Fernando Cruz Galván
Director - Energy Segment
Kannbal Consulting
/
Expert Contributor

Getting Mexico’s Oil and Gas Industry Back on Track

By Fernando Cruz Galván | Mon, 03/01/2021 - 09:16

Mexico’s energy sector has seen interesting developments since the Energy Reform was implemented in 2013. The Gulf of Mexico, for instance, was the most explored region in the world from 2015 to 2017. As far as we know, 68 percent of prospective reserves are still out there waiting for further exploration.

In 2020, the pandemic introduced a huge challenge to the O&G sector. The price of oil fell and the pandemic accelerated changes in O&G business worldwide. In the case of Mexico, we can add the challenges resulting from PEMEX’s financial deterioration and the difficult and delayed progress on production, which has impacted the whole value chain. Still, PEMEX remains the main player for Mexican O&G.

The global energy transition, in the context of climate change commitments toward 2050, has also accelerated changes and added pressure to reorganize businesses around efficiency and to come up with broad and flexible solutions to succeed. Changes resulting from the energy transition have also altered the cap value balance between traditional businesses and new business models; for instance, the market capitalization of O&G groups has dropped over the last five years while renewables are growing faster and higher. A remarkable case is Ørsted (an offshore wind leader), which has grown its capital value by 349 percent in the last five years while Exxon Mobil has dropped 47 percent in the same period.

As a result, O&G groups must reduce their break-even mark by nearly 50 percent in the next decade and implement deep changes to maintain profitability.

Gong back to Mexico, the evolution of the O&G business has been harder because we are also dealing with the component of low liquidity, where the impact has been shared between suppliers and contractors. As a result, they have lower investment capacity to access digital solutions, improve operational excellence, retain and improve talent, among other areas where companies are focusing to improve efficiencies. The limited investment over the last year and for the foreseeable future is a burden that hinders success. I remember when high oil prices allowed companies to subsidize inefficiency and variations in budgets were not a deal breaker. Now, a 2 or 3 percent variation definitively has an impact on decisions.

The path to recovery starts with a thorough analysis of the lessons we’ve been learning over the last year, embracing the fact that there is a different reality and borrowing solutions from other business sectors, such as technology, where change is a constant.

Technology is increasingly providing companies with the opportunity to collect large amounts of real-time data that can be transformed into actionable insights that enable the business to operate much more efficiently and productively. As well, traditional performance drivers would aim for more comprehensive parameters that include people, the planet and, of course, profitability.

In terms of relationships, collaboration is clearly another lesson we have learned. This means having leaner organizations with improved communications, including integration with partners, and embracing digital transformation to realize efficiencies and increase opportunities for revenue diversification and then recovery. As well, mergers are imminent, with large integrations and sharing of different service lines where synergies can be achieved.

On a day to day basis, Mexican O&G companies (operators and contractors) should keep in mind several tasks to manage business in the right direction, such as the use of data analytics to capture revenue and find more sources for it, maintaining a focus on digital transformation, retention and in-house development of talented teams using technology to capture younger generations (which by the way are not attracted to O&G) and pushing for ESG initiatives aligned with the energy transition.

By far, one of the main challenges for the O&G sector in Mexico is the lack of liquidity, as mentioned earlier. PEMEX’s weakness has been shared by the whole value chain, which has become a major risk for many groups. Credit availability is, of course, also limited given the current conditions. As a result, implementing thorough and responsible cost controls on a day-to-day basis is also key; a robust project management scheme should reduce leakages and improve operational results. In Mexico, most companies are small, which is also true in the O&G sector, and they are more vulnerable.

In terms of digital maturity, the O&G sector has been clearly behind other sectors such as telecom, financial services and IT. This is a challenge where rapid and practical solutions are needed in the short term while keeping in mind the long road to go so investment can be planned properly.

Regarding leadership, senior managerial teams require a solid set of soft skills. Changes in the business dynamics worldwide have forced relevant groups to switch from talented leaders with solid technical and financial backgrounds to more people-based profiles with skills to inspire, lead and develop talent, while also having knowledge of the digital and tech landscape. In this regard, succession plans are important in a sector where senior management is getting older and younger generations are not that attracted to the industry.

Finally, social, and environmental commitment cannot be left to a charity mentality. This no longer works. Businesses must embrace a more comprehensive approach where economic benefits have synergy with social wellness and equilibrated environmental impacts. The market will reward those groups that have embraced this mentality while those that still see this commitment as a matter of compliance will struggle to find opportunities in a different world.

Photo by:   Fernando Cruz