Is PEMEX on the Right Track?

Q: How satisfied were you with Pemex’s results in 2011?

A: As far as Pemex’s upstream activities were concerned, 2011 was a good year. The company increased its activity in exploration; our reserves are more in line with the figures of the certification companies than they were in 2010; average production of crude for the year stood at 2.55 million bbl/day, which is around the level of the forecast included in the 2011 budget. One positive change for us was the increase in the oil price, which was higher than forecasted. Pemex’s upstream activities actually turned a profit post-tax. Where we dier from IOCs is that the oil we extract belongs not to us, but to the nation. As intermediaries in the extraction process, we must pay for the right to extract hydrocarbons.

Q: Given Pemex’s long term goals to increase production to over 3 million bbl/day and maintaining 100% reserve replacement, do you think the NOC is headed in the right direction?

A: The strategic energy plan that was discussed at the Pemex earnings call in February 2012 stated that by 2026, Pemex would be producing 3.3 million bbl/day with more than 100% 1P reserve replacement. However, most of the reserves that Pemex is relying on to achieve this plan have not yet been discovered or incorporated.

When it comes to whether Pemex is going in the right direction, I have an analogy. To put a satellite into orbit, the only method you can use is a rocket. By taking the satellite to the roof of a tall building, it is moving in the right direction, but will never reach its intended destination, because you are using the wrong tools. For me, this is like the Energy Reform of 2008. It was a movement in the right direction, but it will never make it all the way. It is never enough simply to be heading in the right direction; you need to ensure from the start that you have the right tools to finish the job. In order to achieve a meaningful energy reform, the legal framework governing the sector needs to change.

Q: Do you believe that the restructuring of PEP was the right move to make, even though the Pemex board did not approve it?

A: The restructuring of PEP was an administrative move, and the board is fully behind any changes that can help to make the organization more eective. The most positive outcome of the restructuring was that more importance has now been placed on exploration, which was a necessary and appropriate move. The next step I would like to see PEP take is to separate the administration of dierent production regions in order to minimize competition for attention and resources. This would also have an impact on realistic production forecasts. We need to decouple the reserves of one field from the production of the rest, which does not happen often enough at the moment. We cannot continue to say that the reserves at Cantarell will impact the production levels in other places.

To keep up production, Pemex needs to find the oil to replace what is being extracted. This does not just mean turning possible and probable reserves into proven reserves, but also increasing the volume of new discoveries. Pemex currently has 54.7 billion Boe of prospective resources, and 26.5 billion Boe of these are located in deepwater areas, according to Pemex as of January 1st 2012. This is where we will have to go in order to reach the production levels we need in the long-term: if it was just a matter of adding 2 billion barrels to Pemex’s proven resources, it would be simple to go and prove the prospective resources in shallow waters.

Q: Has your role on the board lived up to your expectations?

A: The reform came out of the political atmosphere surrounding the 2008 Energy Reform, and the desire to give Pemex the ability to plan in the long-term. Before this point, the company was focused on its short-term objectives driven by income and revenue requirements of the Mexican federal government. Instead of managing Pemex in a centralized way through the departments of treasury, energy and commerce, the intention was to give Pemex some independence through an independent board that would manage the company. However, in my opinion, very little has changed since the introduction of the independent board; Pemex is still largely ruled by the government.