Gabriel’s 2 Worlds: Economy (Part II)

My last blog, before my summer break, took a look at the Mexican economy. Whilst I wouldn’t profess to being an economics specialist, I am certainly interested in the topic. As a Mexican I can see the positive impact across the country, and as an insurance professional it’s encouraging to see the opportunities that are presented for the industry.

One of the areas that is particularly interesting is the impact of the energy reform.

Just a few years ago, it was illegal for private investors to risk their capital in Mexico’s energy sector.

The energy reform was introduced to redress this. So far, to positive acclaim. Analysts have praised the move as ‘a very well-managed, technical and transparent tender process’. Even though the drop in oil prices didn’t help get it off to a good start¹!
Local and foreign investors have been able to partner with energy companies to invest in oil and gas exploration and production (mostly offshore), mid and downstream projects in storage, transportation and refining infrastructure, and not least, power generation and, of particular interest, renewable energy.

The oil fields and production blocks tendered so far, already account for over US$60 billion in earmarked investments, with a multiplier effect for ancillary services. Certainly, opportunities for the insurance sector opened, as a result of the guidelines published by regulators, which set out the details of mandatory insurance and minimum limits of liability. I was part of the consultation process between the regulator and the reinsurance industry, which looked at examples of best practise from other parts of the world.

The energy sector brings a wealth of possibilities to the Lloyd’s market, with an increase in cover for many of the specialist classes Lloyd’s excels at.

From Marine & Energy to cater for offshore activity, to Financial Lines, as the boost in foreign investment requires local companies to become more sophisticated in their risk management. On the Property side, there will inevitably be developments in infrastructure which needs to be covered against natural catastrophes. And, more demand for products designed to mitigate completion risk – be it surety bonds or the local insurance equivalent “seguros de caucion”.

It’s not just the oil and gas industry that is being overhauled. When it comes to renewable energy, Mexico has set an ambitious goal to generate 50% of electricity from clean sources (including co-generation).

The solar energy contracts, signed in Mexico back in February, form part of the country’s second Clean Energy Auction; worth US$2.3 billion in investment and achieving the lowest median price unit of energy in the world to date, a positive indicator of things to come.
Mexico certainly has the right conditions for solar energy, but it is not just about the natural resource. These projects have benefited from Mexico’s network of free trade agreements (10 FTA’s covering 45 countries and numerous bilateral and multilateral reciprocal arrangements), making it possible for project developers to import the components needed from around the world at the lowest possible prices, and without having to pay import taxes.

There are certainly lessons to be learnt from the energy reform. Particularly, the renewable energy side including the accompanying regulation and framework for the trading of carbon credit certificates. Other LatAm counties, such as Colombia, already have an advanced framework for involving private sector investment in the oil and gas sectors, and I believe many will look at the success in Mexico to up their efforts. In particular, I can see a great deal of potential for solar energy in Chile and Peru, and eventually Central America.

¹– Mexico’s federal government managed this fall successfully by hedging its exposure to oil prices in what the Bloomberg titled “Uncovering the Secret History of Wall Street’s Largest Oil Trade”