José Rinkenbach
Investment Executive Director
AINDA Energía & Infraestructura
View from the Top

The Road to Increasing Oil Production

Tue, 01/21/2020 - 09:59

Q: Where do you see a consistent business opportunity in the Mexican oil and gas industry?

A: I believe there are many opportunities to invest with PEMEX through PPAs or farmouts. There has been some uncertainty about whether PEMEX will continue looking for farmouts. In fact, the company does not have many other options as the capital it would have to invest in E&P activities alone would be prohibitive. The NOC is investing US$7.5 billion in current operations and will need to invest four times that amount if it were to work on its own. Additionally, given oil prices, no operator will come into the country and invest to work only as a service provider. Mexico produces 1.8 MMb/d and if action is not taken, by the end of the new administration the country might be producing 500Mb/d. Nevertheless, the new administration’s objective is to produce about 2.6 MMb/d by 2024. The only way to meet big production expectations while minimizing investment is through farmouts.

Q: What measures should be taken to help boost national oil and gas production?

A: From my point of view, it is necessary to spin off PEMEX E&P and create a separate entity: PEMEX Gas. This company would act as a ring fence for the exploration and production of gas. The process to create this new entity would need to be implemented alongside appropriate public policy.

The migration of CIEPs and COPFs to PSCs and license contracts is also extremely important as the latter provide better fiscal regimes that offer between eight and 10 times more capacity to deduct expenses. At the moment, PEMEX can only deduct one eighth of its expenses in the assets where there should be a migration, so it is unprofitable to develop those fields. Additionally, migrating those contracts makes it possible to certify reserves and ask for capital to develop them. This is a major issue. In the last three years, PEMEX has not been able to invest due to its lack of liquidity and its contribution to the federal budget. Finally, the creation of an SPV to allocate some farmouts or good assets with the objective of launching an IPO would help. As a result, the NOC could raise money to fund other projects and increase its accountability.

Q: What factors could affect the financial perspective of projects according to AINDA’s expertise?

A: In the oil and gas industry there are several topics that are absent from the conversation and could dramatically affect project finance operations. For instance, a good project for which the financing source is incompatible will not be developed. On Jan. 1, 2019 the new accountability rules for IFRS 16 came into force. This means that every balance sheet for every contract must be registered in the books. With the former legal framework, if a company had a sale and leaseback contract and the asset was sold, it could be deducted. But according to the new accountability framework, these transactions will be registered as a debt. This will create an increase in liability and in the bestcase scenario, if a company had a debt capacity of 20 percent, this means that its debt capacity would be greatly decreased.

Q: What is the main reason behind the company’s collaboration with ITAM for the Executive Program of Energy Investments?

A: We just closed the third edition of this program and are about to start the fourth. The program encompasses various topics in the Mexican energy industry, from electricity to oil and gas. Its most important achievement is that it has raised awareness of the Mexican legal and commercial frameworks related to the energy and oil and gas industries among all involved entities. Three years ago, nobody understood how to do business in these industries in Mexico. Our involvement in the program helps to provide the industry with a deeper, more specific understanding of how an open market works and how society also is reaping the benefits of having better players, regulators and policymakers. 


AINDA Energía & Infraestructura is a private equity fund focused on investing in energy and infrastructure projects in Mexico. Its team consists of professionals with experience in the hydrocarbons, electricity and water industries.