Priorities of Mexico’s Onshore Operators

Moderator: David Enríquez, Partner at Goodrich, Riquelme & Asociados
Panelist: Rogelio Montemayor, CEO of Strata BPS
Panelist: Jaime Martínez, Business Development Director of ERM
Panelist: Javier Zambrano, Executive Director of Jaguar E&P

As private onshore operators take a foothold in Mexico’s liberalized oil and gas market, panelists at the Mexico Oil and Gas Summit 2017 reflected on Rounds One and 2.3 to evaluate the different stages of the Energy Reform, the steps that have been taken and the path that lies ahead. Several issues arose during the discussion surrounding the priorities of Mexico’s Onshore Operators.

“The Energy Reform brought about a singular scenario where PEMEX can be your partner, your client and your competitor all at once,” said David Enríquez, Partner at Goodrich, Riquelme & Asociados, to open the discussion at the Hotel Sheraton María Isabel on Tuesday. This transition means companies that before dealt with a monolithic entity are now dealing with a multivariable scenario involving the several new facets of the productive company of the state.

The panel included Rogelio Montemayor, CEO of Strata BPS; Jaime Martínez, Business Development Director of ERM; and Javier Zambrano, Executive Director of Jaguar E&P. Enríquez moderated the discussion between the industry experts.

The former hydrocarbons monopoly was at the forefront of the talks. “The Reform needs to ensure PEMEX’s institutional and market capacity in absorbing such a complex and multifaceted business venture like farmouts,” Montemayor said, as the productive enterprise of the state suffered from making decisions that more often than not had heavy political undertones, to the detriment of economically sound and strategic measures. Adding context to the farmouts, Martínez reminded the audience that PEMEX was immersed in and operating under monopolistic conditions since 1938, crystallizing processes that weighed heavily in its transition in the form of a certain inertia to the detriment of decisive decision-making.

“Under the new regulatory framework, PEMEX is regulated simultaneously by the Energy Regulatory Comission (CRE), the Ministry of Energy and the National Hydrocarbon Commission (CNH),” Montemayor added. This further complicates the interactions of private players with the sector’s regulators under this tripartite scheme.

Regulating authorities were also part of the state of the industry discussed during the panel. A particular focus was placed on the oil Rounds, as well as the social and environmental impact issues facing the industry. In the previous auctions, particularly 1.3, “some companies found themselves with a negative ROI once all was said and done,” Enriquez said. Consequent Rounds learned from past mistakes, as “the imposition of a royalty cap is a positive message for the market,” according to Montemayor.

The design of the Energy Reform left the private sphere practically on its own in terms of the required social and environmental impact assessments. The cost of an exhaustive and holistic assessment is considerably more expensive than the cost of fixing environmental issues found on-site prior to launching the project, said Montemayor. To address the issue, Enriquez suggested the design of a trusteeship financed by private funds, managed and distributed by the government, based on the required studies conducted by government agencies. “If left unaddressed, social and environmental impact assessments will become a time bomb,” he added.

At present, the available guidelines and incentives are not adequate to allow private players to abide by the regulatory framework and reach an agreement with local communities and land owners without hindering the development of the targeted project, Montemayor said, while Martínez added that in some cases, social and environmental issues are reason enough to definitely bring down onshore projects. “The authorities need to revamp their institutional capacity in addressing the novelties of indigenous consultations and social impact and integrate them with environmental impact assessments, while the law treats them separately at the moment,” he said.

Regulatory authorities, however, have significantly improved the design of oil-round contracts, the panel agreed, while adding that this technical advance must be mirrored in the design of a regulatory framework tackling social and environmental impact issues.

The panel concluded by stating that the success of the reform will manifest itself when Mexico’s competitive hydrocarbons industry, incentivizing private participation across the value chain, is consolidated. To give it the means to succeed, solid regulation in financing mechanisms and easily accessible liquidity are required, the panelists agreed. Another capital condition, according to Enríquez, is a solid asymmetric legislation that levels the playing field between private onshore operators and PEMEX.