In the wake of the opening of the oil and gas industry in Mexico, the country's supply chain has become more important than ever. But with issues like PEMEX's payment slowdown to contend with, companies have been stretched further than ever.
For nearly 80 years PEMEX dominated Mexico’s oil and gas industry, leading to the development of an experienced supply chain consisting of companies that were designed to provide products and services to just one final client. These companies now face the dual challenge of adapting to the needs of international operators while also taking in PEMEX’s new procurement strategy and processes, which 170 are increasingly geared toward productivity, efficiency and profitability.
On top of dealing with a complete overhaul of the energy sector, the Mexican supply chain felt the pinch as PEMEX suspended countless projects indefinitely amid budget cuts and liquidity challenges resulting from a wider industry downturn, which saw the benchmark WTI crude oil price hit lows of less than US$27 per barrel in February 2016. The suspended contracts and delayed payments left PEMEX’s contractors reeling as they faced an uncertain future.
Toni Solis, Vice President of International Sales and Operations for TSC Group, which saw PEMEX nearly cancel the rig refurbishment project TSC was working on, explains the lengths companies are going to in order to keep working for their biggest client. “When PEMEX began to cut spending, its intention was to cancel the entire project. The problem was that it was contractually bound to pay TSC a certain minimum amount, even if the work did not go ahead. Rather than having the company pay us for nothing we renegotiated the deal to three rigs but it was a long process.”
As the supply chain grappled with fewer available projects, those lucky enough to secure a contract were given the additional challenge of a change in their main client’s payment terms. In 2015, PEMEX increased its payment terms from 20 to 180 days. Most of its debts are now paid off but the impact on its suppliers is still being felt.
Dealing with less capacity for future planning and even turning to alternative financing methods, in many cases PEMEX’s contractors and suppliers changed their strategies to reflect the NOC’s transformation. Abraham Zepeda, Commercial Director of Grupo Hosto, says the situation has improved vastly since PEMEX’s new leadership took over in 2016 and adds that certainty can mean more to suppliers than a quicker payment period. “Now PEMEX can tell us the exact date when they will pay us. Even if there is a delay, knowing the payment date is useful for Grupo Hosto’s budget and planning.”
The supply chain’s relationship with PEMEX has changed but so has the way companies compete with each other to win contracts. In 2016, 30 percent of all goods and services purchased by PEMEX were awarded under no-bid contracts, which entail a single-source service or product with no competition vying for the contract. This was down from 80 percent in 2015, a change which resulted in savings amounting to US$1.1 billion for PEMEX last year.
Fewer no-bid contracts fit into PEMEX’s overall strategy aimed at increased cost-effectiveness. PEMEX’s Director of Procurement, Miguel Servín, cites “transparency, contractor certainty and more competition” as three byproducts of the new awarding scheme.
PEMEX is not alone in pushing the Mexican oil and gas supply chain toward a more competitive future. The arrival of international operators means suppliers of services and products must up their efforts in terms of certification, compliance, performance and safety standards. As well as being a prerequisite for securing work with IOCs, compliance with certification can instill confidence in newcomers as they request services from local companies, says Rubén Benítez, CEO of Integra Marine Services. “We acquired Trace certification, valid since Jan. 1, 2017. This means we comply with Trace’s due diligence standards in terms of financing and ethics, giving international clients certainty about Integra’s service standards.”
Telésforo Segura, Director General of COBSA, echoes the importance of certification in helping the supply chain survive the influx of international competition. “The majority of similar Mexican companies did not worry about obtaining international certifications before the market opened up, especially financial certificates,” he says, adding that his construction firm realized the necessity to invest in certifications so it could cater to international players.
With the higher standards demanded by international players and the new direction and processes of PEMEX to get used to, Mexico’s oil and gas supply chain has its work cut out as the industry emerges from the slowdown of the past few years. But with an increased focus on compliance, a consolidated payment time frame from PEMEX and a cautious optimism, the path is set for a competitive supply chain to develop.