Managing the Flow of FundsWed, 01/18/2017 - 11:10
Q: How has the FMP’s relationship with authorities and regulators evolved in the last year?
A: It has been excellent. The Energy Reform is something that happened very fast as the Fund started operations in 2015 and we already have a full round of oil bidding processes under our belt. CNH is about to launch Round Two. Because of the speed at which this happened some elements in the law were not very clear or only partially defined.
Today, the responsibilities have been assigned to each authority and coordination is good. This year one of the main elements of the reform is the creation of the new market agent for the state and this is bringing the Ministry of Finance, Ministry of Energy, CNH and FMP together to make this a reality. Before, PEMEX’s PEP unit handled crude oil marketing duties in Mexico and its PMI Comercio Internacional unit did it abroad. Now the law allows for one or several companies taking over these duties for all hydrocarbons and that is a challenge that demands great coordination.
Q: What will be FMP’s role in this new state marketer?
A: Legally FMP is responsible for requesting that CNH hire the market agent from 2018 through a bidding process. PMI will act as the market agent throughout 2017. From 2018 onward the market agent will be the winner of the bidding process that CNH will launch. The most important area where the Fund and its technical committee will be participating is in establishing the maximum price the market agent can charge for its services. It has to send an opinion for CNH to consider, including pricing schemes like a fixed quota or a percentage of the sale. This is a work in progress right now.
Q: What has been the Fund’s strategy to consolidate its operations in such a short time?
A: From the start of its operation, the Fund established three clear objectives: administer the oil income and make the corresponding transfers, handle the financial dealings of the oil contracts and administer the long-term reserve. The latter will take some time to consolidate because with oil prices at current levels it is difficult to foresee annual revenues arising from hydrocarbons production activities to surpass the 4.7 percent of GDP threshold that has been set before we can begin accumulating a long-term reserve. Therefore, our efforts have focused on the first two.
Immediately after we started operations back in January 2015, we concentrated our efforts on preparing the infrastructure required to receive the oil income from PEMEX and transfer it to the different stabilization funds and the Ministry of Finance.
Another project that was fundamental at the beginning was the design and implementation of our IT system, the System for the Payments of Assignments and Contracts (SIPAC), which had to be ready before the contracts came into force in August and allows us to receive all the information in the contract. In this sense, we have been able to set effective short-term objectives to comply with our two main functions. In the near term, we will also be in charge of receiving the funds of the state market agent, including the VAT, which has to be transferred to the Mexican Tax Authorities (SAT).
Q: How are you ensuring your stakeholders that operations are transparent?
A: By law, the Fund has to observe strict transparency obligations regarding the information about production of the new E&P contracts. In particular, the Fund is obliged to publish the volumes produced in each contractual area, as well as the costs, expenses and investments incurred by the contractor as part of its operations. The Fund receives and processes this information through SIPAC and later publishes it on its website. In this way, even if a third party would like to reproduce the Fund’s figures and calculations it could do so through the information we make available.
Transparency is not an end in itself because a large part of making this information and costs publicly available has to do with another important objective of the reform, which is generating increased competitivity in the Mexican market. With more operators and participants there is a need for everyone to guarantee they are operating to the highest and most efficient industry standards. The public has to know that companies are not generating inefficiencies or incurring costs for the state above the international standards. Specialist will be able to see the cost of drilling a well in Mexico and compare it to similar operations in other parts of the world.
Q: How is the FMP structuring its collections mechanisms?
A: Ninety percent of the Fund’s income is generated from PEMEX assignments, with the remaining 10 percent coming from the new E&P contracts. Although the share of income from contracts is still small they represent the largest share of workload for the Fund because we are responsible for the administration of the financial aspect of each contract, while for PEMEX’s assignments this is not the case. The complexity arises because the contracts from a particular bidding process contain a specific economic model, which differs for each bid.
There has been a steep learning curve for both the Mexican Petroleum Fund and the contractors and with time there has been an improved understanding of the calculation mechanics and the different economic models. This has been complex because each of CNH’s bidding rounds has introduced tweaks to the contract model. There are adjustment mechanisms, for example, to change royalty payments in view of the price of oil and these terms change from contract to contract. On our side, we have to make sure that after every round and with every contract we incorporate these new economic models into our system. The contractors themselves are in charge of making the calculations for their own payments, our system acts as a verification tool in case of discrepancies.
Q: What effect does the higher relevance of royalty payments over the additional investment factor have on the Fund’s operation?
A: The operation of the Fund has not been impacted by recent changes on bidding design. For instance, in the Trion bidding the upfront payment played an important role in determining the winning bid but once those resources reached the Fund they basically followed the same treatment as those received from royalties and were distributed to the stabilization funds and the Federal Treasury. Upfront payments or royalties only affect the timing of the resources’ entry into the FMP, since for projects like Trion royalty payments will not start until eight to 10 years from now.
Q: How will the recent recovery of oil prices impact the eventual creation of the long-term savings fund?
A: The 4.7 percent of GDP figure was based on 2013 numbers. In that year, PEMEX contributed 4.7 percent of GDP to the government's accounts, with a production level of around 2.4 million b/d at a price of US$100/b. If production levels had remained stable, which they did not, we would have to see a price around or above US$100/b before payments to the long-term savings fund would be made because the country’s GDP has increased.
It is important to remember that this is a long-term project and the idea is that the Fund becomes a reality as the industry develops and consolidates. Deepwater projects will start production eight years from now and as the country’s production level increases, it will eventually allow us to accumulate funds. This is a project to give Mexico a stabilization fund for its budget so government expenses can be covered in a responsible way. The actual investment decisions regarding the reserve are our responsibility following the technical committee’s guidelines