National Champions Emerge from Energy Reform

Mexico's oil and gas industry is entering a new era wherein new international players are flocking to reap the rewards of the couuntry's promising reserves and resources. But Mexico's own homegrown titans must not be overlooked, or underestimated. 

International players are not the only ones champing at the bit as the Energy Reform unfolds. The new playing field paves the way for national companies to join the race and seize opportunities never before available to them. From domestic suppliers and service providers becoming operators after bidding successfully in licensing rounds, to private companies branching into the downstream gasoline market as prices and brand participation are liberalized, examples of Mexican success stories made possible by the reform are starting to emerge.

Sierra Oil & Gas’s entry into the market stands outs. Proudly wearing the badge of Mexico’s first independent oil and gas company, Sierra won blocks two and seven during Mexico’s first-ever licensing round in July 2015 in consortium with Talos Energy and Premier Oil. Last December, the company also became the first private Mexican company to win a deepwater block, the fourth Salina Basin contractual area in Round 1.4. Complementing its groundbreaking activity in upstream, Sierra is also taking advantage of midstream opportunities, teaming up with TransCanada and TMM for a refined products project that includes the construction of a marine terminal in Tuxpan, with 265km of pipeline and an inland storage and distribution hub. “Sierra wants to become the first independent Mexican company to participate in the complete oil and gas value chain, to become a local energy champion able to attract investment and develop projects that will benefit the country,” says Iván Sandrea, CEO of Sierra Oil & Gas.

Sierra Oil & Gas’ desire to sew roots in all areas of the oil and gas panorama is echoed by Grupo IDESA. With a history spanning 61 years, the Mexican group boasts activities ranging from petrochemicals to midstream storage and distribution. Now, through its alliance with Canadian International Frontier Resources, it is operating the Tecolutla onshore block that it won in Round 1.3 under the name Tonalli Energia. “Grupo IDESA has 60 years of experience but our human capital is our main asset,” says José Uriegas, the group’s CEO. Notable for the partnerships with international firms that led to its upstream win and the US$5 billion Braskem-IDESA project, IDESA’s CEO says that international companies are looking for “a partner that already has serious foundations in the country.”

It is not just companies that are transferring their past experience to new, upstream ventures but also individuals. Carlos Morales, Director General of PetroBAL, resigned after almost 40 years working for PEMEX, of which 

the last nine were spent running its upstream division. After a mandatory one-year absence from the Mexican oil and gas industry, he became the Director General of Grupo BAL's new E&P company PetroBAL in February 2015. In partnership with Fieldwood, PetroBAL moved fast to win contractual area four in shallow-water Round 1.2 during the same year. To staff the new venture, Morales looked to local talent to fill entry level, mid and senior positions.

“To find the experienced professionals, I interviewed PEMEX employees and retirees,” he says, hinting at the abundance of talent to be found among the NOC’s veterans.

Supply and service companies with experience in the country will be vital not only for the wealth of knowledge they afford but also for new operators bound by CNH contracts to comply with local content rules. How the rules will be enforced is not yet apparent. "We have doubts about how the government will actually measure the local content in a given project,” says Luis Vázquez, Founder of Grupo Diavaz. “Given that the majority of Diavaz’s services are completed in alliance with international firms it will be difficult to quantify how much of a job has been done by Mexicans.” Standing out as an example of a Mexican firm diversifying into upstream, Grupo Diavaz was founded in 1973 with the objective of providing services to the offshore oil and gas industry and won two blocks in onshore Round 1.3 to become an upstream operator.

“Noncompliance triggers the payment of the missing percentage in local content,” explains Nestor Martinez, Commissioner at CNH. “In the end, CNH and the operators are partners: they take special care in complying with all our provisions, just as we are diligent in making sure they comply.”

As a new era rises over the oil and gas industry, challenges lie ahead and questions remain. Among the main sticking points, the Mexican players ready and willing to take advantage of the opening landscape, and the international operators who will work alongside them, still wonder how the rules will be assessed and enforced. Three years after the Energy Reform was approved, the race is just beginning.