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Maximizing Value for the Mexican Economy

Wed, 01/20/2016 - 12:49

Q: What is the most effective way in which the State can maximize the value created from hydrocarbon reserves?

A: Hydrocarbon reserves have to be managed in a way that creates prosperity for the Mexican people, and there are several mechanisms to make this happen. Firstly, local content has to be used to its full extent, and the law clearly states minimum percentages. Therefore, a natural progression would be for Mexico to create goods that are internationally competitive so that operators will use Mexican equipment, materials, and employees, generating wealth and jobs for the country. The requirements are adequate given the sector’s development conditions. Norway’s oil and gas industry is an excellent example of best practices in capturing oil revenues, and if we compare Norway to countries like the UK with whom the North Sea reservoirs were shared proportionally, we will see that the former has accumulated about 50% more than the latter. In this sense, the local content rules established for Mexico are appropriate, as the country cannot ask for a higher percentage given that it does not yet have the necessary competencies. A second element to take into account is the fact that exploration and production plans have to maximize value in the long term. Maximizing value in terms of hydrocarbon reserves does not only mean incorporating new reserves, but also includes well-considered production  strategies. This means that each field must have a plan for optimal production that allows the hydrocarbons’ potential to maximize revenues in the long term. Poorly planned hydrocarbon exploitation can generate losses in the future.

Q: How can the hydrocarbons sector create direct value for the Mexican economy?

A: The hydrocarbons sector plays a crucial part in tax collection, so the sector’s growth will create jobs and foster employment synergies because taxes are used to pay for health and other services that also create jobs, industries, and infrastructure. In this sense, adjacent industries can also grow alongside the oil and gas sector, such as the food, cement, and barite industries. This sort of collective growth creates value for the nation. It is often said that the shale industry is not profitable, but the industries surrounding shale operations are strong and contribute greatly to the states where these operations take place. The key is to find the growth synergies in the oil and gas industry.

Competitiveness is an essential component, especially considering the fact that operators seek to maximize value. In this sense, competitiveness among operators will be crucial so that these players can capture different markets. This situation entails materials, talent, and infrastructure, so the government has to invest in the development of highquality talent, which is lacking in Mexico and the rest of the world. There are several initiatives at the government level to foster competitiveness in the sector, many of which involve scholarships. CONACYT is the main party involved, and this entity also funds the development of technologies, as competitiveness entails the use of the best technologies in hydrocarbon production and exploration activities. CNH is involved in validating exploration and production plans, so it is well-positioned to make suggestions regarding the use of certain technologies to companies, thus improving their competitiveness.

Q: How is Mexico faring in maximizing hydrocarbon reserves with a long-term approach?

A: As a country, it is important to increase reserves because this creates a pipeline for project development and future production, and because reserve replacement will ultimately have an impact on the job market and the economy. So far investment has been restricted, so reserves have not been replaced at the pace that technology allows in other countries. However, with the Energy Reform, the entry of more operators, and the willingness of financial institutions, we will certainly see an increase in the level of reserves. Every guideline CNH has developed has been crafted in a way that makes it the least invasive for operators in order to enable an efficient development of operations. In addition to the issuing of guidelines, we are currently working with PEMEX on the migration of many fields that the NOC might want to develop in partnerships, either technological or financial. CNH’s role is to be efficient, that is, to reduce the amount of procedures and paperwork to the largest possible extent in order to assign these processes and allow the companies to begin operations promptly. Previously, CNH was overseeing one operator, PEMEX, which is now changing and this forces us to think more openly.

Q: What are some fiscal implications of PEMEX turning into a productive enterprise of the State?

A: In order for PEMEX to create value, it has to operate in a competitive environment where the same rules apply to the NOC as to other operators. Those rules are already established, and there is a transition period, which should be as short as possible. PEMEX has autonomy that enables the NOC to draft policies aimed at creating value, and despite any issues the company might be facing at the moment, this is possible in the short and medium term. During the transition period, PEMEX will continue paying a fiscal contribution that is much larger than that of most NOCs. This is why the transition must be as swift as possible, as it will relieve PEMEX of its fiscal burden, allowing it to reinvest its resources. Although PEMEX is experiencing financial complications, the government has thoroughly discussed ways to provide the NOC with a platform that will enable it to be profitable in the long term. These are the types of actions and interventions needed to help PEMEX become the productive company contemplated in the Energy Reform.

Q: How do Mexican upstream opportunities compare with other options operators have around the world?

A: The main obstacles companies encounter globally are burdensome bureaucracy for field development and a lack of coordination and common objectives between governments and regulatory agencies. Other countries have had a clear vision of the way operators and governments should coordinate, because these will ultimately become partners seeking value. Mexico possesses these traits, as evidenced by the strong relationships between CNH, ASEA, the Ministry of Finance, and the Ministry of Energy, and operators are aware of this. However, operators also notice other situations, such as the country’s social and security issues. When balancing all the elements, Mexico becomes a location in which operators want to invest.