José Rinkenbach
Founding Partner
Ainda Consultores
View from the Top

A Change from the Roots

Tue, 11/14/2017 - 08:53

Q: You are creating a new investment fund. How will it be directed?

A: We are now at the final stage of creating the fund, which will be called Ainda Energía e Infraestructura. Through this tool, we will manage funds of between MX$4-5 billion. This will be invested in upstream projects for the oil and gas sector, in the support of infrastructure necessary for the development of upstream activities, such as ports, highways and airports, and finally, in power generation projects such as combined cycle plants and wind parks. The creation process of this fund started in 2015 and we expect to start allocating investments during the first quarter of 2018.

Many people in the industry are still looking for opportunities from companies like CFE and PEMEX, which would be a product-push vision for the implementation of projects. This kind of vision leads to investment in refined products. The push for development of refineries in the country is unnatural given the global fuel surplus and Mexico's ability to easily import fuel. This requires a very long-term vision to analyze if it works. Instead, Ainda is following a market-pull strategy. Our decision to invest in the aforementioned sectors is driven by the market and the needs we have detected.

Q: How hard is it to finance investments in a market like Mexico?

A: Financing is not scarce. If a project makes sense the money is available, and there are many investors in the world looking to invest. The real issue is the expertise required to place the money in the correct project. It has to be smart money to provide investors with security.

The path we are following is going to combine money with our knowledge and implementation capacity from the project developers, making the investment proposals extremely robust.

Q: Where will Ainda Energía e Infraestructura invest the most in the upstream segment?

A: We are looking at the winners of onshore and shallowwater projects. The awarded blocks of most of those rounds are mature fields with proven reserves, and we think that an investment there will be available to cash out in four to five years. To enter into upstream operations, we have developed a strategic alliance with Goldman Sachs, which is giving us plenty of strength. Goldman Sachs chose us as a strong ally because we think globally while acting locally, which is important in Mexico.

In this country, without local expertise, the projects will not see daylight. It is also essential to know how to act in a globalized world. Combining these two visions is what will make us successful in the market. We only invest when the operators are co-investors, so there is a riskreward alignment for them and for us, and this offers extra security to our allies.

Q: What factors are going to affect the development of the oil and gas industry in 2018?

A: The 2018 elections are not a big concern for the development of the industry. As most specialists say, it is extremely difficult to change the constitution. The biggest threat for the Mexican oil and gas sector is actually NAFTA. This is because all the big investments to come will be deployed by international companies. Without NAFTA, international companies will have to solve any issue that may arise in a Mexican court of law. No matter if the constitution remains the same or if we elect a president aligned with the opening of the energy market, uncertainty puts investors off. If the upstream sector becomes stagnant for this reason, the midstream and downstream sectors will also flounder as they are dependent on upstream. Unfortunately, this is something over which we do not have any control and we will have to wait until the renegotiations end. While this might be seen as a tremendous risk for any other investment fund, we are taking the safe route by investing in independent local operators for onshore and shallow water operations that, regardless of the outcome of NAFTA, will thrive in the country.

Q: What is hindering the development of unconventional resources in Mexico?

A: The social context is a problem in the development of unconventional resources. The licensing round for these fields has been postponed due to the presidential elections; no one wants to have social issues in an election year. Unfortunately, to develop an industry such as that in Texas, Oklahoma or Colorado, Mexico has to move toward unconventional fields. Sadly, in Mexico we are not aware of all the new technologies that can be used to exploit these resources, meaning people are still fighting against old practices that we could avoid implementing in the country. 

To change this mentality, we need to provide the correct information to educational institutions and to the public in general, but that will take time. I do not see this as an issue that will stop the unconventional resources industry, but I do see it as one that will delay its development. The fact that Mexican companies must negotiate with hundreds of people within an ejido instead of with one landowner, as it is in the US, makes the problem more complicated.

Q: What is needed to further develop offshore operations in Mexico?

A: The rules the government has developed are incentivizing the entrance of international companies, but at the same time they make it almost impossible for Mexicans to participate. This is due to the need for previous experience in offshore operations and a certain number of produced barrels to be able to participate as operators in the licensing rounds. The rules are there to make sure that operations are safe but changing the rules to allow more alliances between Mexican companies and the creation of junior operators would certainly provide a boost. We now have PetroBAL, Sierra Oil & Gas, Citla Energy and Jaguar E&P as big Mexican players but changing the rules a little would allow for the creation and expansion of even more. Allowing for this to happen could be considered as a second phase of the Energy Reform.

Q: What is needed for PEMEX to become a stronger NOC?

A: PEMEX is producing less each year and is also getting into greater risk positions. An important way to help PEMEX is to allow the NOC to sign more farmouts. PEMEX has budgetary constraints and is letting fields just sit there without producing oil, and even worse it has to pay taxes for them. It is much better to have 50 percent of something than 100 percent of nothing. As of November 2017, there have been only three signed farmouts, Trion, Ogarrio and Cárdenas-Mora, which sets a really slow pace considering that it has been five years since the implementation of the Energy Reform.

The purpose of the Energy Reform was not only to open the market, but to have a fitter and stronger NOC, and as of now PEMEX is not in such a good position. History shows how, after energy reforms were implemented in their respective countries, companies such as Petrobras, Statoil and Ecopetrol were still involved in 80-90 percent of the production activities in their respective countries. For that to happen in Mexico, we have to give PEMEX the financial strength and the autonomy it needs. PEMEX still has many legal constraints that make it very difficult for people inside to make important decisions. An employee of PEMEX is a public servant and making a wrong decision can cause unwanted exposure. Meanwhile, making a good decision does not provide any benefit inside the company. That is not good in a risky business such as oil and gas. We need to push for the system to offer the right incentives to the right people.

If PEMEX launches an IPO on the BMV or somewhere else where it could reap the benefits of an open and transparent market, it would greatly benefit Mexico. The government could remain in control of the company, but by doing so incentives would be changed and the decision-making processes would be improved with greater transparency. That is how Petrobras, Statoil and Ecopetrol became successful. If this is not done, I do not see PEMEX changing from the inside, which is what the NOC needs the most.