Perspective on Energy Priorities for MexicoTue, 01/22/2013 - 13:24
During his tenure as Pemex CEO from December 2006 to September 2009, Jesús Reyes Heroles was one of the main advocates of making significant structural changes in the way that Pemex operated and the national oil and gas industry was managed. As the 2008 Energy Reform advanced through Mexico’s dierent political forums, several modifications were made to its original framework, frustrating the aspirations that key executives had for transforming the industry. Reyes Heroles, who now works as the CEO of consulting company EnergeA, shares what the lessons learnt in this process mean for the issues that must be addressed in order to achieve a comprehensive energy reform in 2013. The central issues that he believes should not be neglected for the energy reform to leave a significant stamp on progress are presented in the table below.
“Mexico is an energy-rich country. However, our story in the past few years has been a tale of missed opportunities,” he explains. “It is frustrating to see that the resources are there, within our grasp, and we cannot take advantage of them in order to contribute to faster growth for the country.” Leaving his dissatisfaction with the ways the industry has moved in the past few years aside, Reyes Heroles believes that the future is bright for Pemex with an energy reform looming, but asserts the importance of not missing the opportunity to really leave a mark.
The first step towards building a more comprehensive energy reform means acknowledging what happened with the 2008 Energy Reform, learning from it, and building on it. “The energy sector has been overdiagnosed: we are the same group of people having the same discussions,” he says. “Most of the key arguments that we discussed five years ago are still valid: we know what has to be done. We just have to establish how we will do it and that means negotiating the required modifications to laws, regulations, and the industry’s institutional framework to make it happen.”
With his pronouncement on what needs to be done for 2013, the former CEO of Pemex believes that two crucial changes have to happen in the construction of a new reform. “The energy reform has to embrace both Pemex and CFE as its cornerstones, but put them into real perspective: as part of the energy industry and not the energy itself,” Reyes Heroles argues. “The central change that the reform should aim for is allowing Pemex to partner with other companies at the percentage it deems adequate for the specific projects where it believes it needs assistance.” A change to the 27th Article of the Constitution would certainly mean that Pemex would finally act as a business, being relieved of the mandate to exploit all national hydrocarbons by itself.
While IOCs are interested in entering the Mexican oil and gas market, they prefer to do so in schemes where both risk and reward are shared within the operators. “The ability to form joint ventures with IOCs is relevant for every activity that Pemex carries out, but especially for the exploitation of the recent deepwater discoveries made by Pemex,” Reyes Heroles explains. “Pemex cannot execute all these projects on its own; not because of the technical capabilities of the company, but because of the risk distribution, risk management, and financing issues of such big operations.” With other companies that have the necessary experience for this kind of operations, Pemex would have the time to learn and the teachers to learn from.
SUCCESS FACTORS FOR MEANINGFUL ENERGY REFORM
1. Build on the foundation created by the 2008 Energy Reform process
2. Amend the mandate of the 27th Article of the Constitution that forces Pemex to exploit all the national hydrocarbon resources
3. Allow Pemex to form partnerships with other companies, transforming its mandate from a constitutional decision to a business decision
4. Give Pemex and CFE budgetary independence from the Finance Ministry and reform the corresponding articles in the Constitution
5. Limit the responsibility of the Energy Ministry to defining the country’s energy policy
6. Allow Pemex to obtain the financial resources required for its operation and investment plans
7. Design a new scheme to fight corruption
8. Protect Pemex from the interests of the Finance Ministry as a tax collector
9. Convince Pemex’s Labor Union (STPRM) to contribute in the company’s upturn
10. Avoid the mistakes made in the 2008 Energy Reform approval process.
11. Align the political strategy, critical path, timeline, and communication plan with the proper variables for success.
According to Reyes Heroles, the next step in working out the structural changes needed for the industry includes “pulling out” Pemex and CFE from the federal budget. By liberating the two companies from the fiscal constraints that the Finance Ministry currently exerts on them, there will be more freedom to enhance productivity and e·ciency within the energy industry. Clearly establishing the role and position of the Finance Ministry and limiting them from acting as the energy authority in the country would contribute to a better administration of Pemex, Reyes Heroles believes. Self-management by the NOC would further allow it to get additional resources to execute its operation. The US$69.4 billion dollars that the company had to pay in tax and duties in 2012 represents the biggest fiscal charge in the entire world. While Pemex is one of the companies in the world with the highest EBIT margins, its operation becomes limited with such a heavy tax burden.
The Energy Ministry’s role should also be clearly defined as the organization in charge of defining energy policy. “Many institutions overlap, causing challenges to appear – sometimes from within the company, sometimes from the Energy Ministry, and sometimes from the Finance Ministry,” Reyes Heroles states. “Everybody believes they have a say over Pemex, and the NOC cannot listen to all of them at the same time. These issues could be solved if the government were to give more autonomy to the CEO of Pemex. By eliminating the Public Administration Ministry, current President Enrique Peña Nieto has contributed in removing some of the overlap and obstacles that came from it.”
The final steps to achieve the comprehensive reform that the sector needs involve aligning all of its components – operational, technical, scientific, administrative, but overall, human resources – in the same direction. With the correct alignment of all the dierent segments of the company, it would be easier to pursue the same goals along the organization. “Pemex requires a major shake-up; you cannot have several isolated areas that barely coordinate with each other,” Reyes Heroles says. “I think the current CEO will be able to consolidate all the managerial capabilities of the company; people at all levels of the administration would then need to follow his lead.”
WHAT WILL THE MEXICAN OIL AND GAS INDUSTRY LOOK LIKE AT THE END OF THE YEAR?
Right now, there are many things on the table in Mexico related to the oil industry. We can split these subjects into at least three dierent topics: the legal issue, the reorganization of Mexico’s national oil and gas company, and companies’ technical and economic visions related to new ventures and opportunities. From the legal point of view, it seems that a big reform is appearing on the horizon. My personal point of view is that it is needed for the country in order to fully exploit and monetize the vast reserves and resources that lie both in conventional and unconventional reservoirs. Things seem to be going in the right direction. There will be some very tough discussions in Congress and in the country in general, but I think good things will come from having these discussions. I don’t know how long it will take for reform to happen, but I am sure it will occur.
I also believe that the reorganization of Pemex is a positive step for the industry. Since 1992, Pemex has been running its activities through four dierent divisions. 20 years ago, this was a good approach in order to improve the results of each division, but over time, the entire value of this structure has been lost, and as a country we are losing a lot of value. A typical example of this loss of value is Pemex concentrating the vast majority of its investment activities in the upstream sector, and forgetting that it also needs to support downstream. Pemex’s E&P division has seen incredible results, but it has caused a lot of pain in the downstream performance. Mexico is the only country in the world that produces so much oil and imports so much refined product. I hope that this talk of restructuring will become a reality, and Pemex can make the transition to not just vertical integration, but also horizontal. Finally, from the point of view of new actors in the industry, the energy reform and the restructuring of Pemex will provide a much better investment scenario.