Assessing the Industry's Strengths Going Forward

Q: What is the extent of the changes introduced by the Energy Reform five years after its adoption?

A: The changes have been quite positive, with the commitment of a series of IOCs and companies from different countries to the development of Mexico’s energy industry as the major highlight. There is a good spectrum of long-term investments, ranging from 25 to 50 years. This reflects the opportunity Mexico represents for the hydrocarbons industry and the international community is aware of that, backing the market with US$160 billion already committed for future projects. Low-risk exploratory blocks awarded during the first rounds pushed production estimates to around 40,000 b/d and we got a positive surprise in Round 2.4 due to the dimension of the projects awarded. The industry is expecting new discoveries and this will reshape the future of the hydrocarbons industry in Mexico.

Q: How have licensing and production-sharing rounds evolved to become more attractive over time?

A: Mexico has gone through a learning curve quickly and successfully. Interest in the country’s fields was present from the beginning but the lack of experience in handling day-today operations required different implementations. In the first three licensing rounds there were no down payment tie-breaker mechanisms, no pre-awarding awareness on maximums and minimums for the blocks’ additional royalties. However, during and after Round 1.4 the feedback from the industry was well-received by the Mexican National Hydrocarbons Commission (CNH) and applied to future rounds, making them more competitive for both the industry and the state. Licensing and production-sharing rounds have also attracted different players and different types of blocks have been tendered, which has created a varied market behavior.

Q: What is the result for PEMEX in terms of new opportunities and challenges?

A: PEMEX has seen its production potential increase after the industry’s opening. The NOC needs to develop the fields it was awarded in Round Zero mostly through farmouts, and it is in a privileged position as this scheme will lower its exploratory and financial risks. The Energy Reform is also encouraging PEMEX to incorporate better and different financial mechanisms, such as the Fibra E, which has not been exploited yet, and potentially publicly listing part of its equity, although an additional reform would be required for that. The company has also learned how to be more competitive and to open itself to larger multicultural associations with IOCs from around the world. Other big challenges PEMEX faces right now include wider competition in the downstream sector, particularly in retail, and possible financial constraints, but this is why partnerships are necessary.

Q: How has the regulatory framework increased KPMG’s client portfolio and which gaps should be addressed?

A: We have seen our three major business lines grow exponentially. In auditing, because we manage the largest companies in the hydrocarbons industry in Mexico. In tax, since we help structure our clients' investments so their capital enters their home countries and revenue is repatriated efficiently. And in consultancy, where we are conducting market studies to see where companies are competitive and management consulting to plan their operations and project their future growth. This is why we have seen our business grow since the reform was enacted.

Regarding the gaps to fill, meeting local content requirements is an area where we have had advisory operations and it has been easy to cover so far. But as investments flow and they grow larger, meeting local content percentages will be harder to achieve. There is a need to bind Tier 1 and Tier 2 service suppliers to local requirements since they only apply to operators at the moment and industry players need to work under coordinated rules to make sure there is a commitment to deliver. This is particularly important since CNH and the Ministry of Economy are working to verify that local content requirements are met and their processes are carried out over time.