Post-Energy Reform Industry at Crossroads
Q: What impact has the Energy Reform had on the international interest in the Mexican oil and gas industry?
A: It has generated a vast amount of interest, which was rather unexpected for me. We have had many interested parties, asking us to identify opportunities for additional investments. Marcos y Asociados offers project and business development for international oil service companies, and we have received visits from different Chinese companies interested in entering the industry every week for the last two months, which shows the degree of interest that the sector is generating. Our investment banking practice has been visited by private equity funds that have experience investing in the oil and gas industry around the world. For the first time, these funds are interested in participating in private equity for investments in Mexican oil and gas, particularly in the downstream sector. The interest is so high that a new danger has arisen. If the Energy Reform is not executed as expected, the image of the country will suffer greatly as the expectations that have been generated are so high. Obviously, this is positive but we have to make sure the process is followed through correctly and that the corresponding regulations are successfully enforced. The main issue is that the entire value chain must be liberalized, beginning with exploration and production. This will not work if we only pretend to liberalize partial slots of the value chain. All sectors must be opened up so a market that does not exist today can be developed with the capability of producing and importing oil and gas products in a free market environment.
Q: What global financial trends are going to be the most influential in determining PEMEX’s future?
A: Since Mexico currently has no private industry directly involved in oil and gas production, the financial sector will have to evolve and fully accommodate the requirements of the oil and gas industry. PEMEX has announced that it is preparing the issuance of its Fideicomiso de Inversión de Bienes Raíces (Fibra). This is a method that only became available in Mexico at the beginning of 2014, and which allows companies to offer assets that are rented, that are generating cash flow, and that could be of interest for investors. This has been a very successful new capital market development. It consists of a limited partnership structure that would allow PEMEX to finance the existing pipeline system, for example. You can put all of these assets together, securitize them in the capital markets, and access all the resources that are generated through this initial issue to invest in additional projects in the same activity or sector. The gas pipeline system will be developed using this new financial scheme. Mexican banks do not understand this business, but they will have to learn. They will have to develop the kind of financial instruments that would allow private investment in the upstream sector to be financed. That requires equity and private financing.
Q: What would be the ideal development scenario for the creation of PEMEX’s new tax regime?
A: The only way to strengthen PEMEX and to let it be competitive is in a free market environment. This would force the government to design a fiscal regime for oil that is attractive for international companies and then apply the same regime to PEMEX. The new formula described in the new Hydrocarbon Revenue Law clearly shows that PEMEX would gain additional resources to be able to support increasing investments, over and above the level of investment it is allowed to make at this time. I ran some numbers for 2012 using the new fiscal regime described in this initiative, and my estimation is that it will give PEMEX an additional US$10 billion of financial resources annually, which would not go to the government as fiscal contributions. This sum will be retained by PEMEX to increase its productive investments. The effect of US$10 billion is very important, and the fact that this same formula will be applied to other operators will make up for the reduced federal income from the taxation of PEMEX, and is expected to generate many times more than what it will temporarily sacrifice. The government has to reduce its dependence on oil revenue through the Reform and it has to reduce the fiscal contribution of PEMEX.