Gotta have the right connections.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Mexico’s energy revolution could prove to be a bitter pill for the vast rump of the Mexican population, who stand to lose out on billions of dollars of annual state funds provided by the newly privatized but financially crippled oil company Pemex.
But where there are losers, there are inevitably winners. In this case the biggest beneficiaries will be some of the world’s largest oil and gas majors — particularly those in the U.S. — and well-connected local politicians. Chief among them is former Mexican President Vicente Fox Quesada, whose private equity firm Energy and Infrastructure Mexico (EIM) has just signed a joint venture with Aubrey McClendon, former CEO of natural gas giant Chesapeake Energy and current CEO of American Energy Partners (AEP).
A Well-Oiled Revolving Door
The partnership’s main purpose, according to Sin Embargo, is to exploit the vast exploration and development opportunities opened up by Mexico’s newly privatized and liberalized energy sector.
“This is a significant vote of confidence in the Energy Reform program championed by current Mexican President Enrique Pena Nieto, and in the myriad possibilities offered by Mexico’s unconventional resources,” hailed a joint press release. Those resources include Mexico’s side of the Eagle Ford Shale basin.
EIM Capital’s own website admits, with seemingly not even a hint of shame, that the company was “founded in anticipation of Mexico’s historic Constitutional (Energy) Reform of 2013,” a reform for which Fox himself helped pave the way during his six-year presidential mandate (2000-2006), as recently confirmed by a 2005 State Department diplomatic cable about Fox’s first visit to Alberta recently leaked by Wikileaks:
“[T]he Mexican Trade Consul in Calgary…[said] there continues to be much interest in investing in Mexico’s energy sector… The Trade Consul said it is ‘painful‘ to let Mexico’s resources sit in the ground.”
Now, thanks to Peña Nieto’s landmark reforms, the pain is set to recede as Mexico prepares for the mother of all oil and gas rushes. “This is a major opportunity for Mexican energy production,” Fox said in the press release. “We look forward to working closely with the Mexican government to advance this monumental project and enhance Mexico’s current energy policy.”
Dirt-Cheap Labor and Land
At the heart of that policy is Mexico’s dirt-cheap labor and land. In an October 2014 Dallas Morning News article, Señor Fox himself boasted that Mexico’s cheaper labor costs and the government’s willingness to accept less royalties than U.S. landowners would make both drilling and the acquisition of land cheaper in Mexico than in Texas.
This was no doubt music to the ears of his new business partner, McClendon, who has made a career out of land flipping. As Rolling Stone reported in March 2012, when the price of US natural gas had collapsed to a decade low, for McClendon the profit came not from selling the gas, but from buying and flipping the land that contains the gas:
The company [McClendon’s former employer Chesapeake] is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil.
As McClendon put it in a conference call with Wall Street analysts a few years ago, “I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.”
This is particularly true when you refuse to pay all that you owe. Chesapeake Energy is currently facing a class-action lawsuit in Texas for allegedly short-changing landowners on royalty payments. In Jefferson County, Ohio, landowners sued AEP subsidiary American Energy-Utica in June in another class-action lawsuit alleging much the same.
Now McClendon has his sights set on Mexico, a country with much cheaper land and much weaker private property rights than the US. Indeed, even before the ink had dried on Peña Nieto’s energy bill, opposition parties, NGOs and civil rights groups were up in arms about the government’s expressed intentions to expropriate mineral-rich land owned by farmers, smallholders or communities in order to sell it to fracking companies like AEP.
Perhaps most worrisome, the energy bill does not include even a token provision for the consultation of local populations affected by oil or gas exploration. According to Senator Luis Sánchez, the land belonging to millions of Mexicans spread across 12 states and 260 municipalities is now at risk of expropriation, either because of the hydrocarbons under the surface or the pipelines to be built on it.
It’s unclear yet as to when bidding will begin for shale drilling in Mexico. After the first auction of offshore oil leases ended with an almighty flop, with only two of 14 exploration blocks awarded, the government postponed many of the other auctions to give itself time to sweeten the deals. When the shale gas leases do finally go up for bidding one thing of which you can be fairly sure is that thanks to former President Fox’s vast web of political connections, McClendon will almost certainly get first dibs on the most lucrative deals.
Call it the “Peña Nieto Bottom.” Read… Brilliantly Timed Oil Reforms Push Mexico into Fiscal Meltdown
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Another day dawns, another Ponzi scheme is erected, another billionaire borrows another billion — or ten billion — and hopes for the best.
At the end of the day the customers are still broke. The money they would have borrowed has been lent to the billionaires, there is nobody to repay the debt other than the billionaires themselves.
If they repay their own loans they are no longer billionaires … it’s a tough world out there.
Meanwhile, the customers cannot repay anyone as driving in circles earns nothing. Customers broke => oil prices decline => the ambitions of Aubrey McClendon & Co. run aground.