Héctor Rocha
Energy Partner
EY
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Surveying the Strength of the Mexican Situation

By Pedro Alcalá | Tue, 01/21/2020 - 15:11

Q: How could PEMEX improve its recently downgraded BBBcredit rating from Fitch Ratings?

A: The two elements that would improve PEMEX’s ratings are production and efficiency in oil operations. The current administration has promised PEMEX will increase its crude production by nearly 50 percent to over 2.6MMb/d by the end of the administration’s term but the company must perform this improvement while implementing cost-cutting measures. While the previous government chose to work with the private sector and received huge amounts of money via bidding rounds, the current administration believes strongly in oil sovereignty and is working in new modalities of co-investment with private players. With the suspension of bidding rounds and farmouts, the resources, skills and technologies of private companies are being spurned. Further exploration is needed to halt the production decline of Mexican oil fields, which have been dropping for decades. PEMEX has historically spent around MX$35 billion (US$1.85 billion) of its MX$150 billion (US$7.92 billion) budget on exploration but has not dramatically increased its added reserves. PEMEX needs the support of the private sector in exploration; if the company conducts the exploration alone, it will have difficulties to find the financial backing required.

Q: How should PEMEX promote efficiency at its management level?

A: One of the major issues for PEMEX is its size. Because the company is so large, information is easily lost and decisions are difficult to make. Therefore, data and its accurate collection must be put at the center of PEMEX’s operations so that decision-makers can base their decisions from one indisputable source of information. At PEMEX Drive 2018, the directors openly stated their belief that PEMEX has a problem with La Ruta de la Bestia. This is the phrase given to the decision-making process in the state-owned behemoth; hundreds of approvals must be passed for any decision to come into effect. Removing this entrenched obstacle must be a priority for PEMEX. NOC should also be more open to engaging in short-term projects that create value for the company, without the need for large-scale investment. An example of this is a two-year digital transformation project that can be piloted in a small section of the business and, if the value is high enough, can then be rolled out across the company.

Q: Where does EY see future growth in Mexico’s oil and gas industry?

A: Following the downturn in oil prices, the industry as a whole has had to reshape itself, strengthen organizations and do more with less. Shale has provided an option for operators, meaning their investment gets repaid more quickly. Ten years ago, we realized that we can drill a shale well in two to three weeks. In comparison, an offshore well can take more than a year. From a macro perspective, shale has changed the game. The boom in shale has converted the US from a gas importer to an exporter. Both Argentina and China are developing their unconventionals. Yet Mexico, which is importing gas, will not develop its unconventional potential. This despite being across the border from the world’s largest shale discovery. Geology does not distinguish between borders. PEMEX has already explored the area and we know major shale opportunities exist in Mexico. There is an understandable concern about environmental impact but problems only occur when drilling is uncontrolled. With strong environmental regulation, environmental damage can be avoided.

Q: What are EY’s goals for the coming year?

A: Last fiscal year, EY grew around 20 percent in Mexico. For this coming year, we are forecasting a more cautious 15 percent growth increase. To achieve its goals, EY is leveraging technology to improve efficiencies and processes for its clients. The problem we are finding is that ideas of the digital transformation have become so convoluted that no one knows their true meaning. We remove jargon and communicate our message in the language of the client so that the value of technology, IoT and machine learning is clear to those on the ground.

 

EY is one of the world’s Big Four consultancy firms, providing professional services to over 150 countries. The firm offers industry expertise to clients across major industries and employs more than 270,000 worldwide.

Pedro Alcalá Pedro Alcalá Senior Journalist & Industry Analyst