Ernesto Marcos
View from the Top

Make the Most of Reform Options

Wed, 01/18/2017 - 07:16

Q: What impact did the fall in oil prices have on AMESPAC’s members?

A: On average, the service providers and contractors that make up AMESPAC have had to reduce their personnel by 70 to 80 percent since 2014 due to lower oil prices. Companies that are still active are trying to recover delayed fees from PEMEX. The only way to energize the industry is by making the most of the options made available by the Reform. This includes possible alliances with service providers and this is something we have tried to do through AMESPAC.

Q: How have Mexican service providers reacted to the difficult times and what financial structures are available?

A: In the early stages of the crisis, Mexican oilfield service companies in AMESPAC tried to maintain their technical capacities, such as keeping their engineers, geologists and other experts, and instead sold physical assets. But low oil prices and PEMEX’s reduced activity hit hard and they were forced to lay off personnel. Another reaction service providers had was to diversify and become operators. This is why Round 1.3 was so competitive, with aggressive bids involving high royalty rates that made some contracts unprofitable. That round displayed the appetite of service providers to keep their companies afloat and put their expertise to good use as operators of mature fields. It was in essence a survival tactic.

Another fundamental issue faced by oilfield service companies has to do with PEMEX’s contract migrations, which are considerably delayed. This is because PEMEX is still finalizing account settlements. In the past CIEP and COPF contracts established that PEMEX was not obliged to pay contractors if its cash flow was insufficient. When it comes to migrating PEMEX service contracts into production contracts under CNH, complications arise when settling the expenditures of all previous operations. The last reaction of service providers in Mexico has been to focus on their own evolution and how they can transform into acceptable and preferred contractors for the new, international operators entering the Mexican market.

Q: By October 2016 PEMEX had paid most of its delayed invoices. How has this impacted AMESPAC’s members?

A: The payment of invoices for finalized services was straightforward. PEMEX simply extended the payment dates and is now up to date with them. Problems arise when projects are suddenly cancelled before being finished as this results in more costs that need to be documented and legally processed. This process takes a long time to resolve and if companies lack operational resources they can sometimes go unrecognized.

Q: What legal action can suppliers take against PEMEX’s payment slowdown?

A: Most providers did not resort to legal action to recover delayed payments from PEMEX because the state company was often the only client they had. International companies facing this issue in Mexico accepted that if they demanded the payment from PEMEX it would be the last contract they would ever have with the company, and would basically amount to leaving Mexico. Mexican firms do not even have this option. The process is improving for two reasons. On one hand, PEMEX officials have the responsibility to fully follow up any debt with providers in a transparent way because they are civil servants controlling public assets. On the other, providers are no longer threatened with losing their only client because PEMEX is no longer the only industry player.

Q: What will be the most pressing need in the Mexican oil and gas industry in 2017?

A: We say that 2017 will be the year of the midstream sector. Mexico has only two days of supply in storage infrastructure for gas. Many aspects of the Energy Reform can help by encouraging strategic alliances and selling assets, for example. Think of gasoline supply to Baja California, which PEMEX has covered at great cost with imported product. Instead the market should be allowed to supply this area and PEMEX should abandon that costly obligation.