Eugenia Solana
Managing Partner
Solana Consultores
View from the Top

Overhaul of Mexico’s Refining Reality

Wed, 01/22/2014 - 12:36

Q: What is Solana Consultores’ perspective on the targets set in the National Energy Strategy regarding the role of natural gas in Mexico’s energy mix?

A: Natural gas is to play a relevant role as a driving force for Mexico’s economic growth. The goal of producing 8bcf/d by 2018, established in the National Energy Strategy, is merely an expression of the country’s natural gas potential and future energy needs. Competitive natural gas prices in North America are a factor that has promoted the importation of this hydrocarbon from the US to Mexico. It is not the sole reason, but it is one of the most important ones. For President Enrique Peña Nieto’s government, low natural gas prices are part of an integral strategy that also includes the execution of natural gas production projects and the development of infrastructure to transport and distribute this hydrocarbon. A challenge in the Energy Reform lies in making sure that the opening of the energy sector enables the productive companies of the state and private parties alike to actively participate in exploration and production endeavors, as well as in the construction and operation of infrastructure to transport and distribute natural gas.

In the future, it will be important to establish rules that clearly identify both the rights and obligations of all the participants in Mexico’s natural gas industry. The most convenient scenario would be for these matters to be addressed in the secondary laws. This would imply accurately establishing the roles of PEMEX and CFE. Clearly defined rules that are easy to comply with and enforce will give decision-making processes more transparency and will provide more incentives for the participation of private parties.

Q: What are some examples of ways in which the Energy Reform will influence the refining sector?

A: The Energy Reform includes certain aspects that pertain to refining in Mexico. The changes approved by Congress incorporate general guidelines so that new refineries can be built by partnerships between PEMEX and private actors. In this context, SENER recently mentioned the midterm possibility for private parties to refine hydrocarbons on their own. In the long-term, and according to the corresponding authorities, private entities could also commercialize refined products. For this layered openingup process to yield the expected results, the state must guarantee product supply at competitive prices. The same goes for the petrochemical sector: access to natural gas is the departing point to successfully drive this activity. It should be taken into account that, all around the world, refineries and petrochemicals have narrow profit margins. Unlike oil exploration and production, where it is possible to produce a barrel for US$20 and sell it at US$100, the petrochemical and refining sectors need very high levels of efficiency to yield significant revenues.

Q: How can the private sector get involved in helping PEMEX’s refining operations become more efficient?

A: Even though PEMEX has placed great efforts into increasing the operational efficiency of its refineries over the years, issues remain unsolved as the refining infrastructure needs to be updated and modernized. With this in mind, PEMEX has begun revamping its refining complexes. Once plants begin operating with new technology, the company is expected to produce less fuel oil and focus on more valuable fuels. When the revamping process of the National Refinery System (NRS) concludes, PEMEX plans to look at possible partnerships with the private sector to expand the NRS’ capacity. The idea PEMEX has brought up in its comments is to replicate the model used in the Deer Park Refinery. PEMEX’s presence across the entire value chain of the hydrocarbon industry will be decisive in maximizing the value of oil revenues in a scheme where the rules are clear and well-established.

Q: What are the most important actions PEMEX should take in order to successfully compete with international players instead of letting them poach its talent?

A: With the liberalization of the hydrocarbon industry, PEMEX will be thrust into competition with experienced oil companies. In order to ensure it participates successfully in this new environment, its business strategy should center on its workforce. It is true that, with the opening of the market, a lot of people working for PEMEX will receive job offers from international firms. This is the main reason why the national oil company should align its interests with those of its workers. It is about creating a win-win situation. Additionally, it is important for PEMEX to ensure that its workforce has access to all the possible tools that will allow it to compete with other participants. Generic competency development and access to technology are two essential elements that should be considered within HR related affairs. We are talking about a deep change that involves each and every one of the 154,000 employees that make up PEMEX.