Eckhard Hinrichsen
Country Manager
View from the Top

Realistic Expectations Lead to Measured Confidence

Wed, 01/21/2015 - 10:11

Q: What will be the real impact of the drop in oil prices on the investment plans of oil and gas executives in Mexico?

A: We expect that investment decisions might take longer, many projects will be postponed or cancelled, and companies will think twice before entering new markets. While some areas will definitely be hurt, others like deepwater, are longterm investments that are less dependent on the current low oil prices. Although Mexico is affected by low oil prices, just like any country, it remains one of the most attractive destinations for oil and gas investments. The enthusiasm we saw following the Energy Reform might have been somewhat exaggerated, so it will be good for the sector to scale back and analyze things more realistically. Many companies are still interested in investing in Mexico despite the current low oil prices, since there are still opportunities to develop profitable projects. This leads to a situation in which the government might overreact in an attempt to restore confidence. However, I believe the government will react appropriately. The most important part will be how PEMEX acts in upcoming months and what projects it decides to take on. The company has been somewhat cautious about its future and the private sector has struggled to understand its plans. Despite this drop in confidence worldwide, the IOCs will be able to cope with the temporary drop in oil prices, even as they streamline their organizations.

Q: Your 2015 outlook listed China, the US and Norway as the best countries to invest in during this time of low oil prices. What can Mexico do to raise its profile as an investment destination?

A: Mexico could achieve that objective by improving security conditions, generating a low-risk environment and political stability. Mexico lags behind in this area, with insecurity still being a real issue in the north. In terms of political stability, Mexico has developed a very positive environment in the last ten to twelve years, but there are still areas of opportunity to improve. The country’s reputation will also improve if the Energy Reform matches the expectations and the government delivers on its pledges. The restructuring of PEMEX is critical, as the Energy Reform’s success will be measured by whether or not PEMEX becomes a profitable company and is able to compete with the international operators that will come in. If this does succeed, Mexico’s market environment will be much more positive.

Q: Will DNV GL adapt its service offering now that PEMEX is free to select its providers based on value rather than cost?

A: The truly significant change is that we will become more active in the Mexican market and offer a great scope of services under this new regulatory framework. We started this process and are in discussion to collaborate with the likes of Statoil, Shell, and ExxonMobil. Most incoming companies need support and guidelines to understand and adjust to the requirements of PEMEX and the authorities. Since DNV GL has operated in Mexico for 20 years, we have significant experience in the market and contacts among key government agencies. Therefore, we are ready to advise any company seeking to invest and participate in the energy sector in Mexico.

Q: Do you expect the Mexican authorities to look closer into the enforcement of international best practices in the country?

A: Mexican standards, as we have seen in deepwater, are quite detailed. The issue that concerns me is the uncertainty of whether the regulatory agencies will be ready to apply new regulations on time. We know that SENER and CNH have turned to specialized consultancies for advice, which is encouraging. In terms of environmental regulation, international oil companies all have their own standards, most of which are very robust and mature. These regulations have been applied all over the world, so it is expected that these companies will use their internal standards in addition to the regulations that the Mexican government designs. There will also be a learning curve before entities like PROFEPA and ASEA can recruit the high-quality experts needed for their audits. It will also be difficult for these institutions to recruit the human resources they need, and to offer them the attractive compensation packages that the private sector and international companies offer. We would recommend also using the verification schemes that were developed for the Mexican natural gas sector, and have been successful and matured over the last decades, for offshore and deepwater activities.