Fluvio Ruiz Alarcón
Professional Board Member
PEMEX Petrochemicals
View from the Top

Expectations and Outcome of the Energy Reform in PEMEX

Wed, 01/21/2015 - 09:41

Q: How is PEMEX dealing with the demand for transparency embedded in the Energy Reform?

A: The problem is that a need for transparency can be very easily confused with, or lead to, overregulation. PEMEX has a serious problem in this area. In the fallout from the Energy Reform, we need to distinguish between transparency and overregulation. The overregulation requirements are centered on the procedures and not on the quality of the decisions that are made. This is something that needs to be transformed. If we do not do so, the perception of PEMEX as a corrupt institution will prevail. One of the criticisms that I have made about the Reform is that Mexico is adopting some rules and regulations that can apply in other countries, but not here. For instance, the interdiction for company officials to have meetings with regulators has been a foolish thing, as it does not match our culture. Now you can follow CNH’s sessions online. These sessions are five minutes long because the important things have already been discussed and agreed on; the meeting is only a formality. This is one of the reasons why I truly believe simplification is needed.

Q: What are the main differences between what the policy makers expected PEMEX would become after the Energy Reform and what it has actually become?

A: The very first thing relates to the context. The Energy Reform was done in a very ideological fashion and in a context where the oil price was at US$100. The Reform was created by a very small and select group within the government, one with a very particular vision. Among the central elements of this vision is that oil should be seen as just another commodity. This happens right when the members of OPEC remind us that oil should not be seen as such, but rather as one significantly related to geopolitics.

One cannot expect that it will not be necessary to make adjustments as we go by. It will be necessary to adjust and correct as we move forward, there is no doubt about it. This year should be a period of evaluation of the changes that have been approved. If we need to make adjustments later on, let us make them. There is nothing wrong with that. For instance, shifts in the oil price might very easily imply the need to make adjustments in PEMEX’s strategy. What I mean is that there needs to be a sense of flexibility in the application of the Energy Reform. These are subjects that Congress did not foresee. We need to take a moment to reflect, analyze, and make the corresponding adjustments as needed. There are still significant gaps between what the law orders PEMEX to do and what is acceptable in reality. One good example relates to the budget costs in oil companies. All major oil companies in the world have cut their budgets following the drop in the oil price. Yet, there is a very significant difference that we must keep in mind.

The Minister of Finance in France, Norway, or the US did not announce spending cuts as a result of the decrease in oil prices; the Mexican Minister of Finance did. The public nature of PEMEX and its weight on Mexican public finances lead to what I see as a serious burden to the Energy Reform. The Treasury should not have announced that PEMEX will make cuts. What happened to financial autonomy? The law indicates that if PEMEX faces a decrease in its revenue, the Board will then have the responsibility to decide whether to make cuts or not. That was not honored.

Q: How will the fiscal regime influence PEMEX’s performance?

A: PEMEX pays taxes equivalent to 70% of its income. PDVSA pays half of that, Petrobras close to 30%, Statoil 15%, and Ecopetrol 11%. There will be a strong political discussion, especially when people realize that any international oil company pays less than PEMEX. The situation in Mexico needs to change. PEMEX should ultimately pay 35% of its income in taxes and the government should work on increasing tax collection from other sources. As the new fiscal regime comes into force gradually until 2019, PEMEX’s fiscal responsibilities will decrease from 70% to 60% of its income. This should be lowered even further. Of course, for that to happen, it is necessary that other sectors pay more taxes. At the end of Round One, we will know the specific contract regime that the state will sign with international oil companies. It will then be clear how similar these regimes are to the regime of PEMEX. I would think that the fiscal regime imposed on international oil companies should be very similar to that of PEMEX, if they are all operating under similar geological conditions. Furthermore, the Treasury will wield huge influence on how PEMEX develops and invests, especially as the Minister sits on the Board and has a strong influence on every decision made. This is a paradox. On the one hand, the Mexican state wants a national oil company that works as any other international oil company. On the other hand, it still wants to control all of the central decisions made by PEMEX because fiscal policy depends substantially on oil revenues.

Q: What should PEMEX look for in potential partners for joint ventures in Round One?

A: For me, the main point should be the transfer and application of technology. The ideal partner is someone that has something to teach PEMEX, mainly in managing and thinking about costs. This is not limited to learning about the Mexican sector, learning about the global oil sector is crucial for the NOC.

The current regime might give PEMEX the flexibility to aim for an exchange of project participation with other companies. In the specific case of trans-boundary fields, the law demands that at least 20% is owned by PEMEX on the Mexican side. This means there will be cases in which PEMEX will cooperate in projects with other companies. The regulation requiring PEMEX to own at least 20% of the projects on the Mexican side in trans-boundary fields does not show a strong concern with national security. In fact, one of the greatest absences in the Energy Reform, derived from the belief that oil is like any other commodity, is a reference to national security. I am convinced that in the case of trans-boundary fields, PEMEX should be the operator on the Mexican side, owning at least 51% of each project. This idea that oil is like any other commodity is a serious oversight. I have not heard any discussions on who will be responsible for protecting the installations developed by foreign oil companies in Mexico. This issue also needs to be addressed.