Mexico’s Pemex to Buy U.S. Natural Gas Through Mercuria

Mexico’s state oil company struck a deal to import U.S. natural gas from a Swiss trading house, a step that would help the nation secure a cheaper long-term alternative to fuel oil for its power plants.

A subsidiary of Petroleos Mexicanos will form a joint venture with Geneva-based Mercuria Energy Group Ltd. to handle the gas and will aim to be one of the five largest participants in the North American natural gas market, the company said today in an e-mailed statement.

Pemex, as the world’s ninth-largest oil producer is known, burns fuel oil for most of the power plants in Mexico and is seeking to cut its energy costs. The gas would be delivered to Mexico by pipeline from the U.S., where hydraulic fracturing technology has released abundant new supplies.

The joint venture will begin operations in the fourth quarter to coincide with the opening of the Los Ramones pipeline, a 1,200-kilometer project that will import gas to central Mexico from south Texas.

Legislation approved last year is ending Pemex’s 75-year monopoly on hydrocarbon production in Mexico, and the company has said it will form joint ventures with foreign companies.

Mercuria agreed in March to buy JPMorgan Chase & Co.’s commodity business for $3.5 billion. That deal, which has yet to be completed, will significantly increase the 10-year-old firm’s gas and power trading operations in North America and Europe.

Regulatory Restrictions

Mercuria has grown from a 10-person shop in 2004 to the world’s fourth largest independent commodity trader with about 1,200 employees and revenue of $112 billion in 2013. Originally focused on oil trading, the closely-held firm has expanded operations to include coal, metals, natural gas and agricultural commodities.

Founded by former Goldman Sachs Group Inc. traders and University of Geneva classmates Marco Dunand and Daniel Jaeggi, Mercuria traded 195 million metric tons of oil or its equivalent in 2013, according to its website. Non-oil commodities accounted for 46 percent of revenue in 2013 when the firm posted a 12 percent decline in net income to $273 million as stiffer competition and lower oil price volatility eroded margins, Chief Financial Officer Guillaume Vermersch said in May.

Banks including JPMorgan, Credit Suisse Group AG, and Barclays Plc. are withdrawing from commodities due to lower profits and increased regulatory restrictions on proprietary trading and capital requirements. Independent traders such as Mercuria, which is growing faster than competitors including Vitol Group, Trafigura Beheer BV and Gunvor Group, are filling the void.

JV Funding

The JPMorgan deal will give Mercuria gas and power trading operations on both sides of the Atlantic, physical assets spanning 40 locations in North America, an oil-trading book with a supply and off-take contract at the largest refinery on the U.S. East Coast, and 6 million barrels of storage leases in the Canadian oil sands.

Mercuria hired Magid Shenouda, a former Goldman Sachs commodity co-head, in May as global head of trading. Roger Jones, a former Barclays executive, left his position as Mercuria’s head of non-oil trading, the company said in June.

Pemex, already Mexico’s largest bond issuer, may sell more debt to fund joint ventures, Chief Financial Officer Mario Beauregard said in an interview on July 9.

A Pemex subsidiary is forming a joint venture with three other entities including the Enesa Energia SA, which is backed by Carlos Slim, to build a $650 million electric energy and vapor plant, the companies said on July 14.

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