Risk Assessment Helps Companies Put Best Foot ForwardTue, 01/21/2020 - 18:35
Q: What are Verisk Maplecroft’s main services and projects in Mexico?
A: We had been providing our services to clients for over 10 years before the oil and gas industry opened in Mexico. We cover a wide array of risk issues, from politics and economics to environmental and social, and work with all the major oil and gas companies and service providers. We support new IOCs in Mexico with human rights and environmental impact assessments, as well as logistics and infrastructure reports.
Our current projects focus mainly on environmental, sustainability, human rights, stakeholder analysis and social issues. We provide guidance, risk management and scenarios once a company is in the country, coupled with logistics and supply chain assessments. Water represents an important part of the production process in the oil and gas industry. The increase in demand for production has also elevated companies’ focus on water stewardship to better grasp the water availability at the basin level and determine how best to manage the resource.
Q: What is Verisk Maplecroft’s strategy to gather data in Mexico?
A: Verisk Maplecroft provides a robust outlook on the risk situation within the country. Our main differentiators are our data and risk analyses, which are supported by 150 risk indexes across 198 countries. We work with different sources, such as the UN, the US government, NGOs and similar organizations, to cover projects dealing with politics, economics and social concerns. Our analysis is produced by gathering our own data and by web scraping. We leverage our office in Mexico City to provide data-led analyses complemented by on-the-ground intelligence, which is further enhanced by experts in the oil and gas industry. Our work is done in-house and our personnel come from different backgrounds, including environmental science and lawyers who focus on human rights.
Q: What do you offer to companies that have not been able to resolve their issues through governmental institutions?
A: One of our value propositions is mapping key stakeholders, local communities, civil societies and indigenous populations during the early phases of a project so companies can secure social license to operate, especially since proper execution often requires the consent of all stakeholders. We also offer assistance on specific processes in Mexico to ensure they are carried out properly and with transparency. By putting checklists in place and identifying the main players, we can assess all aspects to uncover potential challenges in each case. We also help companies find potential vulnerabilities or gaps they should be mindful of because reputational risks are heightened due to social media. Companies cannot afford to make mistakes regardless of local governmental policies because they are now being judged by international best practices. In this regard, we help companies put their best foot forward.
Q: How is Mexico perceived in terms of foreign investment and as a business destination?
A: Mexico is often grouped with similar countries in the region, such as Argentina, Brazil, Colombia and Venezuela. The country is well-ranked on the strength of its institutions and is regarded as a stable destination due to the unlikely probability of a coup taking place. On a macroeconomic level, Mexico does well in relation to its peers. However, companies entering the country should diligently research their partners and suppliers since Mexico’s competitive weakness is evident in our corruption index. Firms would like to see more transparency on public procurement and consistent application of investigations into corruption. Another risk factor for Mexico is criminality, in which the country fares the lowest in the region and is in the bottom 10 out of 198 countries globally.
Q: How has the new administration affected the investment attractiveness of Mexico’s oil and gas industry?
A: The Energy Reform was in many ways an inflection point for the oil and gas industry in the Americas as a whole. Mexico offered many opportunities by liberalizing its upstream segment. The Energy Reform forced other countries to reassess their position compared to the newly-opened Mexican market. The timing of the reform also seemed to coincide with the shift of the ideological tide in Latin America towards more market-friendly administrations. Mexico’s Round 0 and its subsequent tenders created a rippled effect on oil and gas regulations that resulted in increased receptiveness by governments to foreign investment.
The country’s situation then shifted as a result of President López Obrador’s election last year. His election was partly fueled by the failure of the Energy Reform. In particular, it appears to have failed to meet the expectations of the Mexican electorate on two fronts: the expected increase in production and the unfulfilled promise to decrease energy prices. AMLO’s new policies are focused on achieving energy sovereignty. This contrasts from the previous administration’s goal of achieving energy security from diverse sources, ultimately affecting the situation for all operators.
Q: What legislative changes could the government make to decrease the risk of investment in the country?
A: While Mexico is trying to reach a 2.6Mb/d production by 2024, this ambitious goal would require the country to maintain a viable space for IOCs. For this to happen, a regulatory environment should support the improvement of factors such as dcreasing criminality, among other issues. 1Q19 was one of the deadliest in almost 20 years and this situation makes it harder for the presidential administration to carry out its agenda.
A positive aspect is that the 107 E&P contracts reviewed by the administration are being respected as opposed to the situation of the canceled NAIM, which has created unease for other parts of the private sector. The idea of potential public consultations on contentious issues generates anxiety for the oil and gas industry.
Overall, the trend we have seen in the Americas has been favorable. Brazil, Colombia and Argentina have been streamlining regulation and reducing corporate taxation. Even though these changes have been positively received by the industry, from an operational standpoint, oil and gas companies are still struggling due to social issues. Companies need to do more to secure buy-in by local stakeholders and communities. One useful case study is the Rubiales oil field in Colombia, which ended up being a high-profile field since it managed to increase output substantially. Rising hydrocarbons production often leads to higher expectations among the local community. However, tensions and subsequent social mobilizations can arise if communities are unable to perceive any significant improvement in their local livelihoods, which was the case with Rubiales. In the case of Mexico, a jump in output at the field level could make both PEMEX and its high-profile partners vulnerable because communities need to be engaged and registering local benefits.
Mexico had a window of opportunity to create a marketoriented policy with the rest of the region headed in the same direction. Now that Mexico is taking a step back, the country is challenged to remain competitive in oil and gas not only in the region, but globally. There has been a global uptick in licensing rounds as host governments seek investment. Standing out and attracting investment will become more difficult due to the increase in competition in the overall external environment.
Q: What is the difference in terms of risk between offshore and onshore operations?
A: The general perception is that onshore operations are riskier than offshore operations. There are several issues in different parts of Mexico. In the north, the conflict between the Zetas and other drug cartels has led to kidnapping and extorsion risks in the area, hindering businesses. Central Mexico houses a number of drug trafficking organizations that have become sophisticated and nimble, diversifying their range of illicit enrichment activities to include pipeline fuel theft. Aside from the financial loss caused by these thefts, pipeline personnel in Guanajuato, Hidalgo and Puebla are put at risk by these organizations. The latest statistics released by PEMEX have also revealed that attacks on offshore platforms experienced a 310 percent increase between 2016 and 2018. Operating offshore does not necessarily imply immunity from criminal behavior.
Q: What do you think needs to happen in Mexico for you to consider this a successful year?
A: Mexico is an important part of our strategy because our business is not limited just to the oil and gas industry. There are many similarities with the mining industry, in which we also serve, specifically regarding human rights, environmental impact and logistics. All major conglomerates present in the international supply chain are hyperaware and sensitive to the impact of subcontractors on their business. This is especially applicable to the offshore segment because companies are vulnerable along their entire supply chain due to the increasing layers of international subcontractors. We help companies put processes in place to monitor these vulnerabilities.
Verisk Maplecroft is an advisory data analytics firm working to enhance the way businesses manage risk. It works with experts from environmental, political and human rights disciplines to provide full-scope assessments to the oil and gas industry.