The Mexican Oil Expropriation of 1938 is an event as iconic in Mexico’s history as the Boston Tea Party or the Declaration of Independence is for the United States. It was the declaration by President Lázaro Cárdenas that all mineral and oil reserves found within Mexico belonged to the government, ultimately a response to the culmination of feuds between union workers demanding better wages and work conditions and the oil companies who denied their requests. As the story goes, Cárdenas took a thorough look at the books of the oil companies and decided that they were well-equipped to cover the financial needs of their workers. So when a compromise couldn’t be reached, Cárdenas played his trump card and sent all foreign oil companies packing. As a result, the Mexican state-owned petroleum company, Pemex (Petróleos Mexicanos), was born.
An international boycott of Mexican products followed, and the United States unleashed an aggressive public relations campaign against Mexico. Mexican finances suffered due to the boycott, but Pemex survived. In fact, international oil exports during World War II kick-started the company. Pemex quickly became one of the world’s largest oil companies, subsequently helping Mexico rank in the top 10 for oil exports in the world.
Today, another energy revolution is occurring in Mexico, this time in the form of the deregulation of Pemex. For the first time since the expropriation, the market is open to foreign companies, and Pemex’s new role is essentially just another oil company on the playing field.
With a rich and complicated history of relations between the U.S. and Mexico — and many differences in business practices, energy regulations and culture — it is not as simple as sitting down at the table to strike up a business deal. It takes a certain amount of respect and knowledge of those differences to forge ahead in the oil fields of Mexico.
BUILDING THE EMPIRE
When Mike Howard and Brad Bynum co-founded Howard Energy Partners in 2011, they immediately set out to diversify the company’s assets across several areas of the midstream space, as well as expand across basins. The energy provider recently acquired more than 100 miles of gathering pipeline in Pennsylvania. However, gathering and processing is only about 50 to 75 percent of the business. The rest involves liquids handling and processing further downstream.
Howard Energy’s South Texas assets are vast. They include 700 miles of gathering pipeline, the Reveille cryogenic processing plant in Webb County handling 200 million cubic feet of gas per day, a new off-spec liquids stabilizer facility near Three Rivers, an industrial logistics railroad hub in Live Oak County, and more than 500,000 barrels of liquid storage capacity between two terminals in Brownsville.
A South Texas native, Mike Howard has always envisioned working with Mexico. With Mexico facing natural gas shortages during the past couple of years, the business opportunity to meet the supply demand was clear. “What’s good for Mexico is what’s good for South Texas,” he always says.
Now, Howard Energy is well-positioned (with assets along the border) to expand into the neighboring country. The company currently has two major cross-border pipeline projects in the works: one for natural gas and one for liquids. And Howard’s right-hand man for Mexico, Brandon Seale, is leading the way.
NOT YOUR AVERAGE GRINGO
Brandon Seale is a bona fide gringo on the surface. To someone on the other end of a business call, he is a highly intelligent and intuitive businessman well-versed in the Spanish language and culture. He is quick to break down cultural barriers and make people feel at ease when talking with him. These important characteristics coupled with 13 solid years of experience working in Mexico landed him the current role of President of Howard Energy México, a wholly owned subsidiary of Howard Energy Partners.
Since his days in law school, Seale has had a fascination with Mexico and the history of oil and gas regulation. One of his proudest accomplishments was co-founding the Texas Journal of Oil, Gas, and Energy Law while at The University of Texas at Austin School of Law. “It’s fascinating to compare the effects of regulation in Texas vs. the effects of regulation in Mexico and the outcomes they have produced,” he says. “It’s almost a perfectly controlled case study because the geology and the terrain [don’t] change, but it’s also an important analysis of how different countries can regulate the same resource toward different ends.”
Seale’s work in Mexico started in 2003 with Lewis Energy Group. Serving as Construction Superintendent for Mexican operations and Director of International Projects, Seale gained his first exposure to making deals with Pemex and learning the Mexican regulatory system. He lived in Monterrey, Mexico, from 2003 to 2004 and even studied at the Monterrey Institute of Technology and Higher Education (Instituto Tecnológico y de Estudios Superiores de Monterrey). After seven years with Lewis Energy Group, Seale embarked on his own journey as business owner of a small production company, Zaragoza Resources. He successfully sold his production in 2013 and began working on Mexican projects with Howard Energy.
Moving from the upstream to midstream sector has certainly given Seale a new perspective on energy operations. “Upstream engineering is fascinating because it requires making complicated decisions in the face of immense uncertainty. The variables in midstream projects are much better known, but that allows us to transform the molecule in much more complicated ways. We have found that one of the most effective ways for us to add value is through these processes, and so we are a process-oriented company with a strong chemical engineering focus.”
CREATING VALUE IN THE MIDSTREAM SPACE
Seale explains that there are three fundamental ways in which Howard Energy creates value for its customers in the midstream space.
The first is finding a way to improve logistics. “If today you’re going from point A to B to C, let’s figure out how to draw a straight line from A to C,” Seale says.
Second is transforming the molecule, for example, by splitting an unstabilized condensate stream into three separate marketable products: condensate with a Reid vapor pressure of 9–11 pounds per square inch, y-grade natural gas liquids (NGLs) and rich gas at Howard’s condensate stabilizer in Live Oak County. Or by moving rich field production through a cryogenic gas processing plant and stripping out the heavier hydrocarbons, as at Howard’s Reveille cryo plant in Webb County.
The third way of creating value for customers is what Seale is tackling now — creating new markets, like in Mexico. “For example, when we bought the Webb County gathering system here in South Texas,” he explains, “it only had one delivery market. All the producers were delivering to one point, to one customer, so they were captive in a sense. So to find ways to enter into new markets, interconnect to new systems or create totally new markets like we’re doing in Mexico, you can create more opportunity for your producers, which also means more activity for us as their logistics and midstream provider.”
The objective of Nueva Era, the first of two major pipeline projects Howard Energy has announced, is straightforward. Today, Mexico is importing approximately 3.5 billion cubic feet of natural gas per day; and by the time the pipeline goes into service, that number could go up to as much as 6 or 7 billion cubic feet, Seale explains. Howard Energy is creating an opportunity for Mexico to directly access field production in Texas for the first time ever.
“You have the most prolific gas-producing county in Texas, Webb County, that produces nearly 2 billion cubic feet per day of natural gas,” Seale explains, “and you have the largest point of consumption of natural gas in northern Mexico, Monterrey, which is probably the most industrialized city in Latin America, not just Mexico 1.5 billion cubic feet of natural gas is consumed or passes through Monterrey each day, and that number is only going up. So going back to that first method of value creation, why can’t we just draw a straight line to connect these?”
The project will have a huge impact on both sides of the border. A few years ago, Mexico was facing severe natural gas shortages. Pemex was importing liquefied natural gas (LNG) to its Pacific Coast and paying as much as $20–$24 per thousand cubic feet (MCF), while producers in South Texas were struggling to get $3 per MCF for their natural gas. With the Nueva Era pipeline in place, a direct route for Texas producers to send gas to Mexico without routing through Houston and other intermediary pipelines is now available. It cuts out a huge portion of transportation that producers have to pay for and creates more market options for them. On the Mexican side, it’s a considerable change in the way business is done in general.
“In the past, gas station operators in Mexico bought their gasoline essentially the same way they bought their Twinkies. You call Hostess for Twinkies to get delivered and you call Pemex when you want your gasoline delivered. But you’re not fundamentally having to worry about underwriting long-term infrastructure and things like that, because Pemex took care of all of that. And Pemex should get a lot of credit for that, too, because it was a major service and a subsidy that they provided for a long time to a lot of consumers in Mexico. That’s a major change that’s going on right now,” Seale says.
The scope of the Nueva Era project will have a significant impact on jobs as well. Coming down from Howard Energy’s Webb County system, 190 miles of 30-inch pipe will tie into two points in Monterrey. Seale reports, “We have awarded the pipe order to a local company. All of the pipe and steel in Mexico will come from Mexico.” The process was the same for selecting construction contractors. “We’ll use two companies for the Mexican side and one for the U.S. side.” In total, Howard Energy expects to create approximately 200 direct jobs during construction and about a dozen after construction is complete.
In addition to the direct jobs created, Seale notes, “Demand has been artificially suppressed in the Monterrey market for decades because of shortages and the lack of consistency in pricing. Pricing wasn’t based on market pricing, which already has enough volatility baked into it, and it made it difficult for banks to finance any long-term investments. Also, Pemex and Mexico heavily subsidized competing fuels like fuel oil and liquid propane, and now as you’re moving away from subsidies into an open market, we think the actual demand for natural gas is only going to build on itself. In terms of job count, especially for Monterrey, it’s going to make them the most competitive gas market in Mexico, which gives them a competitive advantage from a commercial standpoint, from a manufacturing standpoint, and it yields a whole bunch of indirect jobs that are impossible to quantify.”
Nueva Era received an essential piece of approval, its presidential permit, in May 2015, to construct, operate and maintain border-crossing facilities. Furthermore, in October of 2015, the Comisión Federal de Electricidad (CFE) signed up as the anchor shipper for 25 years, with 504 million cubic feet per day on the pipeline. The one-year construction process is set to begin this summer. By June 2017, the pipeline will be flowing South Texas natural gas to Monterrey.
“It’s a thrilling project,” Seale proudly reports. “As someone who’s spent his whole career in this part of the world, to get to tie it all together like this is a dream come to life.”
The second pipeline project, dubbed Dos Águilas, or “two eagles,” after the national symbols of both countries, is a liquids pipeline project due to be in service by the middle of 2018, about one year after Nueva Era. The project will consist of approximately 287 miles of of 12 inch pipeline connecting the refineries in Corpus Christi with markets in Monterrey.
In Corpus Christi, refineries have the capacity to process approximately 800,000 barrels per day. There is a seasonal 75,000 barrel-per-day deficiency, depending on seasonality, for refined products in general for northern Mexico, a market that is only growing. Rather than transport by rail, truck or barge, the most efficient way to meet the demand over the long term is to move it by pipeline. As an added bonus, this method is undoubtedly more environmentally safe.
The idea is to connect the refining system in Corpus Christi with markets close to and across the Mexican border, as well as move three different products (ultra-low sulfur diesel, regular gasoline and premium gasoline) through the pipeline to three different delivery points: Laredo on the U.S. side, Nuevo Laredo across the border and down to Monterrey.
Liquids pipelines are more heavily regulated in both the U.S. and Mexico, so the project has been a complete immersion in regulatory compliance and dealing with a post-reform system in Mexico. It is innovative in that it is the first attempt to merge the U.S. and Mexican regulatory systems into one process. It has been an opportunity for Seale and the Howard Energy team to not only apply some of their longtime experience of doing business in Mexico, but also pave the way for how it is going to work moving forward. “Part of our service is finding a way to make the regulatory regimes work together in a seamless fashion. At the end of the day, that’s the biggest selling point that we have to our customers … that we’re crossing an international border but they’re not going to notice.”
Until May 23, Howard Energy is running a simultaneous U.S. Federal Energy Regulatory Commission (FERC) conforming open season and a Mexican Comisión Reguladora de Energía (CRE) authorized open season. An open season is a regulatory requirement and formal process in which you can start to market your service, and customers can approach you with interest in having capacity on the pipeline. The process allows all interested shippers equal access to the project on non discriminatory terms.
The job impact will be similar to Nueva Era during construction, but it will actually have more of a long-term impact; at these terminals, you simply need more people. Seale explains that the process is more labor-intensive and hands-on.
A DIFFERENT PERSPECTIVE
“Doing business in Mexico is hard,” Seale admits. “It’s a very different system from Texas, even though in many ways northern Mexicans and South Texans are the exact same people: They both wear boots, they both hunt, they both eat copious amounts of beef. They have all the same vices and virtues, but they come from very different business and legal traditions.” That is why Howard Energy’s strategy has focused on hiring people with experience, and their team’s many lifetimes of experience working in Mexico is what has driven their success to date. “No matter how well-intentioned or hardworking you are, if you haven’t ever worked in Mexico and don’t know the right people to be talking to, you can get lost. You can go broke very quickly in Mexico having good meetings and not really moving the project along.”
Doubts linger for many U.S. companies as to how welcoming Mexico will be to foreign investments following the 2013 Mexican Energy Reform, but Seale speaks glowingly about his experience working in Mexico. “I’ve always had a great experience working in Mexico, especially with Pemex, and many of the people I dealt with 10 years ago are still the ones I’m dealing with today.”
Seale recently launched a podcast on the history of oil in Mexico. His program, “El Petroleo es Nuestro: A History of Oil in Mexico,” delves into topics such as why oil has such an iconic role in Mexico and how that played out in its own interesting and unique ways (and some not so beneficial ones). “All the perceptions people have come from somewhere. So I set out to try to study that in more detail, to go out and read all the primary sources and some great secondary sources in Mexico.”
Also interesting to Seale is how his experience working in Mexico has made him reflect on his own country. He admires Mexicans’ ability to grasp and appreciate the impact that large infrastructure projects have on their economy. “Because oil and gas has such an outsized role in Mexican history and in the Mexican economy, it makes the stakes higher. Regular people in Mexico care about oil and gas infrastructure projects in a way that even the most well-informed people in the U.S. don’t. A lot of what we do in the energy business gets taken for granted in the U.S. in a way that it doesn’t in Mexico,” he states.
THE OPPORTUNITY AHEAD
Even in the wake of a depressed market, Seale sees opportunity for Howard Energy. If anything, he explains, low commodity prices help infrastructure projects like Nueva Era and Dos Águilas because they are driven by demand, whereas the drill bit drives the gathering business. Projects like these, he says, make it easier for consumers to use more — they encourage consumption.
Seale describes the oil industry in the United States as “shockingly efficient.” He explains that it takes a lot of capital to be able to optimize to the degree, for example, that U.S. refineries have. “It’s a unique virtue of the American energy industry that we have this kind of specialization,” he says. From an infrastructure standpoint, there is a huge opportunity in Mexico. For example, Texas has approximately 250,000 miles of gathering and interstate transportation pipeline, where Mexico falls far behind with less than 25,000 miles in-service.
It isn’t because there is less petroleum in Mexico, though, Seale says. “If you listen to my podcast, some of the most prolific wells ever drilled were in Mexico. Cantarell Field [was] the second-largest [producing] oil field ever discovered, only behind Saudi Arabia’s Ghawar Field. It’s a testament to what a unique opportunity it is to work in Mexico’s oil fields.”
For more information on Howard Energy, visit www.howardenergypartners.com. To learn more about the Nueva Era and Dos Águlias pipeline projects, visit www.pipelinenuevaera.com and www.dosaguilaspipeline.com. Brandon Seale’s podcast, “El Petroleo es Nuestro: A History of Oil in Mexico,” can be found on iTunes at itunes.apple.com/us/podcast/petroleo-es-nuestro-history/id1078689026?mt=2.
Photos by: Michael GiordanoClick here for reuse options!
Copyright 2016 SHALE Oil & Gas Business Magazine