Gilberto Alfaro
Energy Partner

Financial Opportunities Embedded in Reforms

Mon, 09/01/2014 - 12:38

KPMG has long been able to put together complex evaluations that allow clients to make informed business decisions about those key issues that can have a long-term impact on their growth. Providing auditing and advisory services in oil and gas, taxes, infrastructure, retail, and consumer products, KPMG understands the unique challenges and problems endemic to each sector. It also matches up its local understanding with its global footprint to link up international best practices with local needs. “We can tell our clients how to implement programs in line with their strategy or processes, while we can also pitch new technology and software to help them adapt to the emerging trends in the industry,” explains Gilberto Alfaro, Energy Partner at KPMG.

KPMG was an external auditor for PEMEX until 2012, allowing it to grasp the complexity of the oil and gas business. “We have had a very good relationship with PEMEX. Emilio Lozoya Austin, CEO of PEMEX, has been extremely open with us and demonstrated his willingness to address the predicaments facing PEMEX by using external auditors as a resource to identify the root of the problems afflicting the company,” says Alfaro. He identifies PEMEX’s size, the level of segregation between departments, and burdensome red tape as factors that make working with PEMEX a tricky endeavor. “The processes are more focused on form than substance, which means many rules have to be followed to get any agreement signed. KPMG’s main achievement as an external auditor was the timely delivery of reports. The firm’s high performance resulted in a two year extension of our contract.” The knowledge and experience KPMG gained through PEMEX gave it the necessary skills to support the private sector in oil and gas activities and help it understand how PEMEX works. KPMG is helping its clients prepare for the changes in the Mexican energy sector and Alfaro explains that most customers have their own strategies and challenges. This is not limited to the national level, as KPMG’s customers also face international competitors. “Our clients might work or produce in Mexico, but the market is global and competition can come from anywhere. Sometimes companies located in Mexico are not able to match the price of foreign products,” Alfaro notes. He adds that efficiency in Mexico is affected by factors such as volume, technology, the cost of labor, security risks, taxes, permits, and bureaucracy. Companies have to consider these elements because they end up impacting costs as well. KPMG has several areas within its structure that allow it to keep up to date with the industry’s particularities, such as particular challenges and the ways companies in other parts of the world deal with similar situations. This is essential for the firm to maintain its reputation as a valued problem solver. “We have an auditing area and advisors specialized in oil and gas, taxes, and infrastructure, among other areas. As taxes and finances are a primary issue, our clients need to consider if they are going to import goods and from which location. The KPMG team can put together complex evaluation models that allow clients to make proper decisions, since these models factor in each company’s unique situation,” details Alfaro.

Energy will be one of the main triggers for the development of the Mexican economy, as it has a lot of implications for costs and pricing. “Mexico is in a highly privileged position as it has a lot of resources in both oil and gas and in renewable energy,” he mentions, while remarking that he believes the country is in a good position to use those resources for social and economic development. Alfaro regrets that previous administrations were not able to implement the changes needed in order to take advantage of Mexico’s resources due to social and political complications. He believes a larger participation from the private sector, which the Energy Reform now permits, will allow PEMEX to acquire valuable knowledge and technology as well as share risks, particularly in refining, transportation, and storage. “We need at least six refineries to supply Mexico’s demand for gasoline, and we need to triplicate the distribution infrastructure as the country is limited in that area. With the implementation of the Energy Reform, electricity prices will drop within two or three years,” Alfaro predicts. “If Mexico can cover its natural gas demand with US imports or increased production from the country’s natural gas reserves, our gas prices will match those of our northern neighbor.” He admits this will be difficult because the US has a different regime for land, and a raft of incentives in place. However, Alfaro warns that if Mexico is not able to reduce its LNG imports, the country will never be as productive or competitive as possible.