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News Article

Thinking in Terms of Open Markets

Mon, 09/01/2014 - 14:28

After operating in a monopolistic environment for over 75 years, PEMEX now has two years to transform itself into a ‘productive enterprise of the state’ operating side by side with other oil companies to maximize internal value creation, as well as tax revenue for the Mexican state. To reach the new objectives resulting from the Energy Reform, PEMEX must be given the tools to compete with operators entering the Mexican oil and gas industry. “I am hopeful that PEMEX will be given the incentives and flexibility of a normal company, with the necessary budgetary autonomy, the power to draft our own strategy, and the ability to make our own operational decisions,” says Carlos Rafael Murrieta Cummings, Chief Operating Officer of PEMEX. “We also expect to have a clear owner to respond to, and we will do so in the same terms as any other company does.” In this case, the owner will still be the federal government, but in the role of sole shareholder rather than decision-maker. This will be paramount in a results-oriented paradigm that no longer sees PEMEX as the sole enforcer of public policy for the oil and gas industry.

The successful overhaul of PEMEX requires the reshaping of both the company’s internal way of working and the treatment it receives by the authorities. “Everybody outside PEMEX will have a hard time getting used to seeing us as a business, since they are accustomed to employ us as a policymaker,” says Murrieta Cummings. “We do not make public policy; the government now needs to define the Energy Strategy and Development Plans for the country through public policy so that the industry participants – and not only PEMEX anymore – can provide for the country’s different markets.” Murrieta

Cummings implies that public policy will shift from being a government instruction mandated directly to PEMEX to becoming framework that aligns operator interests with the Mexico’s energy and fiscal needs.

The opening of the Mexican oil and gas market is destined to increase production levels while expanding the economy. “Rather than creating a situation in which everyone is fighting over the same piece of the cake, it is about making the cake bigger so that everyone can take some pieces. We are going to have more resources, so we will need to increase overall production,” says Murrieta Cummings. “The increase in crude production is going to provide resources for the government to implement social programs, develop infrastructure, and satisfy additional development needs. People will be seeing those changes in the price of gasoline at petrol stations and the price of natural gas for domestic use. We are aiming to have more competitive prices and more competitive fuels for international markets, since those markets define the opportunity cost.”

Even though modifications to industry regulation and the government’s relationship with PEMEX will be defined by the secondary laws, the company itself has to transform the way its people view the market. This cultural change will have to start at the top and permeate all the way to the heart of the company. “We are going to redefine the way we manage our operations, both in the upstream and in the downstream markets,” Murrieta Cummings reveals. “From now on, PEMEX will be evaluating the market differently and we will reshape our strategy accordingly. PEMEX will stop talking about business lines, and will start thinking in terms of markets. We will define which markets we are going to fight for in order to maximize our value creation. At the same time, we will stop thinking in terms of the infrastructure we currently have in order to focus on the different markets we want to participate in.” As part of its approach to fulfill the objectives of the Energy Reform and protect its market share in priority areas, PEMEX will take advantage of the new provisions that allow it to partner up with other companies. “When you have suppliers, you decide what you need from them and they settle upon what they can offer you. However, when you have partners, you describe a problem to them and you work hand in hand to try to come up with a great solution that combines both parties’ experience and expertise,” explains Murrieta Cummings. This opening in PEMEX’s mindset and the industry’s rules provides an opportunity for operators of different sizes. While partnering with the larger companies provides PEMEX with more expertise, technology, and financial capability, partnering with smaller companies allows more flexibility and a quicker reaction to market needs. However, not having the rules established yet brings uncertainty to all the players wanting to associate with the Mexican giant. “The industry has changed and so have the rules. We have to first understand what the new rules are going to be, and then help our suppliers to understand them so they can continue assisting us in our goals.”

In its interaction with partners and suppliers, PEMEX expects fair trade conditions that can help both parties to optimize their performance in the market, placing information-sharing above company-level decisions. “We want to be treated as any other private company in terms of information sharing,” Murrieta Cummings says. “If we supply confidential or valuable information to other operators, we expect to receive the same treatment from them and thus be able to get the information they have.” The exchange of information will facilitate the incursion of private companies into the market, while simultaneously helping the company bridge existing gaps in terms of new technologies and specialized personnel. “As a productive enterprise of the state, PEMEX will finally have money to invest in technological tools and equipment,” Murrieta Cummings declares, while noting the correlation that exists between technology advancement and productive labor. “With more modern tools and training, we will be able to reshape the way in which we work and increase our productivity. We need to move quickly in developing our internal capabilities and replacing the equipment that is in critical condition in order to have a significant impact on production figures in years to come.”

PEMEX will also refocus its professional development strategy as partnerships and collaboration will help the technology spillover to take place, while the company’s personnel learn from companies with different focuses. The biggest challenge for PEMEX, however, will be keeping the best engineers and technicians in the country as part of its workforce. “For the first time, there will be real alternatives to working for PEMEX as IOCs will start operating in Mexico. That is both our greatest challenge and our biggest concern,” reveals Murrieta Cummings. “We need very competitive compensation programs and a clear growth perspective for the key members of each team to prevent this from happening, and this has to happen at all levels within PEMEX.” Murrieta stresses the urgency of this matter, saying that the company needs to define its corporate structure as soon as possible, establishing which people will be in charge to soothe its high potential talents, and send a clear message to the competition that PEMEX knows and values its champions.