Jose Lau, senior counsel at Sempra International, speaks to Michael Washburn about energy and infrastructure reform and development in Latin America
What areas does Sempra focus on in the Latin American region?
Sempra Energy is a Fortune 500 energy services holding company parent of San Diego Gas & Electric, Southern California Gas Co and Sempra US Gas & Power. Sempra Energy also owns Sempra International – a company that develops, builds and operates energy infrastructure assets and distributes electricity and natural gas to customers in Mexico, Chile and Peru.
Mexico has been in the headlines a lot recently because of energy reform. What other markets in South America offer exciting prospects for expansion of your operations at the moment?
In the Mexico-USA region, our presence is not new. Sempra has a long-term relationship with Mexico, being so close to Tijuana, which has grown enormously in the last 30 years. This is a unique region in North America. It’s a major, cross-border venue and in which we believe Sempra can play a central part. We are a longstanding investor in the region.
Sempra International also has an 80% interest in Luz del Sur, one of the largest electricity distribution companies in Peru, which serves mainly in the south part of Lima, the capital of Peru. In terms of existing distributors, it’s probably the largest in terms of volume, or very close to being the largest. In Peru, as well, we have projects in development that we’re excited about. I’m referring to the construction of an approximately 100MW hydroelectric - power project in the mountains of Peru, and we have also been discussing the possibility of extending the lines of business for power generation, whether hydroelectric or conventional. We are also looking for additional opportunities in transportation or storage of hydrocarbons in the region. Peru is an exciting country for us. It’s one of the markets in Latin America that has shown consistent growth and stability in the last decade.
And besides Peru?
We have interest in Chile as well. We have the third largest electricity distribution company in Chile, Chilquinta Energia. In addition Chilquinta owns important participations in other smaller electricity distribution companies in Chile. In Chile, we are looking to expand our footprint through additional transmission lines. We have a joint venture with another company, SAESA, through which we have won bids for transmission lines in 2012 and 2013. We are looking at other opportunities as well in Chile. We are very optimistic.
Chile, as you know, is one of the strongest economies in Latin America, and has received increasing foreign investment over the years, including in the energy industry. It is expensive to generate electricity in Chile, and it’s expensive to bring it. There is potential for the generation and development of renewable energy, particularly in the north, where there’s lots of sun – the Atacama desert of Chile is perhaps the driest place on Earth. Given its energy needs, we expect to have additional investment opportunities across the entire energy spectrum, including in natural gas transportation and power transmission and generation.
So there’s a great demand for energy and infrastructure, and we think the opportunity is there. Chile is a large county, but it’s mostly vertical, so it can be difficult to bring energy throughout its various regions, such as the Andes. The opportunity is there.
Peru has been growing at a very strong rate for the last ten years. There are tremendous opportunities because they have natural gas, which needs to be taken out of the producing region and brought to places where it can be used. The infrastructure needed to take advantage of these natural resources is one of the most important projects in the region - the southern Peru gas pipeline. The government is studying this project and we expect great interest from potential investors, both domestic and foreign.
What sort of growth have you had in Mexico in recent months?
We have been an investor in Mexico since 1996, shortly after Mexico’s first energy reform that allowed private investments in certain sectors of distribution of natural gas. Although we are not a new investor, the energy reform currently underway in Mexico is likely to be a game-changer and generate great interest from foreign investors. We’ve been in Mexico for years, we have invested approximately $2.4 billion, and we expect to invest more. In October 2012, we won bids to develop 500-plus miles of natural gas pipeline infrastructure in the state of Sonora and northern portion of the state of Sinaloa, in the northwest of Mexico. This is a major development for Mexican infrastructure, which is expected to permit the conversion of new and existing power plants from using fuel oil to natural gas, and provide natural gas access to industrial customers in the region.
In addition, in Mexico, we conducted an IPO of IEnova, our Mexican affiliate, in March 2013, selling almost 19 percent of IEnova shares in concurrent offerings in Mexico and abroad. In addition to that, in late February before the IPO closing, we closed a Mexican debt offering for IEnova. So you have the debt offering and IPO happening within a few weeks of each other. Both offerings - debt and the equity – were highly successful. The proof is in the pudding, as they like to say. It is proof that investors are very eager to support energy development in Mexico. Given the energy reform, we expect that investors will continue to remain very interested in Mexico.
The market has received the company very well, and IEnova priced at the top of the range in the IPO. IEnova’s stock has performed very well to date and joined the Bolsa’s IPC index – the principal Mexican stock index - this year.
What do you think accounts for the IPO’s popularity?
As I mentioned, one of the great drivers in the IPO is the ability of the public to invest in a company other than Pemex that has access to the private development of energy infrastructure in Mexico. With the nationalisation of the oil industry in 1938, foreign participation in Mexico’s oil industry has been limited severely. Energy – throughout almost the entire supply chain - has traditionally been owned by the government, so the ability to participate in the development of energy infrastructure, with or without the expected energy reform, is an enticing opportunity for investors.
IEnova’s business is divided in two segments, our gas segment and power segment. In our gas segment, IEnova’s pipelines business owns and operates systems for natural gas and liquefied petroleum gas, or LPG, throughout the states of Baja California, Chihuahua, Jalisco, Nuevo León, Sonora and Tamaulipas. IEnova’s LNG (liquefied natural gas) regasification terminal, located near Ensenada, Baja California, began operations in 2008 and was the first west coast LNG receipt facility in the Americas. In addition to natural gas pipelines, we have utilities that sell natural gas to residential, commercial and industrial customers in three distribution zones in Mexico.
IEnova’s Power segment includes a wind farm in development, Energía Sierra Juárez, in the northwest of Mexico, near the border with the US, it’s a wind farm that will have an approximate generating capacity of 150MW, so it’s a significant development.
Lastly, we have a combined cycle plant in Mexicali, a 650MW electricity generation plant, which at this time exports electricity to the US from Mexico.
What is your relationship with Pemex?
We recently, through our joint venture with Pemex Gas in Mexico, were awarded development of the first segment of Los Ramones I and Los Ramones Norte, a project that basically involves development of natural gas infrastructure that goes from the border with Texas to near the centre of Mexico. It will expand greatly Mexico’s capacity for supply of natural gas. This is extremely important for the future development of the Mexican economy. In addition we have other important infrastructure projects with Pemex Gas in pipelines and storage, including a recently commissioned LPG storage facility in Guadalajara.
What plans do you have for expansion in the region?
I wouldn’t be surprised if we look elsewhere as well. Latin America, South America, are places where energy opportunities abound. You have to be very careful as well, but it is a place for future growth. It is a region still developing. Some parts are more developed than others. You have to weigh all the pros and cons. There are perceptions about risk in every country.
We’re competing with others, investors from everywhere in the world. China is a major player, its investors are becoming a major presence, not to mention Japan and Korea. We also compete against investors in the US, Spain and France, who are very active and have a longstanding footprint in the region as well. You have to recognise the opportunity, but you have to value it and pursue it accordingly, and there’s a lot of competition.
At this time, the big story is the Mexico energy reform. We believe that the reform is positive for most investors. As to when it will happen is unknown. Even today, I was sifting through the paper in Mexico, and they were expecting to send the bill to the senate this weekend, and it looks like they’re not going to be able to make it. [Postscript: the energy reform bill amending the Mexican constitution passed the legislative chambers on December 12 2013 and was recently ratified by the required number of Mexican state legislatures.]
Our ability to invest in the region will not depend on energy reform. With or without reform, there will be opportunities for further development of energy infrastructure. Production of oil in Mexico has decreased significantly in recent years. Demand for natural gas and electricity is expected to grow significantly in the near and medium term. Other countries in the region need to increase oil production and develop energy infrastructure.
We do not have a monopoly in Latin America. I believe we are an important player, but we are not the only ones. We see these competitors all the time and it makes things challenging for us, but it’s good for the region. I am originally from Mexico, so I care. We don’t want to buy the most expensive infrastructure we want the most efficient.
Roughly what is the split between your external and internal counsel, and with regard to the former, do you prefer fixed or hourly rates?
We do a great deal of work internally. I cannot give you an estimate - when we need help, we reach out to outside counsel. Locally we have internal counsel at our South American and Mexican affiliates, so we are well-covered for much of our needs.
We use both fixed and hourly rates. Some deals are tough to price on a fixed basis, but we do like to bid out services at fixed amounts.
What do you look for when it comes to external counsel?
We have worked with a number of firms in the region. Over the years we have developed close relationships, we usually work with several depending on the expertise.
I think it’s important that outside counsel be available for us. We work under tremendous pressure, under tight deadlines and not only their knowledge but their availability is very important. Who needs the best lawyer in the world if he or she is not available?
About the author
Jose Lau is senior counsel at Sempra International and a former counsel at global law firms Latham & Watkins and O’Melveny & Myers. Sempra International is an operating division of Sempra Energy, a Fortune 500 energy services company, based in San Diego.