By Jessica Toonkel and Christine Murray
NEW YORK/MEXICO CITY (Reuters) - Almost a year after Mexico opened its energy market to private investors, North American firms are rushing south to decide which pipeline or power plant to invest in.
Enthusiasm is so high that some executives from big asset managers, pension funds and private equity firms complain of overbooked hotels in certain parts of Mexico City and business-class airplane cabins crowded with pitchbook-reading competitors.
So far, the potential investors are mainly looking, not buying, with actual investments in Mexican energy projects coming in more slowly than some expected. The Mexican Energy Ministry has predicted $62.5 billion (40.7 billion pounds) in both public and private investments over three years from the new programme, which was signed into law last August.
Since then, only five private equity deals worth a total of $2 billion have been announced, according to Pitchbook, a Seattle-based research firm.
Though the money tap could eventually open, given the promise afforded by Mexican natural gas, oil and renewable energy projects, some of the reluctance to ink deals may be laid to the peculiar risks of doing infrastructure-related business in Mexico.
Government bureaucracy, crime, challenging property rules and local opposition have delayed some projects and raised their costs, investors told Reuters.
"There is a lot of interest but I agree there have not been that many actual deals announced," said Alfredo Alvarez, a partner for Ernst & Young, which advises investors on Mexico energy infrastructure deals in Mexico City. "They are coming."
Mexican government and regulatory agencies are still writing the rules and staffing to handle the reform, Alvarez said. Once the tender offers begin for oil exploration projects, which typically require more than $1 billion, the total value of deals will jump dramatically, he said.
Mexico's state-owned oil behemoth Pemex [PEMX.UL] expects total investment of $76.4 billion in exploration and production as a result of the reform, a spokesperson said.
"The process of implementation is advancing satisfactorily and with it the investment will materialise, as well as the job creation," a spokesperson for the Energy Ministry said.
EARLY ENTHUSIASM
The energy reform ended the decades-long production monopoly enjoyed by Pemex and the wholesale electricity monopoly held by utility CFE [COMFEL.UL].
"We think it's a great opportunity for investors." said Larry Fink, chief executive officer of BlackRock, in an April interview with Reuters. "We are a big believer in Mexico, in the wake of the reforms."
In addition to BlackRock, private equity firms KKR and First Reserve and Swiss-based private equity firm Partners Group have announced investments in Mexican energy projects in recent months.
Pension funds may not be far behind. Canada's second-largest pension fund Caisse de depot et placement du Québec is creating a fund to jointly invest up to $3 billion in energy infrastructure with local pension funds, according to a stock exchange filing.
The firm also is opening an office in Mexico, spokesman Maxime Chagnon said.
Both the California State Teachers' Retirement System, the second largest U.S. public pension plan, and the Canada Pension Plan Investment Board, the country's largest pension fund, are looking to invest in Mexico as a result of the reform, officials told Reuters.
PERMITS BEFORE PIPELINES
For the right deal, the payoff can be sweet. A project like a natural gas pipeline can pay out 9 percent to 12 percent in income for decades.
But getting those projects built can be a challenge. Environmental permits can take months instead of weeks, and local opponents can block projects.
In March, Macquarie Group's Mexico Infrastructure Fund said in a filing that there was a "substantial uncertainty" over whether it would recoup its investment of more than 1.1 billion pesos ($71.31 million) due to opposition groups blocking access to its Marena Renovables wind farm in Oaxaca.
Companies are required to get right-of-way permissions from every landowner whose property might be touched by a new pipeline. In some parts of Mexico, this can involve hundreds of farmers, each owning small plots of land.
"I normally don't sleep until we have 95 percent of the rights," said Javier Chavarria, senior vice president for private infrastructure Americas at Partners Group, speaking in May in New York. "It only takes one landowner" to stall a project.
The $250 million, 172-kilometer Morelos pipeline being built by Spanish companies Enagas (MC:ENAG) and Elecnor (MC:ENOR) is two years behind schedule due to trouble getting rights of way from the owners of the 2,000 small plots of land the pipeline will pass through.
It has been hard to even find the owners of those plots, some just 1 square metre in size, but since getting the permissions, construction has run on time, an Enagas spokeswoman said. Recently passed laws should make it easier to handle such disputes but they have not yet been tested, said Marisol Gonzalez de Cosio, a director at Standard & Poor's.
Security and corruption issues also give investors pause.
Texas-based energy firm Key Energy Services Inc . (N:KEG) took a $2.2 million charge in the first-quarter for assets destroyed after an arson attack on a facility in Tabasco state.
A spokesman for Key Energy Services referred to the company's public statements.
Problems likes these have caused investors including CalSTRs to move cautiously.
"We would have concerns about where the asset is located and what the security issues are," said Paul Shantic, who oversees inflation-sensitive investments at CalSTRS.
In general, CalSTRs wants to make sure there is dedication on both the part of the government as well as the market to make these projects go smoothly before it commits to more, Shantic said.
"I think people are somewhat enthusiastic about the market, but the only pause we have is to make sure the dedication is there on both sides," he said. "I do think some of these first deals will stimulate more deals."
And interest in the deals remains high, and newcomers still are still booking those flights, restaurants and hotel rooms, much to the consternation of more established investors like Chavarria.
He used to sail into an easy booking at the Marriott in the upscale Polanco neighbourhood of Mexico City, before the competition arrived. "Now I have to call two or three hotels before getting a reservation," he said.