Energy Reform Creates New Opportunities for PEMEX

“If someone had asked me in July 2013 about the scope of the Energy Reform, I would have never guessed that it would go so far,” stated Luis Vielma Lobo, Director General of CBM. This summarizes the reception that the document passed on December 21, 2013 has garnered among those with international experience in the oil and gas business. The Energy Reform addresses the main issues that Vielma Lobo believes should be dealt with in any structural transformation process such as the one being undergone by the Mexican oil and gas industry. “Based on my experience, including Venezuela opening up its oil industry in 1992, any energy reform should address certain issues to send a clear message to the international community and attract foreign investors,” explains Vielma Lobo. For starters, in its wording, the Mexican document clearly states as an introduction that all hydrocarbons located in the subsurface of the nation’s territory belong to Mexico. “After reaffirming the state’s ownership of the resources, the document establishes that PEMEX will not be privatized, but rather strengthened and empowered to make better decisions from the financial and strategic standpoints by being turned into a decentralized institution.” This decentralized institution, legally referred to as a ‘productive company of the State’, will have budgetary and administrative autonomy. “The Energy Reform intends to alleviate PEMEX’s burden from those aspects that hinder its development,” claims Vielma Lobo.

“PEMEX will receive a determined budget from the government, which shall act as a shareholder. This budget could be approved based upon a commitment on PEMEX’s delivery on certain results, such as producing a set amount of barrels,” he explains. “Acting as a shareholder, the government will receive a certain profit per share, which in this case could come through taxes and royalties.” This autonomy comes with the responsibility to satisfy the shareholder’s wishes, which are still to be defined by the secondary laws. However, it will keep PEMEX’s budget safe from having to serve as the country’s petty cash fund, Vielma Lobo asserts.

In a move that surprised Vielma Lobo, the Energy Reform passed by Congress even specified the different contracting models through which Mexico’s blocks can be tendered. “Many other countries have not addressed this issue so openly. This is really beneficial for everyone involved, since it gives international companies a better idea of how Mexican opportunities can be seized,” says Vielma Lobo. PEMEX will also have the chance to revise its E&P policies without the constraints of being a government branch. “Under Round Zero, PEMEX will have the

opportunity to select the areas where it wants to operate before anybody else. The NOC will finally get the freedom to form alliances, partnerships, or joint ventures with the companies that the executives see as having the necessary competences to help PEMEX improve its execution capacity and technological capabilities.” In order to get there, the government will have to redraft a clear taxation strategy that removes elements of uncertainty that put international investors off Mexico and provides PEMEX with the budgetary autonomy to continue developing as a business. The Energy Reform addresses this matter by establishing that new mechanisms of levying operators will be instituted. “Until now, PEMEX has been subject to different tax regulations for each of the different segments it is involved in. For example, the company is taxed differently in mature fields, for fields that produce more than a certain amount of oil, for fields that produce gas, and for reservoirs at different depths,” details Vielma Lobo, when describing the labyrinthine way in which oil and gas duties are collected. “This will be reviewed under the secondary laws of both the Energy Reform and the Fiscal Reform and give way to a simpler procedure that maximizes the fiscal income, levying both PEMEX and the new operators.”

Another main issue that the Energy Reform addresses is the required sustainability for oil operations to continue for decades to come. This is a very important point in Vielma Lobo’s opinion, since it encompasses some of the main issues currently affecting Mexico’s oil operations. “The Energy Reform also includes the creation of an autonomous oil fund, removed from the hands of the government. The creation of a fund and, more importantly, the fact that it will be managed by the Bank of Mexico, an organization that is not directly dependent on the government, will help the national industry to grow in a way that benefits the country’s development,” he claims. This fund will collect a percentage of the royalties paid by companies operating in Mexico, and allocate it to infrastructural development and technological innovation.

“The government’s priorities will be the same but the strategic focus to get there will be completely different,” predicts Vielma Lobo. Audits and control mechanisms will now be performed internally and externally, with clear business objectives being used to set new yardsticks. “PEMEX is not familiar with competition; now its home turf will be entered by international companies used to different standards. This will create a real-time benchmarking process, to which PEMEX will quickly have to adapt. The Energy Reform gives PEMEX a new chance to become a better company,” Vielma Lobo concludes.