David Enríquez
Senior Partner
Goodrich, Riquelme y Asociados
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View from the Top

Creating Greater Value Under Real Market Conditions

Fri, 01/17/2020 - 18:42

Q: What still needs to be done to ensure the continuity of Energy Reform?

A: The Energy Reform has created attractive conditions for international companies to come and invest in the country. Nevertheless, this is just the first stage and we cannot state unequivocally that the Reform will continue being successful in upcoming stages.

One important parameter for keeping the framework on track is to have an effective, functional division between the policymaker (Ministry of Energy) and the industry regulators: CNH, CRE and ASEA. Regulators must ensure that activities are performed under the best security, quality and environmental standards, while keeping industry players economically competitive. This requires an even market playing field for all participants, while also acknowledging that PEMEX and CFE have an inherent market dominance and are performing their activities under asymmetric regulation. Meanwhile, the Ministry of Energy should be in charge of outlining and defining the public policy to be followed by the country according to its best interests. If regulators were to be subordinated and sectorized under the Ministry of Energy’s mandate, they would inherently lose their technical and economic autonomy, which is vital for them to exist.

While former President Commissioner of CNH Juan Carlos Zepeda was very clear when stressing that the institutional scaffolding of the industry regulators is enshrined in the Constitution, we should keep an eye on all these institutions and make sure that they remain autonomous for the benefit of the country. Mexico has to respect the regulatory and institutional design that has been established by the Energy Reform and that follows best international practices.

Q: What are the key priorities that the Mexican government should follow to ensure that the country remains a major oil and gas hub?

A: Governments that focus on productivity and efficiency at the institutional level and that align with international best practices create the strongest and most competitive industries. This game is not only about having a strong and profitable industry for companies; the industry should also create more jobs, higher security and better education and public health conditions for the population. This is achieved by creating the best market conditions for companies to work in the country. There are many examples, all over the world, where focusing on these measurable factors has been much more successful than focusing on political ideologies.

The Mexican government will have to prioritize projects based on ROI optimization, given its limited budget and high potential to fall deeper into debt. Concepts like national security and sovereignty are more abstract and much harder to measure than social benefits created by the revenues from a strong industry that is open to international competition.

Q: The AMLO administration has set an ambitious target to increase production to 2.6MMb/d by 2024. How realistic is that goal?

A: From the beginning, the Peña Nieto administration set high production expectations that were not achieved due to both internal and external factors. Now, the AMLO administration is following the same path by stating that in two years the country will produce over 600Mb/d extra through service contracts with PEMEX. Service contracts do not favor competition; they offer earnings based on a tariff and not on production, meaning that companies will not go beyond the basic service they are paid for to ensure production maximization. PEMEX, will have to absorb all the associated risks. This shows a lack of knowledge about the industry that sets false expectations, even with knowledge of a national reality of an almost 10 percent annual decline in oil and gas production.

 

Goodrich, Riquelme y Asociados advises IOCs and key players involved in exploration and production activities. Its services include representation in public procurement processes related to pipelines, LNG terminals and other downstream facilities.