A Framework that Endures Turbulent TimesWed, 01/20/2016 - 12:23
Q: What is the short and medium-term impact of the drop of the oil price on Mexico’s energy policy decision-making at this time, and how will this impact the implementation of the Energy Reform?
A: While this new price scenario represents a challenge for Mexico, it should be noted that the Energy Reform has granted the country new tools and mechanisms to adapt to the current circumstances and also take advantage of what these conditions present throughout the entire energy value chain. As a result of Energy Reform, Mexico has taken some important steps toward positioning itself as one of the most attractive countries to invest in exploration and production activities. There are companies capable of takings risks even in these economic conditions. Currently, these companies have significant financial strength and are the ones we are looking to attract with Mexico’s exploration and production bidding rounds. The most important thing for companies in this situation is to have a solid institutional and regulatory framework, transparency, and contractual conditions that can provide legal certainty to investors in the long term. There are also attractive business opportunities in other hydrocarbon areas, such as the transportation and storage of natural gas, pipeline construction, industrial transformation, and importation and commercialization of fuels, among others.
The fall in oil prices requires us to make moderate adjustments to ensure public finances remain strong, but it also presents us with an opportunity to make this juncture a catalyst for the full implementation of our Energy Reform and a new age for PEMEX as a more efficient productive enterprise of the state.
Q: What is your assessment of the success of Round One to date, and what are the main lessons learned and actions taken to continuously improve the framework for Mexico’s licensing rounds?
A: The three tenders of Round One have been recognized by experts around the world, as these have relied on the highest transparency standards. These proceedings were public, transparent, open to national and international participation, and streamed live. We are thoroughly satisfied with the results. Even during the current national and international oil market volatility, many national and foreign companies, alone or in partnerships, have shown interest and have participated in the bidding proceedings, confirming that blocks and fields offered in Mexico are attractive and competitive. As a result of these process, so far we have awarded 30 contracts to 30 companies from seven countries, including 20 Mexican players. The winning proposals guarantee excellent conditions for Mexico, with high profit margins above 70%.
Q: Which steps must be taken to ensure that PEMEX successfully completes its transformation into a productive enterprise of the state that has the financial and human resource needed to optimize value creation?
A: PEMEX is facing two fundamental challenges: accelerating its transformation to take better advantage of the opportunities brought by the Energy Reform, taking environmental sustainability into account, and at the same time, achieving financial and production improvements during an international dip in oil prices. Efficiency and profitability are a priority in all the procedures in order to achieve international competitiveness. Therefore, PEMEX is adjusting its cost structure, looking into its expenses program, and strengthening its investment procedures according to the new schemes of association and private sector investment brought about by the Energy Reform.
Q: What are the respective roles that PEMEX and private operators should play in Mexico’s oil and gas industry?
A: Mexico’s Energy Reform established a whole new legal and institutional framework, setting the basis for the development of open and competitive markets throughout the energy sector. In the hydrocarbons sector, companies can participate in upstream activities through competitive bidding rounds or in partnerships with PEMEX. In the natural gas sector, companies can participate in the expansion of the natural gas network through competitive processes for the development of strategic or social interest pipelines, as well as participating in the development of merchant pipelines at their own cost and risk when they deem supply and demand conditions favorable. As for the midstream and downstream sectors, companies can participate in industrial transformation activities, transportation and storage, and commercialization and retail activities by obtaining the corresponding permits. In terms of access to infrastructure, it is worth highlighting that the new legal framework establishes open access principles and the use of competitive service fees, established by the CRE.
The Mexican Energy Reform started from the premise that it was essential to introduce competition and specialized operators. This competitive environment will allow Mexico to attract the capital and specialized technology required to boost upstream activities, as well as the development of much needed infrastructure and the provision of highquality energy services. In this scenario, PEMEX, as a stateowned enterprise with the mission of creating value for Mexico, must focus on its key strengths to play a strategic role in the development of the new Mexican energy industry.
Q: How is the Ministry of Energy optimizing the competitiveness of Mexico’s upcoming deepwater round in terms of resource availability, fiscal regime, operating environment, and long-term investment protection?
A: The Energy Reform set clear rules and proceedings for the contract design and award process. It also strengthened the regulatory bodies, established clear interaction mechanisms, and accountability and transparency standards throughout the process. The Ministry of Energy leads the design of the contracts, establishing terms and conditions aimed at attractive top companies for the development of deepwater fields. We want to ensure that we are providing the most accurate available data for companies to make the right decision, and also that companies can operate under the best operational and environmental standards. We also expect this bid to accelerate the technology transfer process while establishing national content requirements that the Ministry of Economy will keep track of. Q: How is the dialogue between the Ministry of Energy and potential deepwater operators shaping the conditions of R1-L04? A: To ensure the best possible long-term conditions for both the Mexican state and companies, we have maintained a constant dialogue with several industry associations through established mechanisms, enabling us to offer flexible contractual conditions that are consistent with international best practice. Our objective is to design and award competitive and sustainable contracts that are attractive to the industry, but also aligned with Mexico’s best interest in the longer term. Companies can provide feedback through the Round One website. This information is reviewed on a regular basis, discussed and incorporated in case the recommendations favor the establishment of fair, competitive platforms. Some companies have emitted comments about R1-L04 which are being considered. The Mexican government is committed to providing new and existing companies with competitive investment opportunities while guaranteeing maximum operational standards and public safety.
Q: What should be the respective contributions of PEMEX, PEMEX farm-outs, COPS & CIEPS, and private operators toward achieving Mexico’s future production targets?
A: Mexico’s Energy Reform addresses, among other issues, the fact that after decade of continuous investment in E&P, oil and gas production continued to decline. Mexico’s new energy model allows for the participation of private companies as well as PEMEX, now as a productive enterprise of the state, individually or in partnership with third parties, in this strategic area. Through Round Zero, PEMEX was granted 83% of Mexico’s 2P reserves and 21% of the nation’s prospective resources. Therefore, the company’s activities will be the key to stabilizing and eventually increasing our current oil and gas production levels. PEMEX will have to optimize its operations in order to maximize productivity in different locations and multiple types of fields. The Energy Reform has granted PEMEX new tools, such as the farm-outs, that will allow the company to build strategic partnerships. We see farm-outs as an excellent opportunity for PEMEX to access fresh capital and state-of-the-art technology as the company moves into frontier fields to address its productivity challenges. CIEPS and COPS can also contribute to boosting the company’s productivity, but these are limited in number while farm-outs have a much greater potential to bring the production numbers back up. The company must also enhance its own performance, particularly in strategic fields.
Private operators can choose between participating individually, partnering up with PEMEX, or working in partnership with other companies in the bidding rounds organized by the state. So far, we have completed Mexico’s first three E&P bidding rounds with positive results in terms of allocations, contract design, and transparency. In December 2016, we will complete the much anticipated fourth bidding round for exploration and production in deepwater blocks. We are also moving forward in the planning of the upcoming bidding rounds and have issued a Five Year E&P Plan outlining our plans up to 2029. It is worth mentioning that different types of projects will yield first oil at different times. In the mid and long term, shallow water and deepwater resources will incorporate more barrels. We are working in the design of upcoming bidding rounds, taking into account this difference in time and the conditions each field demands for its optimal productivity.