Carlos Campos Echeverría
Managing Partner
BC Legal Consulting

Energy Reform Strengthens Business Case for Alliances

Wed, 01/25/2012 - 12:30

“The best way to do business in the Mexican oil and gas industry under the new contracting regime is by means of alliances,” asserts Carlos Campos Echeverría, Managing Partner of BC Legal Consulting. “A developer that wins the bidding for a field is not interested in contracting 40 or 60 service providers, because he would need 40 or 60 managers to handle each one of the contracts. It is much easier to have one or two contracts with a group that incorporates several companies that aren’t necessarily subsidiaries, but companies that complement one another in terms of service and that make it easier for the developer to do business in Mexico.” Campos Echeverría believes that this is the secret of the 2008 Energy Reform, and the key to success for companies that now want to do business in the Mexican oil and gas industry. He points out that companies that could previously not afford to establish a large operation in Mexico, particularly those based in the United States and Canada, can come here by associating with a Mexican company, and be successful by complementing the skills of a national company already established in the market.

As an example, Campos Echeverría points to the collaboration between American-Canadian drilling company Tesco Corporation and Nuvoil, a Mexican engineering company. BC Legal Consulting is working to help additional companies collaborate in similar ways in order to augment the skills that the consortium can offer.

Campos Echeverría believes that around 20 new integrated service contracts will be awarded in 2012, creating more opportunities for service providers as new players start to operate on Mexican energy projects. “In this firm, we insist that our clients embark on strategic alliances to present a single offer to the operators of the incentive-based integrated service contracts. Mexico needs alternatives and the advantage of alliances is that the developer or owner of the field only has to deal with one or two persons instead of 20 or 40. In this country, contract administrators make a lot of money which ultimately comes from the operator. When we talk to new or potential operators, we suggest working with a group of suppliers and service providers that is made up of several companies with just one contract administrator. Operators like this concept, because it saves them a lot of money and streamlines communication and operations. Also, having more operators than only Pemex improves the conditions for suppliers and service providers. Historically, Pemex has been the sole operator, using its monopoly to set prices and terms. Mexico committed a historical error in never developing its own technology, because we just had one operator,” he says. It is also Mexico’s long term-prospects that should make it attractive  to foreign companies, Campos Echeverría believes, saying that companies that come to Mexico today have the opportunity to find business for another 80 years.

When discussing the demand for partners from both Mexican and international companies, Campos Echeverría believes that both sides show a fair amount of interest in collaboration. However, as he explains, “we have to spread the word outside of Mexico that business can be done under the new contracting model. The United States and Canada have thousands of small family-owned companies with advanced technology that can come to Mexico and do business. It used to be difficult, because Pemex only dealt with brands, and the conditions for a family-owned business were very tough. Even though you had a high-technology package, it was hard to get a foot in the door. Now you can do business without problems and partner with either companies from your country or companies from your country as well as Mexican companies. There are no financial or legal restrictions. You have the big advantage of being able to contract with other private companies, and that is very important.”

Companies that come to Mexico can expect to gain the advantage of local knowledge from their domestic partners, according to Campos Echeverría. “There are Mexican companies that have worked in mature fields and already know which well produces how much and what the potential of the various fields is. It might also be a Mexican company that provides you with the logistics of how to do business in Mexico. Yes, there is Mexican technology and the oil industry requires technological applications in many areas ranging from how to inject fluids into a well to how to optimize production levels. There is a technology culture in Mexico, but we need to further develop it. We have very qualified engineers and, most importantly, we know the ground and the subsoil and that is always important. For example, if you want to buy a mine and it already includes the seven dwarfs, you have more opportunities to succeed in that business. The Mexican companies are those seven dwarfs who know the mine and know the field, the logistics and the territory. You don’t necessarily have to associate, but it’s an option. The important point is that you can establish yourself and you have 80 years to do business.”

The technologies that Mexico needs, according to Campos Echeverría, are those that will help Pemex develop wells that are already producing. He points to the example of Venezuela as a country that had problems with the geology of its reserves, with low permeability and heavy oil. For Pemex’s Tabasco fields, American and Canadian companies will be best positioned to provide the advanced drilling technology needed to fully exploit them. He believes that Pemex has had so many difficulties to date in Chicontepec because the company has continued to use the same technology there for over five decades. Only recently has the mindset at the NOC begun to change. Campos Echeverría believes that this is one example of an area that is ripe for development through international partners.

Campos Echeverría concludes by saying that, “until a few years ago, Pemex did everything; it drilled, manufactured pipelines, did the compression; it handled the entire process by itself. As a result, Mexico never developed technology as other countries like Brazil did. But, thanks to the new contracting model, now is the time to develop technology, and more importantly, to develop a national oil industry. The country can get back on track to where the oil industry benefits all Mexicans. This is not just a political reality; it is an economic and business reality that already exists. Mexico is a country for big business and things will get even easier and more attractive in the years to come.”