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Analysis

Challenges Remain Despite Production Push

Tue, 01/21/2020 - 13:22

The future of Mexico’s maturing oil and gas industry will depend largely on the authorities that govern it. To turn the incredible resource potential that exists deep in the subsoil of Mexican territory into a reality that improves the lives of its population will require an industrywide effort from both the private and public spheres.

Despite the entrance of private players into the country, PEMEX remains the market giant. The NOC controls 81 percent of Mexico’s 25.1 billion boe 3P reserves as of January 2019, giving it a total of 20.5 billion boe 3P reserves. This year, PEMEX laid out an ambitious plan to increase those reserves by 35 percent via the development of 23 priority fields and a further 22 fields over the coming years. The revitalization of PEMEX will therefore be central to the market’s development, generating business along the value chain and reawakening the economy’s growth.

International ratings agencies Moody’s and Fitch both dealt blows to PEMEX this year. Moody’s downgraded PEMEX’s long-term outlook to Baa3, one grade above junk status, while Fitch downgraded the company’s Issue Default Ratings to BBB-, a junk status. Both agencies also cut their expectations for Mexico’s economic outlook, which caused the peso to weaken by 1.3 percent and demonstrated the centrality of PEMEX, the world’s most indebted oil company, to the Mexican economy. While Moody’s and Fitch applauded the new administration’s plan to refinance PEMEX’s US$106 billion debt (as of September 2018), they noted that financial support, including a capital injection of MX$25 billion (US$1.3 billion) announced in the government budget, was not enough. The budget for E&P would be insufficient to resolve Mexico’s main problem: replenishing reserves in the medium term. While PEMEX had set aside US$4.5 billion and US$4.3 billion in 2017 and 2018 for E&P, Fitch estimated that “PEMEX will require an annual CAPEX of around US$13 billion to US$18 billion to replenish reserves.”

Hector Rocha, Energy Partner at EY, believes PEMEX’s challenge is clear: cut costs while improving production. The company’s culture, developed in a monopolized market propelled by the Cantarell field and high oil prices, must be reshaped in this competitive cost-pressured market. “One of the major issues for PEMEX is its size. Because the company is so large, information is easily lost and decisions are difficult to make,” says Rocha. Technology must be utilized to reduce internal bureaucracy and deliver a more cost-efficient, faster decision-making procedure. “At PEMEX Drive 2018, the directors openly stated their belief that PEMEX has a problem with La Ruta de la Bestia (The Path of the Beast). This is the phrase given to the decision-making process at the state-owned behemoth; hundreds of approvals must be passed for any decision to come into effect. Removing this entrenched obstacle must be a priority for PEMEX,” he says.

PROCUREMENT ADJUSTMENTS
Supply chain players must also get used to the new centralization of PEMEX’s procurement procedures, introduced by the administration in an attempt to reduce potential financial waste or contract corruption. At the same time, there is a move toward disaggregation of service providers. “There is a tremendous push for disaggregating procurement within PEMEX,” says Carlos Sandoval, Vice President of Business Development at Arendal. “There is an intention to push government procurement through the SHCP and to use a centralized system for buying everything, including PEMEX goods.”

While the approach is likely to inject more competition into the supply chain with disaggregation offering the chance for PEMEX to acquire services from specialized companies, the centralization of the process is a return to pre-Reform practices that can lead to slow decision-making processes. The potential for interrupting progress is present. “Both of these issues will be dealt with in the future but they will certainly take time to get used to. The industry will have to wait and see how strategy may need to be changed,” Sandoval says.

TECHNOLOGY TAKES TO THE FLOOR
Mexico’s oil and gas industry has traditionally lagged behind in the uptake of advanced technologies. The average annual spending on science, technology and innovation was just 0.43 percent of the country’s GDP during the six-year presidency of Enrique Peña Nieto. However, with exploration to continue this year and the country’s mature onshore fields another focus for increased production, technology is to become increasingly essential to the productivity of the market. Edmundo Gamas, Executive Director at IMEXDI, characterizes Mexico’s historical approach to technology: “Mexico tends to adopt technology rather than produce it. Even in the country’s modern industries, tropicalization of foreign technologies is the standard model,” he says.

As a historical adopter rather than producer of technology, Mexico can certainly reap the benefits of technologies already tried and tested in other oil markets of the world. The country now has a chance to push technological development to address the needs of its own unique market. Initiatives such as Mexico Energy Council’s (COMENER) “Rocket and Rigs” competition, which supports the development of technologies that can be used by both the space exploration and oil and gas industries, is one such route. “Mexico should focus its efforts on becoming a powerhouse for technology development in specific areas that are critical for the national industry. A big step was taken in that direction by the IMP when it created the Deepwater Technology Center, which has the potential to become a strategic hub for the development of specialized local content and technologies to better develop deepwater fields in Mexico,” says Bernardo Cardona, Partner Energy and Resources Industry Leader at Deloitte Consulting Mexico.

Safety training is set to be an area in which technology use will also grow. PEMEX’s new Production Process Training Center will deliver high-fidelity training for workers in upstream production. The cutting-edge center, though not explicitly intended as a safety training center, will greatly improve standards. Carsten Röhl, CEO of Rheinmetall Mexico, explains: “We will focus on operational efficiency to avoid downtime and damage to equipment. By avoiding damage, we automatically save human lives and the environment.”

Hazardous environment training providers too are utilizing technology to deliver high-quality training courses at a distance. This reduces the costs that companies would have traditionally paid to send workers to training centers. Rebeca Barrios Morales, Country Manager of RelyOn Nutec says that digital training allows her company to expand its service portfolio. “Our client supplies us with a layout of its rig and from that, we generate a digital replica. This digital replica matches the physical rig in every way,” says Barrios.