Ernesto Marcos Giacoman
President of the Board of AMESPAC and Founding Partner
Marcos y Asociados
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Insight

Range of Opportunities for Mexican Service Companies

Wed, 01/21/2015 - 14:37

While the Energy Reform might have been criticized in certain political circles, it surpassed the expectations of the Mexican Association of Oilfield Service Companies (AMESPAC). Ernesto Marcos Giacoman, President of the Board of AMESPAC and Founding Partner at Marcos y Asociados, explains that the members remain highly positive despite obstacles that have threatened to derail the Energy Reform. None of them foresaw the steep drop in the oil prices, which will lengthen the timeline in which the effects of the Energy Reform will appear.

Marcos Giacoman relates PEMEX’s budget cuts to the drop in oil prices and highlights that this is not exclusive to the Mexican NOC. “Many companies around the world, which have also been affected by the fall in the price of oil, have announced significant cuts in their annual investment programs,” he tells, adding that PEMEX’s budget cuts are having a knock-on effect on its suppliers. “Two years ago, a shortage of jack-ups attracted investors. Now, jack-ups are becoming available in the market but there is little demand for them. Eventually, the market will have plenty of jack-ups, ultimately affecting the original investors.” A possible solution for Marcos Giacoman would be the entrance of new operators to absorb the current surplus of equipment. “We need to accelerate the process by which new operators will come. The negative impact of PEMEX’s budget cut on suppliers would be reduced, as they could be hired by other companies.” Even if this happens, AMESPAC expects that certain members will need help to restructure their finances. Considering that the current scenario may have a long-lasting, negative effect on Mexican oilfield services, Marcos Giacoman suggests that development banks could create a restructuring mechanism to help companies in dire financial situations. As an example, he mentions companies that obtained a loan to invest in drilling equipment and whose services are no longer required by PEMEX. “Looking at the spending restrictions PEMEX has at the moment, one sees the need for financial restructuring. It is possible that foreign funds will arrive to Mexico to aid in this regard. However, it would be convenient if the government would also strategically support these companies.” In spite of these current circumstances, Marcos Giacoman believes the Energy Reform has brought important opportunities to the AMESPAC roster and made certain of its visions a reality. “Probably foreseeing the competition ahead, PEMEX announced that it has established a single record of suppliers and contractors, which AMESPAC has long advocated.” This means that suppliers will have a more straightforward entry into PEMEX’s procurement processes.

Back when the debate around the Energy Reform began in early 2013, AMESPAC argued that Mexican companies involved in the sector would struggle to become operators and might have to focus on services. “Given their lack of experience, we said that many Mexican companies might not be able to venture in this segment while foreign companies would do so, given their experience as operators in other countries,” comments Marcos Giacoman. Despite this obstacle, the collective experience of AMESPAC’s members makes it a perfect port of call for foreign operators needing allies to take on upstream projects. “Mexican companies focused on specialized services like well measurements, cementation, and drilling will set the bar. International companies offering similar services will come to Mexico following their big customers, such as ExxonMobil, Chevron, and Shell, thus creating a change for national companies to grow through joint ventures.” To Marcos Giacoman’s mind, the fact that the members are mainly service companies does not exclude the idea of them growing into operators or international players. These ambitions are shown by AMESPAC having begun preparations for its members to grow outside Mexico since 2013. “We have publicly stated on several occasions that the Energy Reform should help Mexican oil companies to go public and operate in international markets,” says Marcos Giacoman. “The alliance between international operators that have experience in specific types of reservoirs and Mexican companies that provide services in the country could eventually lead to Mexican oil and gas operators.” Finally, Marcos Giacoman mentions the often forgotten opportunities for manufacturers, as these could supply equipment for oil companies of all sizes, even if the machines are to be used abroad. “There are several strong examples of the potential competitiveness of Mexican manufacturers in the oil sector. For instance, Shell has six international procurement offices for oil equipment, including one in Mexico. Its suppliers often include little known Mexican providers,” Marcos Giacoman points out.

However, all these opportunities will only arise if the Mexican oil and gas industry, including PEMEX, responds to new conditions with the right agility. “PEMEX needs to leave behind the practices it used during its monopoly years and focus on generating value.” This would lead a complete cultural shift in the entire Mexican oil and gas market. “Since the legal framework is already in place, we cannot wait for things to fall into place on their own. Instead, we need to work with the elements that are already set,” states Marcos Giacoman.