Ernesto Marcos Giacoman
President of AMESPAC and Founding Partner
Marcos y Asociados
View from the Top

Striving to Keep Service Companies Afloat

Wed, 01/20/2016 - 15:11

Q: What are the main priorities for AMESPAC at the moment?

A: The first and most urgent matter is the problem resulting from PEMEX’s liquidity constraints restraining its ability to pay its suppliers and contractors. AMESPAC has been deeply involved in addressing this problem, looking for solutions, and approaching PEMEX to face this issue so that the government can finally take actions. The first step has been injecting capital so that the oil company can get up to date with its overdue invoices that it has been unable to pay due to budget cuts, affecting jobs and services that have been effectively provided. The second action consists of organizing meetings with the new operators that have being assigned contracts in Round One in order to promote our associates’ services so that these can diversify their markets. We have already arranged meetings with the winners of the first two phases, and our members have presented their service offerings.

Some of the other problems we are revising include the delay in migrating CIEP and COPF contracts. In the case of the latter, we want the migrations to happen as soon as possible, because the companies that provide services to PEMEX and are looking to become operators are members of AMESPAC. Farm-outs are also behind schedule, as PEMEX, the Ministry of Energy, and the Ministry of Finance have not yet agreed on the financial and fiscal terms related to the entry of private investment in fields awarded in Round Zero. Finally, we are also developing new project finance schemes, an area of expertise for Marcos y Asociados, which is assisting in promoting private investment in the sector.

We are seeking all sorts of modalities in which private players can participate in the energy sector, both in oil and gas and the electricity industries, within the new legal framework. Even though AMESPAC congregates companies that work with PEMEX, we have some affiliates involved in electricity generation too. Therefore, the association is interested in promoting all kinds of direct participation of private investment in the energy industry.

Q: What concrete actions is AMESPAC taking to help its members to mitigate the effects of the industry’s current financial reality and PEMEX’s overdue payments?

A: The problem is not limited to companies not being paid for services provided a year ago; the real issue is that PEMEX no longer has the budget to operate as planned this year, so it is cancelling contracts. Some of these are three-year contracts that PEMEX is cancelling with less than 20% of the work being completed. Even though the oil company had an assigned budget for those contracts, it has no available resources. Companies that had such contracts with PEMEX have had to invest in obtaining certifications and preparing their staff, and now their contracts were cancelled without the possibility of obtaining a new contract in the short term. Of course, this is greatly due to the low oil price, which has left the State’s oil company without liquidity. However, this is also the consequence of a structural issue that had a cumulative effect over the years, because an important part of the NOC’s budget was spent on unrelated activities.

The current situation is deeply affecting companies in the sector, and even though AMESPAC members are large companies that do not run the risk of disappearing, many of our service providers and suppliers are going through a difficult situation that sometimes forces them to shut down operations. The association is working on helping the largest possible number of these smaller players to survive, but it is not an easy task as the banks are also worried because PEMEX is the only source of payment these companies have, and therefore their financing guarantee.

In the light of this situation, AMESPAC is looking for new financing schemes, for which we have approached NAFIN, which has a supply chain program that finances contracts from large companies going through a rough patch that hire service companies. NAFIN is offering factoring, so once PEMEX validates an invoice, this is sent to NAFIN, or any commercial bank that obtains financing from NAFIN. The invoice is paid and the bank collects from PEMEX through NAFIN, which provides liquidity to the NOC while commercial banks assume the risk.

It is worth commenting that the risk entailed in having PEMEX pay once the invoice is due, is a significant one, and even though PEMEX is now a productive enterprise, the government will have to make sure that PEMEX does not fall behind on its payments.

We are also working on financing schemes so that the private sector can approach PEMEX and operate, be it through service contracts, associations, or farm-outs. In other words, we are trying to find ways to inject private investment into PEMEX so that it can continue with its projects. In parallel, we are approaching the new operators that are entering the market with concrete work programs. Back in 2014, PEMEX’s budget amounted to MX$300 billion, but there were budget cuts in 2015, and the NOC’s budget for 2016 is MX$216 billion, a 27% decrease. When including overdue payments from past years, known as Due Payments from Previous Fiscal Exercises (ADEFAS), and the recently announced budget cut, PEMEX is left with little money to invest. Our only alternative is to look for private investment.

Q: What can be done to keep the industry afloat until the new operators begin operations, considering that PEMEX is not in a position to drive growth?

A: The Energy Reform was intended to create markets. The electricity market is moving according to schedule and without major complications. The oil and gas market has revolved around the blocks offered in Round One, but this is just a primary market. We also need secondary markets with liquidity, and the only way to support this task is by migrating the COPS and CIEPS, speeding up the farmouts, and for PEMEX to find financing mechanism that will enable it to continue operating its fields regardless of budget constraints, which can only be achieved through private investment. Once the conditions are provided, a secondary market will emerge. I have met with all sorts of players, from private equity funds to family offices, who want to invest in the oil industry, so there is an evident appetite. However, an actual market is still missing, so investors cannot buy assets, for example.

Q: What are some initiatives the private sector is undertaking in order to enhance its participation in the energy sector?

A: A new milestone is the creation of the Mexican Energy Council (COMENER). AMESPAC was a key sponsor of the creation of this entity, and the idea behind it is that there are several organizations and industry chambers across the energy industry, which includes oil, gas, and electricity, that share common interests and concerns. Many members of this organization belong to both AMESPAC and COPARMEX. In fact, Juan Acra, President of COPARMEX’s Energy Commission, was selected as the head of the Council. Another important matter relates to the TPP, as it will consolidate the changes that have been made in the energy sector’s legislative framework and provide legal certainty to contracts signed with the government, both in the oil and gas and electricity industries. We have been working with experts who were advisors to the business sector who are drafting some clauses in the TPP, so we feel optimistic about the additional benefits this will bring to international investments in Mexico’s energy industry. For the first time, investments are being protected beyond the companies, spanning all the way to contracts with the public sector. The TPP will also protect investments and contracts against future changes in the legislation, so everything that has been achieved so far is irreversible, as these changes are valid before international treaties. The objective is to protect the Energy Reform beyond the current presidential term.