HOW SAFE IS MEXICO FOR INVESTORS?

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1 Houston, October 7, 2014 MEI Market Note No. 198 HOW SAFE IS MEXICO FOR INVESTORS? Familiar and new risks of the operating environment D URING A RECENT TOUR of the U.S. Mexican riparian border near McAllen, we viewed of some of the barriers that that the Department of Homeland Security has placed against illegal entry across the Rio Grande, including a portable watchtower and cameras. We were informed that some businesses in Matamoros are moving to the U.S. side, as they can no longer afford the 10% extortion fee on their revenues that is demanded by the Zetas Cartel. Some stores in Mexico are now removing their signs, as if they had closed down; they don t want the cartels to know that in the back they re still in business. A skeptical, prospective investor reported that he had seen on line interviews with captured members of cartels who had informed authorities that the cartels that given them a stark choice: You can work in our drug operations or your can work in our new oil and gas division. It was not a matter of a choice to work for the cartels or not: prospective recruits were threatened that their families would be at risk were they to refuse. It has been reported by Pemex that the incidents of illegal taps of pipelines containing crude oil and refined petroleum products have been increasing in frequency. For several years, Pemex has been litigating in Texas against a number of companies that have received condensate that had been stolen from Pemex s pipelines and storage tanks. It has been observed that the skill level needed in order to tap into a flowing line under high pressure is one not one commonly possessed by a welder in normal operations. Employee complicity in the illegal activities has been shown in numerous cases. This report asks about those safety issues in Mexico for which there may be no corporate barriers, also about those safety challenges for which new barriers will need to be devised. MEXICO ENERGY INTELLIGENCE (MEI) is a commercial and policy advisory service offered by BAKER & ASSOCIATES, ENERGY CONSULTANTS, a management consultancy based in Houston. MEI reports cover topics typically not discussed in Mexico. They are intended to facilitate two way communication between Mexican public and private institutions and the global environment. Our reports examine policy, institutional and cultural issues as they affect the operating environment, energy regulation, and government and private investment in Mexico s energy sector. Reports are distributed principally on a subscription basis. info@energia.com ENERGIA.COM Page 1 of 12

2 Oct 07, 14 How Safe Is Mexico for Investors? This report applies the safety concepts of hazard and barrier to Mexico in relation to the risks faced by current and prospective investors in Mexico s energy sector. Table 1 identifies imaginable safety risks in Mexico, only some of which are familiar. Table 2 is a survey of Pemex safety incidents ( ). Table 3 provides translations in English of articles in the Mexican press regarding the incidents of industrial sabotage in Jul 21, 11 The FPCA Risk in Mexico This report seeks to identify features of the Mexican operating environment that tend to put individuals and corporations at risk for non-compliance of the Foreign Corrupt Practices Act of The report identifies eight (8) situations in Mexico where a company subject to FCPA rules may either be a victim of corruption or find himself in circumstances that could compromise his FCPA compliance standards and protocols. The history of Metalclad, Marathon Oil and Sempra Energy illustrate these situations Dec 29, 10 Murder She Wrote This report inquires into two of the 30,000 homicides that have taken place in Mexico during the presidency of Felipe Calderón: Marisela Escobedo, 52, a victim s-rights advocate in Ciudad Juárez, Chihuahua; and Silverio Cavazos, 42, a former governor of the State of Colima. Such inquiries may lead to a better understanding of the nature of violent crime in Mexico and of the administration of criminal justice and of the outlook for public safety Nov 07, 10 May 19, 12 The Perception of Corruption in Mexico Each year, Transparency International, an NGO with a global reputation and presence, issues its report corruption in the public sector in more than 170 countries. The perception of corruption in the public sector is measured for each country on a 10-point scale, where 0 = Most Corrupt and 10 = Most Honest. Mexico ranked 93 in a list of 176 countries.the present report examines different forms of corruption observed in Mexico Jul 23, 10 Risk Factors in Pemex Debt This market note identifies risk factors associated with Pemex debt that are not reported in Pemex's Form 20-F. There are three exhibits from Pemex s filing dated June 29, Mar 13, 07 Mar 26, 07 Exploration risk, business development and energy policy in Mexico 18 1 This report examines cultural factors that affect discussions in the public and private sectors about energy topics in Mexico. The report considers the use of quantified data and the issues of language. In relation to styles of communication, the report notes differences between the sensibilities found in Mexico City and those found in Monterrey, the United States and Europe. In relation to quantified data, the report notes that data in the oil sector are typically not comparable with data in global databases. These features make news@energia.com Page 1

3 675 Jul 08, 04 The rising cost--and backlash--of insecurity in Mexico Insecurity in the Federal District and in border cities such as Tijuana and Cd. Juárez is increasing the cost of doing business in Mexico. The same insecurity is reducing the quality of life in these cities, as average residents and business visitors are often in fear of their personal safety and that of their families. The report narrates experiences of several crime victims, describes the anti-crime protest march of June 27 in Mexico City, and draws lessons for policymakers, businesses, residents and tourists May 25, 04 The risk of virtual expropriation: Metalclad and Marathon Oil This report examines the risk to investors in infrastructure projects in Mexico from indirect or regulatory expropriation. The cases heard in the first ten years of NAFTA leave serious doubts about the remedies available under its Chapter 11. This report examines two virtual expropriations: that of Metalclad Corp. in 1997 and that of Marathon Oil in Two questions are asked: What went wrong? and What are the lessons? Apr 27, 03 Feb 17, 14 Risk exposure for contractors in the Mexican upstream Contractors and subcontractors face an array of normal business risks in pursuing business opportunities in Mexico s upstream. Risks are those contained within the terms of the contract as well as other types of risk that arise from the operating environment. This report contrasts the perceptions of risk by oil companies and oilfield service companies in relation to MSCs. It also considers risks in relationships and contracts with local companies in Mexico Aug 27, 02 Oct 16, 03 Due diligence in Mexico s energy sector 12 0 This report discusses the challenge of carrying out due diligence in Mexico s energy sector both by public sector organizations and by private companies. Grounds for shareholder complaints about management failure to carry out due diligence are itemized, and ideas for improving management performance are ff d 598 Aug 13, 02 Managing business intelligence services regarding Mexico 7 1 This report examines intellectual challenges facing the manager responsible for business development in Mexico. What is the role of business intelligence subscription services in a world in which managers complain of redundancy and information overload? 506 May 30, 01 Country and project risk in Mexico 5 0 Analysis of cultural and political issues that, together, lead to country and project risk in Mexico. 326 Mar 04, 99 PEMEX procurement pitfalls Examples of how things can go wrong in procurement practices of Pemex Exploration & Production (PEP). news@energia.com Page 2

4 279 Jul 06, 98 Personal safety measures in Mexico City Precautionary and personal safety recommendations for travelers to Mexico City. The atmosphere of Mexico City today is very much colored by a concern for personal safety. There is probably no one in the middle and upper classes who does not personally know someone who has been mugged or robbed (or worse) in the past three years. 141 Sep 03, 96 Country and security risk in Mexico Mexico's efforts to modernize infrastructure and public services have not produced corresponding improvements in the legal system. "Wild west" conditions exist in Mexico's courts of law. Social violence is still very much a part of Mexican politics. A new guerrilla group has emerged in recent weeks, launching attacks on police and military units in several states. The rebels are not considered a threat to the Mexican government, but their attacks are likely to dampen a recent surge in investor enthusiasm about the country s economic recovery Aug 08, 96 Cactus explosion: background analysis An interview on Aug. 3 with Hugh Harleston, Jr., a former Pemex contractor, now retired in Tijuana,led to a new perspective on the Cactus explosion of July 26: The contractor visitedthe refrigeration units at the Cactus plant in December 1994, and, at the time, wasrepresenting a systems automation company May 15, 96 Risk factors in financial transactions--case of Sidek The Mexican Government operates as a family-run business, according to a WSJ article of May 16, Multi-generational families have parents and juniors running in and out of government to the family-run grupos (the Mexican term for conglomerate). 110 May 14, 96 Continuing uncertainty about Samalayuca Financing for the Samalayuca continues to struggle. The Zedillo government was intitially going to put its eggs in two baskets: one, that of privatizing Pemex s petrochemical plants, the other in IPPs or electric power projects of any sort. Since mid-march, however, the government has been retreating on the privatization of Pemex s plants, leaving the electric sector as the targeted credit-worthy sector by default. 87 Feb 15, 96 Jul 7, 04 Personal safety measures in Mexico For the middle and upper classes of Mexico City, daily life now includes exposure to the risk of armed robbery, assault and abduction. For most persons of this sector of society (both Mexican and foreign residents), incidents of this kind have happened, if not to them personally, then to persons in their family, social or professional circles. The business traveler to Mexico also needs to be aware of this danger and to take general and special precautions. news@energia.com Page 3

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