Derek Woodhouse
Partner
Woodhouse Lorente Ludlow
/
View from the Top

Potential Challenges in Deepwater

Wed, 01/20/2016 - 13:32

Q: What are the main concerns of IOCs entering Mexico’s deepwater segment?

A: None of the IOCs entering the Mexican market anticipated legal instruments that truly comply with international standards and respond to the industry’s needs and expectations, and they are therefore somewhat skeptical. However, the IOCs participating in Round One are raising a lot of questions, particularly because they consider that having the legal instruments with the right structure and wording does not necessarily guarantee the success of their future operations. One of the main concerns in this regard is the country’s political environment and whether or not the current favorable scenario will be sustained for the next couple decades. For instance, companies worry about the left-wing party winning the elections and changing the game. These are not irrational concerns, but they are not extremely decisive, which is why companies must consider all the risks when entering a new market. Companies are aware that the country faces a scarcity of physical infrastructure, consultancy services, and specialized professionals, which will present an extra challenge for them once the projects get started. Of course, many of the IOCs have conducted operations in developing countries before, but Mexico is a special case because in many areas it is not considered underdeveloped. This characteristic might take some companies by surprise. To some extent, this challenge can be overcome by importing international expertise and infrastructure, but timing is key in this sector, and companies will struggle to replicate their successes in other markets in the same timeframes. This is why many IOCs are keen on finding local partners. National companies have a better understanding of Mexican waters and have access to many of the resources that IOCs lack.

Q: What role do you expect PEMEX to play in the deepwater segment?

A: If PEMEX plays its cards well, it should be able to learn the business in approximately a decade, but it must use its time wisely during the early stages and form alliances with IOCs. One of the main challenges the NOC will face to becoming successful in deepwater will be retaining knowledgeable people within its staff. Every PEMEX employee with experience working with IOCs and with a good understanding of the business will be targeted by private companies. Therefore, one thing that PEMEX has to learn is how to offer the incentives needed to retain its employees, including an attractive salary. It can be anticipated from past experience that PEMEX will have a troublesome time incorporating this approach to its corporate culture and that the NOC will be drained of its experience. In this regard, it will be crucial for PEMEX to achieve the necessary knowledge transfer soon and retain it within the organization.

Q: What challenges will ASEA encounter as a regulator for the deepwater segment considering that the agency has no previous experience in this area?

A: Having an unexperienced entity in charge of performing a key role in the industry causes uncertainty regarding its course of action. During the early stages, ASEA can take two opposing directions that could make the IOCs’ experiences easier or more difficult. However, maintaining one of these strategies for a prolonged period may cause an imbalance that would be harmful to the industry or the country in the long term.

In the beginning, it is quite likely that ASEA will take a soft approach, as it will not have the means and expertise to handle many of these savvy and experienced companies, which are much too strong and know how to find their way around any situation. It will take time for ASEA to become strong enough to do what similar entities do in other parts of the world, which will probably allow the IOCs a great deal of liberties in the beginning. The agency can also opt for implementing a strict attitude from the outset, an approach that oil companies will find difficult to handle. This strategy could delay projects and cut investments, which would be disadvantageous for all the actors involved in the sector, including the government. I believe that the first approach will be favored, as ASEA is aware that it does not have the political power to play strong. It will probably decide to start from the bottom and build up from there. I think this would be a wise move because it will allow the agency to follow a learning curve to the benefit of the industry. This crossroad is going to be ASEA’s biggest challenge.