Fluvio Ruiz Alarcón
Professional Board Member
View from the Top

Looking Out for PEMEX in Round Zero

Mon, 09/01/2014 - 15:14

Q: Which technical and economic criteria were used to prepare PEMEX’s Round Zero proposal?

A: We specifically followed the 6th Transitory Article of the Constitutional Amendment on Energy. In terms of production, PEMEX kept the rights to the fields where it is already producing, which was already stated in the text of the Energy Reform. We included the legally mandated technical evidence regarding the operational and financial capabilities needed to continue production in those fields in our request. Concerning exploration areas, we solicited those areas where PEMEX has worked to reduce geological risk. As much as 2013 might be seen as an unsuccessful year in terms of exploration, we reduced the geological risk of several areas. By specifying the formations where we have not found oil, we have reduced exploration risk.

PEMEX presented a serious proposal that explained the match between our capabilities and the technical requirements of fields and areas requested. We did not ask for more than we can handle as we know that would put federal income at risk. The request was done in such a way that if SENER and CNH grant us 100% of what we are asking for, we can operate in every field and area, while still producing at an efficient level. We did not draft the proposal under the assumption that it was a negotiation process. PEMEX has a commitment to the country, so our logic was to ask for what we could operate. Our proposal is completely based on our capacity to deliver.

Q: How was the process of drafting this proposal handled within PEMEX?

A: Decision-making mechanisms for Round Zero involved several public servants as members of PEMEX’s Board of Directors. Besides that, our Board of Directors voted nine to one to shift the responsibility for the Round Zero proposal to the Strategy and Investment Committee (CEI). I was actually the only one to vote against it, since I preferred to support the suggestions made by PEMEX E&P. The CEI is composed of five members: José Fortunato Álvarez, Professional Board Member of PEMEX; Luis Videgaray Caso, Minister of Finance; Miguel Messmacher Linartas, Undersecretary of Finance; María de Lourdes Melgar Palacios, Undersecretary for Hydrocarbons of SENER; and Leonardo Beltrán Rodríguez, Undersecretary of Planning and Energy Transition of SENER. Videgaray Caso, Messmacher Linartas, Melgar Palacios, and Beltrán Rodríguez also sit on PEMEX’s Board of Directors, as well as Pedro Joaquín Coldwell, Minister of Energy, and Idelfonso Guajardo Villarreal, Minister of Economy. This shows the leverage that the government has over PEMEX’s decisions. When drafting our proposal, those officials had an important say on what PEMEX requested, ensuring it did not ask for more than it could operate.

Q: Does this direct influence from the government interfere with the autonomy of PEMEX’s management?

A: These people exercise great amounts of responsibility by being on both sides of the table. For example, some members of the CEI had to define the fields and areas that PEMEX would ask for in its proposal, and then decide on that same proposal. I greatly respect the public servants that are fighting for both PEMEX’s and the government’s interests. It makes my job easier as I just have to protect PEMEX’s interests for it to become a business-minded company. The Constitution gives SENER and the National Hydrocarbons Commission (CNH) six months to evaluate PEMEX’s proposal, twice the time that we had to submit it. Nevertheless, the process basically promotes the decision as a technical discussion between PEMEX E&P and CNH. This is the dialogue that lies beneath the definition of Round Zero, with the risk of a conflict of interest.

Q: Once Round Zero is concluded, how will the government ensure that the contracting framework attracts companies that could complement PEMEX on technology, knowledge, and human resources?

A: The secondary laws will define everything, the Energy Reform serves as the framework, but these laws will provide the fine print under which the industry will work. For example, the Energy Reform states that CNH will hold a tender to define PEMEX’s partners, should it look for joint ventures or associations for a certain field. However, we still do not know how this process is going to take place. This could have an irreparable influence on how PEMEX operates in the future. If CNH suggests a number  of potential partners that are technological experts and bring benefits to the table, then PEMEX will be happy with its choice. However, if CNH elects a partner that does not bring capabilities that complement those of PEMEX, we will not be satisfied. In my opinion, PEMEX should suggest to CNH which oil companies to bring into the process. In other words, the secondary laws should give PEMEX preponderant weight on selecting who to partner with. Sometimes, it is not just about partnering with the best company in technical and financial capabilities. Certain intangible benefits need to be taken into consideration when taking such decisions, such as the company’s technological spillover, training services, and the future project opportunities it might share with us. This would help PEMEX to continue developing its people here and in projects outside of Mexico. The secondary laws will need to clearly define these issues, since leaving them open to interpretation would lead to confusion.

Q: What are the implications of having several contracting models available in Mexico?

A: This will also depend on the secondary laws, but it will also be contingent on the institutional strength of the players involved. For example, SHCP will need to open up a specialized energy division, staffed with oil and gas experts, to truly gain the faculties the Energy Reform bestows upon it. Congress will have to build a specialized energy center, to match those that already exist for agricultural development, gender equality, or public finances. This new center would be tasked with reducing the information gaps that currently exist within the executive branch of the government.

Q: Where do you see PEMEX in 20 years?

A: I expect the current legislation to lead us to a scenario such as the one currently facing Norway or Brazil, 20 years after the liberalization of their oil industries. In these countries, NOCs have been consolidated as the dominant operators, while private operators are complementary and serve as an additional source of investment, technology, and specialized human resources. Under this scheme, it makes perfect sense to share the government take, which is what will happen under the Energy Reform. We have to clarify that no company will come here and risk its money without the proper incentives. For this to happen, the secondary laws must define those areas that remain up in the air, while integrating the public policies that have established Mexico’s oil bourgeoisie with specialized private service providers. A medium-term objective behind the definition of the secondary laws is that they should help to integrate efforts made by private companies into R&D centers and academic institutes. This combined approach will shore up the technological and scientific foundation of the national oil sector.