mexican secretary of energy himself told us that it’s the best example of energy reform to date,” Brandon Seale, president, Howard Energy Mexico, said during Hart Energy’s Midstream Texas conference in San Antonio.

Howard wasn’t alone. The field was quickly becoming crowded with midstream competitors, but the company was first and well ahead of the pack with its Nueva Era natural gas pipeline project.

“We understood the market the best and most importantly, we were offering the cheapest transportation solution to the cheapest gas because fundamentally what we were doing was giving Mexican consumers access to gas directly in the field,” Seale said. “Today, all of our gas goes to Mexico—it just gets there indirectly. It goes through other intermediaries, or it goes through Agua Dulce, or it goes to Houston and then comes down. All we are doing is just drawing a straight line down to the conception point and cutting out cost in between.”

Being first has its perks. Howard expects the $500 million Nueva Era project, which created 200 jobs, to turn Monterrey, Mexico, into the most competitive natural gas market in Latin America. Those benefits to Mexico build goodwill and lead to more projects.

Like Dos Aguilas, a refined products pipeline announced in 2016 that will move product from refineries in Corpus Christi to Monterrey.

“We’re able to take advantage again of our knowledge of not only the terminaling business generally, but our experience buying right of way and laying pipe in northern Mexico,” he said. “More importantly, it’s our unique knowledge of the regulatory framework. Because we’ve been down there in Mexico so deeply involved for so long now—so long relative to the energy reform which is only three years old—we create a lot of value for our customers by trying to make this process seamless, by trying to put together two different regulatory frameworks and make them work.”

Cultural Shift

Experience with the Mexican regulatory system is a plus, but U.S. companies have to acknowledge that completely changing a country’s monopoly culture does not happen quickly.

“It might take some time, but what we really see is that there is a real commitment from the government and the political authorities in Mexico to make this change,” Jaime Treviño, managing partner of Monterrey-based J.A. Treviño Abogados, or JATA law firm, told Hart Energy. “If you’re a company, you need to have this in mind when you’re making your decisions, especially in day-to-day negotiations which is where I feel there might still be resistance.”

Midstream Audio: Listen to Jaime Treviño and Carlos Chavez discuss the challenges and opportunities of Mexico's energy reform.

Relying on Mexican attorneys to navigate the regulatory landscape, as Howard did, is critical. For example, if a pipeline crosses communal property (ejido) occupied by indigenous communities, the operator will need to work through the country’s agrarian law framework.

“The real estate where ejidos are located is not classified as private property, so it cannot be easily sold,” Carlos Chavez, Monterrey-based attorney with JATA who focuses on energy matters, told Hart Energy. “It has to be converted into private property. The devil is in the details. You have to follow all the regulations—this can be easily solved with the assistance of a Mexican counsel. You just have to follow the specific guidelines.”

And, you might need a deft touch.

“If you want to build a pipeline, you will be dealing with different ejidos that may be in the way,” said Treviño. “Each one of them has to be handled differently.”

Unlike in the U.S., where a company often confronts a different set of regulations in each state to build an interstate pipeline, Mexican rules are fairly consistent throughout the country. The people who live in the ejidos, however, are not.

“You need to be very intelligent because it’s not a matter of being aggressive,” Treviño advised. “You need to know what people need and be able to satisfy what they’re needing. At the end of the day, you’ve got to negotiate with them.”

Working with the communities on the ejidos and satisfying requirements of agrarian law is a complex process, said Treviño, whose firm has extensive background in this area.

Seale said he and Howard Energy are well aware and respectful of the differences between operating in Texas and operating in Mexico. Pipeline theft, for example, has been an accepted part of the business. Howard faced it head-on.

“When we announced our Dos Aguilas project earlier this year, we announced that we were going to keep all of our customers whole against theft, against pipeline theft,” Seale said. “It absolutely changed the expectations of every shipper and every market participant, of every transporter in Mexico.”

On some pipelines, theft exceeded 10% to 15%, he said, all borne by Mexican consumers. Howard Energy drew a line and said, no more.

“By God, we’re pipeliners,” he said. “If we don’t deliver our customer’s product from Point A to Point B, what the heck are we getting paid for? So we came in and we took that position and it’s changed.”

Not that it’s been easy. Seale said that his company has tried to instill the essence of the Texas oil field into the Mexican industry, but without expecting rapid changes.

“The goal,” he said, “is to work toward a sort of hybrid system that, like the Rio Grande itself, it’s a little bit Texan, a little bit Mexican, kinda muddy but mighty all the same.”

Joseph Markman can be reached at jmarkman@hartenergy.com or @JHMarkman.