Guillermo García Alcocer
Former Chief of the Unit of Exploration and Production Policies
Ministry of Energy
View from the Top

Adjusting Energy Policy to New Open Market Conditions

Wed, 01/20/2016 - 12:52

Q: Has the drop in oil prices affected the Ministry of Energy’s approach to upstream policy, and what does this mean for the Mexican oil and gas industry?

A: The global hydrocarbons market has been affected by several structural changes in the last few years, thus impacting in the entire industry. When we launched the first phase of Round One, the oil prices were around US$80/b but have dropped significantly since then. In spite of this fact, companies and investors are still seeing Mexico as an interesting playing field. Many companies have established offices in the country and technical teams are for the first time carrying out massive geological studies in our country’s side of the Gulf of Mexico, which is still relatively underexplored. For many companies, Mexico holds a strategic long-term importance, which is good news for us, as some companies are bound to be extremely selective about the countries in which they will invest and the kind of fields they intend to explore and develop due to the shift in prices. Mexico has an extremely attractive and diversified offering in this regard. In seismic studies that are currently being carried out with an investment of almost US$2.5 billion, almost all of the Gulf of Mexico is being covered, and that is a solid way to gauge the interests that companies have in Mexico.

Q: What types of market incentives is the Ministry of Energy introducing to guide energy policy, and how is this process advancing?

A: We presented our first version of our Five Year Plan in July, and afterward, we opened a forum for nominations, a process in which companies approached the Ministry of Energy to present feedback on the outline. After a careful look at what companies brought forward, when feasible and convenient for the state, we adjusted the Five Year Plan issuing the definitive version in October. The process will be carried out each year, with a revised version to be published after the yearly nomination process. This interaction proved to the companies that the Ministry is not only willing to listen to their input but within law and reason, implement changes for the benefit of all parties involved. For example, in the first plan, we were extremely enthusiastic and planning to offer contract areas with 3,200m of water depth, and we were promptly advised by companies that only two or three of them would be capable of working at such depths. Therefore, if we included those kinds of areas in the round, there would be a very limited number of possible participants, so we introduced more shallow deepwater sites of just over 500m and left the ultra-deepwater fields for future bids in order to attract a larger number of companies. Due to this feedback and ongoing dialogue with the industry, blocks changed before the tenders were launched, and we remain open to adjusting our offering according to the industry’s reasonable requests.

Q: What is the impact of the drop in PEMEX’s production on Mexico’s federal budget and the country’s ability to meet its medium and long term production targets?

A: A high percentage of our federal budget comes from the petroleum industry, but this has decreased sharply over the last few years. Ten years ago, 40% of the budget came from oil income, whereas today it is about 19%. Our income dependency is now lower due to the Fiscal Reform that was implemented in 2013, and this is important because, although oil production is a substantial part of Mexico’s federal income, we have also diversified into other sources of financing.

We estimate that first oil from the phases of Round One will be coming on stream in 2017, and from then onwards production from the ongoing bidding rounds will start to pick up. In the midterm, this new production will begin to compensate the drop in production from PEMEX. As for PEMEX, we must remember that through Round Zero, the productive enterprise of the State was awarded substantial reserves that allows it to sustain an important production platform for over 20 years without considering future discoveries and participation in the public bidding rounds. In an open market, like the one we now have in Mexico, it is not possible to establish fixed production targets, and much less intervene directly in order to achieve them. Long-term production depends on a series of external and internal factors, most of which are not under the control of any modern government. Current and expected prices, technological breakthroughs, abundance or lack of geological information, as well as changes in fiscal, technical, safety, or environmental regulation profoundly affect production targets. The Ministry of Energy can foster an environment that is as friendly and predictable as possible in order to attract investments in E&P. In this regard, we have conducted three bidding rounds within Round One with very good results. Thirty new companies have been awarded exploration and production areas, and the first privateproduced oil will soon enter the market. Nonetheless, the increase in private production will be a slow process and thus, significant results will only be seen in the medium to long term.

PEMEX is in the midst of a profound restructuring that we hope will only affect short-term production due to budget cuts and the implementation of a new strategy. PEMEX will have to focus on low-risk fields in shallow waters and look for farm-outs for other kinds of fields that will allow for the participation of companies with the capital and technology necessary to develop these resources in the most efficient way possible. We are committed to offering competitive contracting schemes, attractive bidding blocks both onshore and offshore, and long-term certainty so that PEMEX and private companies invest heavily in these kinds of projects.

Q: What is your view on PEMEX’s recently announced adjustment plans?

A: With the comprehensive and sweeping reform that was carried out in 2013, PEMEX is no longer solely responsible for every activity in the value chain. In this new scenario, PEMEX can concentrate activities on the most profitable areas, and leave the rest of the market to specialized private entities. For instance, any authorized company may freely import petroleum products from April 2016 onwards, as well as build storage facilities and pipelines. With this fundamental change, PEMEX can now leave those markets to companies that are more efficient and specialized, and thus concentrate on its core upstream business. PEMEX will concentrate its resources on shallow water and onshore fields, the areas in which Mexico’s NOC is a world champion.

PEMEX will postpone some activities, for instance in deepwater, and these can be revisited when it can find a suitable partner through the bidding process the law allows. Although PEMEX has experience in deepwater exploration, the next stage in its current areas, development and production, requires a completely separate set of skills that are not available to the NOC at the present time.