Of this, there is no debate: The future of Mexico’s oil industry lies offshore, where billions of barrels of crude are locked under the sea floor in the Gulf of Mexico. The country’s deepwater frontier is promising, but successfully extracting offshore oil is expensive and technically difficult, and Petroleos Mexicanos, the state-owned oil monopoly known as Pemex, doesn’t have the financial resources to singlehandedly exploit the Gulf’s ample resources. So they’re going to bring in outside help. In a dramatic about-face, the Mexican government, which historically has been fiercely protective of its energy assets, has finally concluded that outside help is necessary. Reform legislation signed into law in December will, for the first time in 75 years, make it possible—and attractive—for established foreign energy producers to help set those buried hydrocarbons free.
The need is obvious in Pemex’s own results: On Feb. 27, the Mexico City-based company posted its fifth straight quarterly loss—76.5 billion pesos, or $5.8 billion, on production of 2.52 million barrels per day in 2013, down from 2.55 million barrels per day in 2012. Output at the Cantarell oil field, the world’s third-largest when it was discovered 38 years ago, has fallen from 2.1 million barrels per day in 2003 to 400,000 barrels last year.
The company pays more than 90 percent of its operating profit back to the government, so its losses are hitting the Mexican economy where it counts. To boost production and exploit new deepwater opportunities, the ruling Institutional Revolutionary Party (PRI) had little choice but to relax the decades-old laws that nationalized the energy sector, and to open Mexico’s oil fields to foreign investment for the first time in nearly four generations. Pemex currently functions in a vacuum, without a single significant revenue-sharing partnership that would provide access to the new technologies, knowledge and financial resources that could boost productivity. “Mexico has a lot of potential with regard to hydrocarbons,” Rolando Galindo, Pemex’s head of investor relations tells The Financialist. “But these more complex reservoirs have higher costs and technology requirements…and it was getting very complicated for Pemex to do all of this alone.”
The reform legislation allows three new types of production contracts. Profit-sharing contracts will award foreign companies a portion of the profits generated by a given oil-and-gas concession; production-sharing contracts allow them to keep a share of the actual oil and gas production; and licenses require them to pay taxes and royalties to the government to explore and extract oil from a specific concession.
The licensing and production-sharing contracts represent a sea change, allowing foreign and private investors to book the production from Mexican oil fields as assets for the first time. Until the recent reform, only Pemex could own Mexican crude, whether it was untapped reserves or those extracted at the wellhead. But by loosening the monopoly, the government hopes it can outsource the most technically difficult parts of the job to companies like BP, Chevron, ExxonMobil, and Shell.
The potential payoff is enormous. Mexico’s proven reserves stand at around 10.3 billion barrels of oil and 17.3 trillion cubic feet of natural gas, but the most optimistic estimates of offshore reserves are double that. Pemex CEO Emilio Lozoya thinks that the Perdido Fold Belt in the northwestern part of the Gulf holds between 8 billion and 13 billion barrels of oil-equivalent alone.
The state-owned oil company has already drilled 14 commercially viable deepwater wells, and last month it announced the discovery of high-quality light crude at a well in the Perdido Fold Belt. Pemex has also done some initial exploration work in Holok-Temoa, a deepwater natural gas field located in the southwestern Gulf of Mexico.
If the reforms proceed as expected, Pemex’s Lozoya estimates it could generate about $10 billion in new investment by 2025. For its part, Pemex forecasts oil production will grow 60 percent over the current level of approximately 2.5 million barrels per day by 2025, while natural gas production should double to 14.6 billion cubic feet a day. That, in turn, could boost annual GDP growth by 1 percent annually by 2018 and up to 1.6 percent annually by 2025.
Mexico’s 2.1 million barrel-per-day domestic demand is expected to absorb some of the new production, but there are export plans as well. The U.S. buys about 78 percent of Mexico’s oil, but the boom in shale oil and gas production has already reduced U.S. imports and will likely continue doing so. So Pemex has already begun to market its light Olmeca crude abroad, with shipments scheduled to India and the Cressier refinery in Switzerland.
Congress is expected to spell out the details of the new production contracts by the end of April. Meanwhile, Pemex has until the end of March to decide which fields it wants to develop on its own and which it will seek partnerships to tap, after which the Ministry of Energy has six months to approve the decision. Galindo said it will likely take until late 2015 or early 2016 to start working on those so-called Round Zero projects.
The energy buzz in North America has been from further north of late, whether it’s the Canadian tar sands or United States’ shale fracking. But if things go as hoped, North America’s third-largest economy should soon be enjoying an oil boom all its own.
Last spring, the Norwegian government announced that it would use its $818 billion sovereign wealth fund to do more than simply invest the country’s oil money. From this point forth, said the owners of the world’s largest such fund, it would effectively function as an activist investor, with a mandate to advance social goals and influence corporate behavior. The news heralded the arrival of something financial market observers have expected for some time: a new era in which different countries — with vastly different political, economic, and investment philosophies — start to use their populations’ collective wealth to do more than simply investing with hopes of compelling returns.
This is not a matter of minor concern. Sovereign wealth funds collectively control more than $5 trillion in assets, and the 10 largest funds account for 80 percent of that wealth. But it’s also not clear at all what a shift to include more ideological investing portends. In Norway, for example, the Christian Democrats have publicly called on the country’s largest sovereign wealth fund to invest in Africa out of a sense of moral responsibility, while the Labor Party wants it to sell its stakes in the coal industry.
Though countries all over the globe have sovereign investment funds, East Asian and the Middle Eastern funds make up 72 percent of total sovereign assets under active management. And while their investment goals and strategies vary widely, the funds’ potential influence is unquestionable. As of 2012, Norway’s fund owned more than $4 billion worth of stock each in Apple, HSBC, Nestle, Royal Dutch Shell. That same year, China Investment Corp., – the world’s fourth largest fund – bought a 10 percent stake in Heathrow Airport Holdings. The $773 billion Abu Dhabi Investment Fund (world rank: #2), invested $7.5 billion in Citigroup in 2007, which helped the bank to recover from mortgage losses. Temasek Holdings’ assets are worth the equivalent of 10 percent of the Singaporean economy and include majority stakes in both the national telecommunications provider and Singapore Airlines. The Qatari Investment Authority is reportedly considering using some of its $170 billion to build infrastructure in India, the lone BRIC country without a fund of its own.
The Financialist recently spoke with sovereign wealth fund expert Eliot Kalter, the founder of EM Strategies and co-head of SovereigNet: The Fletcher Network of Sovereign Wealth and Global Capital, to discuss the growing influence and evolving mandates of sovereign funds.
The Financialist: Kuwait established the first sovereign wealth fund in 1953, a half-century ago. Why are we hearing so much about them today?
Eliot Kalter: Because more than half of the sovereign wealth funds in the world have been created since 2000. As countries like the United States have accumulated large fiscal deficits, countries on the other side of the trade equation have built large surpluses. International reserves have grown 1,300 percent in non-Japan Asia since 2000 and by 900 percent in the Middle East and Africa. For a majority of those countries, that’s due to commodity exports, such as oil in the Gulf states or copper in Chile. In other countries, such as China, high domestic savings rates and low levels of consumption created the surplus. Sovereign wealth funds were created to invest these external surpluses.
TF: Why do countries establish a sovereign investment fund instead of doing something else with it, like spending it on infrastructure or education?
EK: It’s another way to manage the inflow of capital. In developing countries, it may seem counterintuitive not to spend it on domestic needs, but these economies have to keep inflationary pressures in check and guard against “Dutch disease”—when the commodities sector comes to dominate the local economy. Dutch disease can also result in higher real exchange rates. So the funds send some of the money back out again – in fact, the mandate of many sovereign wealth funds is to invest abroad. Sovereign wealth funds can also invest in much more diversified portfolios than central banks, and hopefully earn a higher risk-adjusted return.
TF: Is there any particular type of investment that these funds favor?
EK: Not really. On one extreme is Chile’s Social and Economic Stabilization Fund (SESF), which is designed to smooth government revenue shortfalls and therefore makes very conservative investments. The SESF holds about 70 percent of its assets in fixed income, and 30 percent in cash. On the other end of the spectrum, you have the Alberta Heritage and Savings Trust Fund, which has about a quarter of its investments in alternative assets.
Other funds exist specifically to fund pension plans; some take advantage of the liquidity premium that comes from alternative investments, while others have less appetite for risk. China’s National Social Security Fund is one of the latter; it allocates 60 percent of its assets to equities and 40 percent to fixed income. The New Zealand, Irish and Australian funds, on the other hand, all had more than 20 percent of their assets in alternative investments such as real estate and infrastructure in 2010. Investment reserve funds, including the Korea Investment Corporation, the China Investment Corporation (CIC), and the Government Investment Corporation (GIC) of Singapore, aggressively diversify their portfolios both geographically and by asset class. The GIC, for example, puts a sizable amount of money into real estate and private equity, as well as hedge funds and commodities.
TF: Most of these funds invest abroad, right? Wouldn’t national interests be better served by providing capital to domestic markets and companies?
EK: You have raised an important question. It’s true that most countries’ funds focus on foreign investments, but an increasing number do deploy their wealth primarily at home. Among the large funds, domestic deals are especially pronounced in three countries: the UAE, Singapore, and Malaysia, where they make up well over 50 percent of total investments. In each case, the host country has established an investment vehicle whose principal purpose is to effectively oversee the management of state assets, including privatization, and to invest in strategic sectors of the domestic economy. They tend to operate like holding companies and have greater access to international capital than the state-owned companies would on their own.
Keep in mind, too, that of the roughly 40 new sovereign wealth funds that have emerged since 2000, almost 80 percent are in emerging-market countries. Many of these countries do have great need for more domestic infrastructure investment. But there are limitations, such as domestic absorptive constraints. And frankly, there are sometimes governance issues that could result in the misuse of vast resources. However, many of these countries are still developing their intellectual and legal infrastructure, and sovereign wealth funds can help them do that by providing a window to international best practices. When a fund chooses an overseas private equity fund to invest with, for example, they’ll obviously look at performance and risk metrics, but they’ll also look at how willing that private equity fund is to transfer its knowledge.
TF: Norway has signaled an intention to begin using its fund as leverage to accomplish broader social and political goals. Are other countries doing the same thing?
EK: Right now, Norway is the only significant player that has adopted an explicit social agenda. But Norway’s actions are certainly significant, and the vast size of the fund could potentially impact the way other funds behave.
TF: Part of the concern over sovereign wealth funds has always been whether countries will end up using the money for political rather than investment purposes. Is that fear well founded?
EK: The reason some might fear the intentions of sovereign wealth funds is that on the whole they have been — and some still are — quite opaque. When they invest in the infrastructure or some other critical industry of another country, for example, people are left to wonder what the real motivation might be. One famous example is Dubai Ports World, which in 2006 wanted to invest in ports in the United States. There was tremendous concern that they could use their investments to influence shipping routes. (Ed note: In the end, Congress blocked Dubai Ports World’s acquisition of the company that owned the ports, which had for all intents and purposes already taken place. Dubai Ports World eventually sold the American assets it had acquired to AIG.)
Many countries have imposed discriminatory legal impediments against direct investments from sovereign wealth funds due to concerns about potential political motivations, so the regulatory hurdles they face are often much more onerous than for, say, pension funds. To address such concerns, sovereign wealth funds have worked to improve their transparency by co-investing with pension funds and other funds with established international reputations.
TF: In 2008, a group of sovereign wealth fund managers created a set of voluntary best practices known as the “Santiago principles,” which were designed to minimize the risk of sovereign funds destabilizing the global economy, keep investments and spending in line with the laws of recipient countries, and establish a common framework around transparency and governance. How well have these principles worked?
EK: In general, it’s had a positive impact, but there’s no controlling authority that says, “You have to do this, or you’re going to be penalized.”
TF: Do you think sovereign wealth funds are going to become even more influential over time?
EK: These funds will continue to grow, and so will their influence. Sovereign wealth funds are in a position to invest in large infrastructure projects that are in great demand and face sizable financing needs. They are also in a position to promote international financial stability – take, for example, their investments in the banking system during the 2009 financial crisis.
However, the global payment imbalances that have been a driving force for sovereign wealth funds are decreasing. In China, for example, the government is encouraging a shift from an export-driven economy to a consumer-driven one, which would tend to drive down the balance-of-payments surplus. At the same time, fiscal and external deficits are declining in the U.S. Sovereign wealth funds will continue to grow, but at a slower pace than we have seen in the past decade.
But as to the question of how will the funds be used in the future? For those sovereign wealth funds that invest abroad, a growing proportion of investments are likely to be in real estate, infrastructure and private equity, a trend we also see in large pension funds. However, one can also expect an increasing number of funds to invest domestically. As we have discussed, this entails risks as well as rewards. A large influx of money can strain domestic resources and create opportunities for official corruption. Countries will have to be careful to account for this increased investment within their own budgetary framework to counter these pressures.
Photo courtesy of Shutterstock.com.
Solar Power developer, Welspun Energy has beaten its own record for the largest solar power project in Asia, with the unveiling of a 130 MW solar photovoltaic power plant in the central Indian state of Madhya Pradesh this month. The project has overtaken the Shams 1 solar thermal power project in UAE as the largest in Asia.
Implemented under the state’s solar power policy the project, required an investment of US $177 million (Rs 1,100 crore) and Welspun Energy is expected to sell the power generated to state-owned power distribution companies at a price of US $0.13 (Rs 8.05) per unit.
The power plant is a significant addition to India’s rapidly expanding solar power generation capacity, which stood at just over 2,200 MW at the end of January 2014. The country added 972 MW of solar power capacity during the 12 months prior to February 2014.
Gujarat Chief Minister Narendra Modi ‘cut the red ribbon’ on the Solar power plant, calling it a “saffron revolution”, Mr. Modi said: “We have already seen the green and the white revolutions; soon, we are going to see a saffron revolution in the country”.
Energy demand is increasing in both India and the UAE and is likely to soar this decade. To meet this demand, it is pivotal for both countries to establish a strong foundation to adopt renewable energy.
India and the UAE have independently announced plans for the adoption of renewables. India has set a target of 29.8 gigawatts in additional renewable energy capacity by the end of 2017, taking its total to almost 55GW.
In the UAE, the various emirates have individual plans for renewable energy. Dubai has announced a target of generating 5 per cent of its total energy through renewables by 2030 and Abu Dhabi has plans for 7 per cent by 2020, which would make for 3GW more of renewable energy in the UAE.
While the countries have very different requirements, both are striving to diversify their energy mix with an aim to enhance energy security and reduce dependence on conventional sources of fuel.
Paul Gosling, MD UK & Europe Allen & York takes a closer look at sustainability within the construction industry.
Sustainability and Construction have not always sat comfortably together; huge use of natural materials, carbon intensive concrete, some-time lack of rigorous health and safety standards, have all contributed to an understandable poor press for sustainability within the construction market.
In the last 10 years as we’ve seen more focus on Environmental and Sustainability issues, construction has been brought (sometimes kicking and screaming it has to be said) into a new reality; in which the impact of the industry’s activities, both on the natural environment, as well as workers and communities has had to be taken seriously.
Hit hard by the recession this drive was brought to a rude halt by the collapse of construction projects from 2008 onwards. In 2012 the Purchasing Managers’ Index (PMI) reported that the Construction industry was contracting at its fastest rate for two-and-a-half years. Sustainability and Environmental issues slipped off the agenda as companies struggled for survival and there was little evidence of retaining an appetite for growing and expanding sustainability teams, until now.
Over the last 6 months this trend, I’m very pleased to say, has started to reverse again and led by an increased demand for CDM roles and more of a focus on project design sustainability, we are seeing an up-turn in sustainability jobs within the construction market.
This welcome trend is facing the obvious challenge that over the last 5 years there have been a relatively limited number of new recruits coming into this sector so there is a clear skills shortage, particularly at the 1-5 years’ level. None-the-less this is a welcome return to putting sustainability back on the construction industry’s agenda.
It is also worth noting that the big brand names are increasingly recognising (with hefty prods in the right direction by various pressure groups) that their obligations can’t stop in the “developed” world and we’re looking forward to seeing these issues taken increasingly seriously globally.
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The first of it’s kind consortium for TAQA Arabia was signed on February 4th 2014 in Paris.
French leading developer and producer of renewable power Neoen, partners with TAQA Arabia, Egypt’s largest private energy firm, to form a consortium.
Being highly complementary, the two firms signed a cooperation agreement that further strengthens their will to work on renewable energy projects in Egypt, as well as on addressing the vast forecasted energy demands.
By this agreement, both companies will jointly develop renewable energy projects such as the 10×20 MW Solar PV project in Kom Ombo, Upper Egypt (est. USD 400 million). The objective is to build, own and operate several 20MW lots. The project is set to bolster Egypt’s national electricity supply to the country’s growing population of over 85 million.
Besides this agreement, Neoen and TAQA also wish to address the energy-?intensive industry needs and explore further opportunities outside of Egypt.
Eng. Khaled Abu-Bakr Chairman of TAQA Arabia and member of the Franco-Egyptian Industrial Committee says: “This is an excellent opportunity for both companies to catch the future and enhance Industrial relationship between France and Egypt”.
TAQA Arabia CEO Pakinam Kafafy adds: “We are seeking to gain more experience in the field of renewable energy that will help mitigate Egypt’s energy shortfalls in recent years. We hope to become a leader in renewable power regionally, starting in Kom-?Ombo,” she adds: “Neoen is the perfect partner to join us in this historic endeavor, with its numerous successful green projects across Europe, Australia and Mexico, and the recent opening of its inaugural office in Cairo.”
Xavier Barbaro, Neoen’s Chief Executive, agrees: “This cooperation agreement is very important to us. With the strong support of TAQA Arabia, a valuable partner, we believe we can help Egypt develop new energy sources and face any future energy challenges,” he says.
Egypt benefits from outstanding wind and solar conditions since much of Egypt’s landmass is comprised of desert, which generates high levels of solar irradiation and the Gulf of Suez is one of the windiest places in the world. Both TAQA Arabia and Neoen believe these conditions and growing government support for renewable energy mark the beginning of a promising and innovative energy sector for the nation.
For more information vist the Neoen website
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