Pablo Guzmán
Management Consulting Leader
PwC Mexico
View from the Top

Designing a Successful Future for Oil

Thu, 10/12/2017 - 17:05

Q: Is the Energy Reform meeting PwC Mexico’s expectations and which areas still require improvement?

A: I think the implementation of the Energy Reform has been extremely successful so far. Nobody is complaining that the nation’s natural resources are being stolen, which has built trust in the processes. Everyone is fine with the international players, there is an emerging Mexican industry of operators and service companies and the behavior of the regulators as they carry out their tasks has also been an extraordinary success. 

Of course, some things could be done better, but I think it is a matter of maturity. For example, there is 110 years of history behind the Texas oil and gas industry, while in Mexico the Energy Reform is only 3 years old. As a country, including PEMEX, we are taking quantum leaps toward transformation and taking advantage of everything the reform has to offer. Now we have to work on the details, to start polishing the legal framework. It is an excellent reform from a legal perspective but some things need to be optimized. It would be ideal if PEMEX could work more effectively in alliances, especially upstream. The way the law is set out, PEMEX can foster strategic relationships to keep developing its most interesting and productive assets; it only needs to ask CNH to execute a bidding round for each farmout it wants to include in this scheme. The problem is that the NOC has never worked with this kind of alliance before, and because of the number of farmouts PEMEX needs to work with, it must become adept at handling these alliances and the respective processes. This is a huge challenge. PEMEX’s management must have the will to actually move in this direction by being more proactive. This, however, is relatively normal if you understand where PEMEX is coming from and where it is going. The process will eventually speed up.

Q: How would you evaluate PEMEX’s transformation since the Energy Reform?

A: It is a challenge to enter into a new industry framework. The most visual evidence of this challenge for the general public is the new gas station franchises. 

However, in terms of the upstream business in Mexico, new entrants are a small fraction of the overall industry and will continue to be for years to come. 
PEMEX will be the predominant player for the next 15 years, and many at the company still think this industry is theirs. One challenge for them is to live under new rules. For example, if the NOC has a block from Round Zero and it is decided that this block needs to migrate from being a direct assignment to being an E&P contract, like any other contract from the licensing rounds, there is a different fiscal treatment for whatever is going to happen with the production in this field. But PEMEX also must obey the terms and conditions applicable to all the different counterparties to this particular contract. That is going to be a challenge because PEMEX has never been called upon to do any such thing in the past. 

The reform was intended to build a high standard of trust, and in doing so we, as a country, have come up with complex E&P contracts. These contracts are difficult to execute not only for PEMEX, but also for new entrants. Normally, when an IOC enters other countries, it signs one contract with only one counterpart, and that counterpart must align with all the federal agencies. In Mexico, that is not the case. Operators or consortia must interact with eight different government agencies, such as the Fondo Mexicano del Petróleo, the Ministry of Energy, CNH and ASEA. Dealing with them is going to be challenging for PEMEX. For example, its current accounting system is different from what is required for the operators of the E&P contracts. Each accounting system has a different structure, purpose and objective. In the past, PEMEX’s accounting was designed to work for fiscal and budgetary purposes. Now, for E&P contracts, PEMEX needs to work with an accounting scheme suggested by the Ministry of Finance that is very different from the one they used in the past.