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News Article

Optimizing the Role of the Oil and Gas Industry

Wed, 07/22/2015 - 09:58

Presentation: Julio A. Santaella, Executive Coordinator of the Mexican Petroleum Fund

Julio Santaella, Executive Coordinator of the Mexican Petroleum Fund

Julio Santaella’s presentation focused on the Mexican Petroleum Fund (FMP), a public trust where the Central Bank is the trustee and the Ministry of Finance is the principal. After the 2014 Energy Constitutional Reform, the fund was created to receive, administer, and distribute revenues exclusively from oil and gas exploration and production activities (E&P). Performing as a sovereign wealth fund, the FMP has roles such as managing the financial aspects of the contracts given after the biddings, and receiving and distributing petroleum revenues, while it is also tended to stabilize the government’s income stemming from petroleum.

The speaker said income for the FMP will come from the revenues generated by contracts with PEMEX and private E&P companies. The main two outcomes will be the shared profit intended for the companies, and the portion planned to contribute to the federal and local governments, comprising 4.7% of Mexico’s GDP. The rest will be deposited in the long-term savings reserve.

The governance behind the FMP is composed of a Technical Committee conformed by seven entities, including the Ministry of Finance, the Ministry of Energy, and the Governor of the Central Bank. There are also four independent members that are appointed by the Senate with an eight-year appointment.

“One of the roles of the Technical Committee is to appoint the Executive Coordinator, which manages the financial aspects of oil contracts, including the calculation and execution of the payments derived from them,” explained Santaella. The Executive Coordinator will also propose to the Congress the allocation of additional transfers like universal pension or investment in science.

Santaella mentioned that the relation of the Fund with contractors and assignees vary. The fund will only receive the amount of oil rights the assignees determine, and for contractors, the FMP will estimate and instruct the payment for each party. “Income will come from royalties, exploration fees, and profit shares, depending on the type of contract signed by the operating company.”

Santaella reiterates that all information received will also be cross-checked with CNH. There will be quarterly reports of activities (which include prices, production and costs), financial statements financial statements, transfers made to the government, fiduciary feed charged, and statistical information related to assignments and contracts. Santaella delineated the four steps that will be taken in the implementation of Round One. The first step is taken when CNH summits the contract for the round and once this is in place the FMP contacts the contractor to start the procedure required to gain access to the technological platform. This platform will be used to share information with authorities and exchange payment instructions. The second step takes place one month after the contract is signed. At this stage, the FMP will start to receive the first payments due to exploration fees. Santaella then described the third step, where CNH approves the first work pan and its associated budget. Contractors cannot lie on their laurels, as they must submit the accumulated costs information that can potentially be recovered on the condition of finding a commercial discovery. The very last step is when production starts and the FMP calculates the full set of contractual duties based on the information presented by all involved parties and it then instructs respective payments.

Santealla was keen to point out that all these procedures are done with the objective of promoting and developing a fair and stable oil industry. He also stressed the importance of enhancing transparency and government accountability, which at the end of the day will benefit future generations. Through this fund the exposure of public finances to the volatility of oil revenues will be reduced. He also boasted that in the long term the reserve will play a role in supporting the investment in human capital development, which will ultimately promote a sustainable development of Mexico’s economy.