Fernando Cruz
Mexico Business Director
Dolphin Drilling
Expert Contributor

Business Plans 2022: Time to Invest in Energy or Play It Safe?

By Fernando Cruz Galván | Tue, 10/26/2021 - 15:03

In my previous article I wrote about the turbulent times in Mexico’s energy sector, specifically in O&G. Among the key factors to consider are PEMEX risk, the Talos dispute, the progress on investment from the private sector and the economic recovery.

We are close to the year-end and most of us are intensively working on our business plans for next year, forecasting what could come but also thinking hard about investment, which probably is one of the most difficult components to assess properly given the uncertainty we continue to experience as a result of the turbulence in the energy sector in Mexico in line with governmental initiatives.

I’m sure you’d agree with me if you collaborate with a global group that it is difficult to have a fluent and comprehensive understanding of the business among board members and regional leaders in regard to what is happening in Mexico’s energy sector. Unfortunately, the perception outside Mexico is sometimes quite different from the perception we normally have within Mexico. Of course, everything is related to decisions made by the administration that have severely impacted the certainty needed to decide on investment.

The narrative of the changes proposed by the government is totally designed to persuade its voting base, or average citizens, so it can maintain a solid position going into the next presidential elections in 2024, while the level of discussion we should be having as a country should be focused on technical/strategic arguments, looking at the long term and keeping in mind the energy transition, for which the negative gap with other regions is growing every day.

In relation to the O&G sector, there is some certainty as the government is supposed to honor the contracts produced as a result of the 2014 Energy Reform but is this really moving in the right direction? The problem is that, based on the facts, we have seen how the cancelation of key private investments has damaged the confidence in a government that follows rules in its narrative while breaking them with specific actions and here we are now scratching our heads over the proposed electricity reform, which clearly most experts agree is a terrible reform that will severely harm the country. More importantly, it will put our energy security on a very weak footing. It will also increase our disadvantage with the rest of the world in terms of competitiveness.

The misconception of energy security versus energy sovereignty is determinant of the actual situation. These days, global interconnection and interdependence is way more important for securing energy sources no matter where they come from (domestic, imported, public, private) rather than ideological aspirations of sovereignty. A government that deliberately avoids the word “renewables” and uses “intermittent sources” instead, tells us a lot about priorities and direction.

Therefore, going back to my original question, is it time to plan for investment in 2022 or is it better to hold out for more visibility? I would say it depends not only on the energy segment your business is in but also the specific niche. In different discussions with contacts and friends in the sector, I’ve seen a diversity of opinions in regard to investment; of course, those related to renewables can hardly see a reliable path forward. Even if the electricity reform fails, the road is full of potholes and unexpected detours. On the other hand, for O&G, those connected with exploration and field development have a positive outlook, as well as those connected with key infrastructural projects. For many others, the outlook involves playing it safe, not risking much and trying to remain as stable as possible.

For now, foreign investment is still below last year’s reference by -1.8% and well below to the highest experienced in July 2018 (-16%). I’m afraid we will see marginal monthly improvements, but it is difficult to see it reaching the higher levels we had in the past.

All this makes it increasingly difficult to forecast with enough accuracy the ups and downs in the energy sector. The government constantly proposing change to something does not help either. Therefore, if you are in the process of planning your business for coming year(s), here are some elemental tips:

  1. Focus on the big picture.
  2. Use logical and simple metrics.
  3. Be realistic and never forget the “what if scenarios,” and, these days, we need to consider as many as possible.
  4. Benchmark your hypothesis, talk to colleagues in the sector and try to acquire as many opinions as possible.
  5. Check local, specialized media and contrast with international media.
  6. Prioritize and only allocate resources to those objectives with the highest potential.
  7. Follow the assets. In some sectors, the market follows the asset and, in some others, the market determines the need for an asset. Key assets in O&G, for instance, are ramping up utilization, resulting in higher pricing.
  8. Visibility is never enough. Do not tie your investment plan to the resolution of X or Y government initiative or reform. Go to the bottom line: is the market trend solid enough to move forward even in the face of those government attempts?
  9. ESG is fundamental and will be increasingly so in the future. Whether you expect to grow or downsize, ESG should be central in your plans.
  10. If you are forecasting for a global group, add some flexibility but do not push too much, bearing in mind foreign perception about Mexico can be on the negative side these days (avoid sandbagging!).
Photo by:   Fernando Cruz