Rubén Cruz
Head of Energy and Natural Resources
KPMG Mexico
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View from the Top

New Vision for Old Realities

Tue, 01/21/2020 - 12:47

Q: What are the most important changes in the industry's public sector framework?

A: We do not believe there have been significant changes in the regulatory paradigm of the industry, at least not yet and certainly not in a textual sense. Laws and guidelines remain unchanged, including those regulating revenue and public spending. The significant shift that we have perceived is related to personnel. The internal composition of public and regulating bodies is changing rapidly, in particular the commissioners of CNH and CRE. The perspectives of these new people are quite diverse. We do not necessarily perceive an ideological bent. In that sense, the first thing that we expect the market to experience is their corresponding learning curve as they get used to their posts.

Some of the aspects of the new administration, such as sovereignty and self-reliance, could be translated simply to reducing imports in general and also crude exports so as to process more of the nationally produced crude into fuel. However, we have yet to see any significant move in this direction because certain realities impose themselves in the process. We have been an oil exporting country for a while, which finances a significant percent of our public expenses. As a result, reducing crude oil exports is not a simple matter, regardless of how much we may want to be self-sufficient in our fuel production.

Current tax and spending laws work under the assumption that we are exporting at least 1MMb/d to international markets, with the US being one of, if not the most important. The average crude exports for the first quarter of 2019 was 1.1MMb/d, so we are even going 10 percent above the initial estimate. This means that the remaining production that could be sent to the National Refining System to be processed amounts to approximately 600Mb/d, which could only account for about 25 percent of the national fuel demand. In other words, the question of self-sufficiency must be adapted to the prevailing mathematics of the matter.

Q: How can the administration reduce PEMEX’s tax burden while re-centering its public finances, support and productivity?

A: The question of the de-petrolization of Mexico’s economy and public finances, particularly its exports, is not unique to this or any other administration. It is an ongoing effort that has been mostly pushed forward through the promotion of Mexico’s manufacturing exports, which have indeed grown considerably and have taken away some degree of weight and relevance from oil exports. The main tool that we expect this administration will use to balance these objectives is actually one created by the Energy Reform, which allows the company to migrate its assets and assignments to different tax regimes.

Previously, it did this through CNH tenders, where it took an active role in choosing which company the NOC would associate itself with based merely on what was the most attractive economic offer. Now, the NOC will have more autonomy to choose its partners, which will also no longer be partners but contractors. Once the company finishes its migrations without any partners attached, it will then issue comprehensive service contracts through which it will take a more holistic approach to evaluating and choosing a contractor to develop the asset or assignment in question.

This new model will not necessitate a change in the current laws of the sector. We believe these types of processes and resulting service contracts will be the prevailing model of the industry going forward, rather than the much more specific service contracts that have been issued by the state-owned company up to this point, such as that signed with contractors to develop the chosen 20 strategic fields. It will be up to Ministry of Energy to redistribute responsibilities over the remaining assets and assignments between the company and CNH.

 

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