Emilio Lozoya Austin
View from the Top

Building the PEMEX of Tomorrow

Mon, 09/01/2014 - 14:16

Q: Which changes in PEMEX’s institutional mindset are essential to successfully transform the company into a “productive enterprise of the State”, and what are the highlights of your progress to date?

A: The Energy Reform establishes a very clear goal for PEMEX: to transform itself into a productive enterprise of the State in two years. To be successful in a new international context, we are transforming our strategy, structure, business processes, and even our corporative culture at a very fast pace. This implies changes in individual behavior, attitudes, and values. We will have budgetary, operational and management autonomy, but at the same time, we will be facing competition for the first time in 76 years. We want to have a stronger, more dynamic, and profitable company that, by becoming a productive enterprise of the State can contribute even more to the development of the Mexican economy. For instance, PEMEX has not changed its corporative structure since 1992, and today we require a much more agile structure so we can develop opportunities in the short term. After the approval of the Energy Reform, one of our first fundamental changes was to modernize the PEMEX purchasing structure through the creation of the Supply and Procurement Corporate Direction, which will make the procurement process more agile and transparent. With this, we are homogenizing the procedures, which will allow us to save around 5-10% of the US$25 billion worth of purchases this year. Furthermore, this concentration of functions into one area will allow us to comprehensively plan our spending, based on our long term needs and have a trustworthy list of our suppliers and contractors. These changes will give PEMEX the tools to compete in an open market, just as in any other oil company in the world.

Q: How can PEMEX plan its future strategy while Round Zero has not been concluded, and which impact could the outcome of this round have on the strategic direction of the company?

A: In compliance with the dates established in the Energy Reform, PEMEX sent to the Energy Ministry its application for the productive fields and prospective areas that it wants to develop. We requested to retain exclusive rights to prospective oil resources, mostly those where we have already had drilling activity. In general terms, we included fields that are currently being exploited, those that are in an advanced stage of development, and fields that have a strategic role and advantages because of their location or specifications. In addition to these fields, we will seek to keep exploratory opportunities in deep waters and shale gas formations. Therefore, we will be focusing in the areas we have successfully been developing, but also have the opportunity to add joint ventures with other international oil companies to complement our investments. In the end, our goal is to allow Petroleos Mexicanos to have enough reserves to ensure our sustainability in the medium and long-term, while giving the market sufficient resources to develop through the private sector. We need to assure our company’s growth and our place as a leader in the oil and gas industry in Mexico.

Q: How does the Energy Reform affect PEMEX’s short, medium, and long-term financial and operational priorities?

A: With the Energy Reform, PEMEX will consolidate its place as the most important company in Mexico and one of five most important oil companies in the world. The thorough reform process we are undergoing will be a game-changer and can imply a doubling or tripling of the investment rate in Mexico. We have to transform hydrocarbons into employment, technology, infrastructure, and the development for our people. Since the start of the natural decline of Cantarell, we had to invest heavily to reverse those losses and focused on the diversification of our production strategies. We have balanced out the production by increasing the output of fields such as Ku-Maloob-Zaap or Crudo Ligero Marino. In addition to that, we revitalized mature fields such as Ébano, Delta del Grijalva, and Cinco Presidentes through the adoption of Integrated Service Contracts, which will have the option to migrate to different contracting schemes after the secondary legislation of the Energy Reform is approved. We need to increase the production of hydrocarbons to the level that the Mexican economy requires to satisfy its own demand, but we also need to have more oil to export. We need to go from $25 billion of investment a year, which is limited only to PEMEX, to more than $60 billion for the industry as a whole. To keep up with production, we need to increase the reserve inventories with new discoveries and reclassify our existing reserves. We have to increase the average oil production and, at the same time, we have to keep on replacing our proven reserves at or above 100 percent, as we have been doing since 2008. To keep the production stable with prospective to grow, we need to optimize investment, operating expenses, production operations, distribution, and commercialization. With the recently approved Energy Reform, PEMEX will have the possibility to reach new heights in the coming years.

Q: What are the main misunderstandings in the national and international perceptions of PEMEX, its capabilities, and its ambitions?

A: PEMEX is the most important company in Mexico, has a very good reputation in our country, and is currently providing a third of the Federal Government’s fiscal revenues. At the end of the day, PEMEX’s efforts end up building one out of every three schools, one out of every three hospitals, and one out of every three kilometers of roads in the country. International oil companies and medium-sized oil companies across the world are very eager to work with us, because despite the lack of flexibility we have faced over the past decades, we still are a leading global player, particularly in shallow waters. In deepwater we have also evolved technologically, and have had a success rate of over 50% in our exploratory drilling campaign. Therefore, international and other medium- sized international oil companies are very eager to work with us and we are eager to work with them. Considering that we have one single owner which is the State, PEMEX has very long-term goals and investment cycles, and this is beneficial for our partners or our potential partners. We have just celebrated our 76th anniversary and we are here for the very long term. We foresee that the new energy revolution that is happening in the North American shale plays and the US Gulf of Mexico’s deepwater reservoirs is a game changer, not only for the region but for the global energy industry. Therefore our long-term goals will continue to be long-term goals.

Q: How will PEMEX address the challenge of aligning the skillsets and business philosophy of its large workforce to the company’s new institutional objectives?

A: We have to undergo a tremendous cultural transformation, to become more efficient and transparent, but one of our main assets is our human resources. One of the biggest challenges we foresee is the talent trap: to attract and retain the best human capital. PEMEX has been the dominant entity attracting talent in the Mexican oil and gas industry, particularly in exploration and production, but competition will surely change the current state of affairs. Therefore we need to work very closely with the Mexican universities, which are producing thousands of engineers a year, to ensure that they want to come and work for PEMEX. We also started to modernize technology management and develop talent that is already in PEMEX. Human resources are PEMEX’s greatest asset, and that is why we have started to invest in continuing education for our workers through the PEMEX University, which is focused on the needs of our business and that will allow them to acquire very valuable skills in the years to come.

Q: What are the mechanisms that PEMEX is implementing to accelerate technological development or acquisition, as well as attracting people with international expertise and experience, in order to compete with NOCs and IOCs in the future?

A: With the changes the Energy Reform will bring, we will be able to build partnerships with private companies that have the most modern and efficient enhanced oil recovery methods to enhance the efficiency of our crude oil extraction. PEMEX already has state of the art upstream technologies, such as our four sixth generation deepwater drilling rigs. At the same time, we are the best shallow waters operator in the world, and our technology and level of expertise and have been proved throughout the years.