Download - Mexico OGFJ 2014 Part 1
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May 2014 Oil & Gas Financial JOurnal | www.OGFJ.cOm | enerGybOardrOOm.cOm 69
Ahead of the Toluca Summit - which marked the 20th anniversary of the North American Free Trade Agreement (NAFTA) and saw the reunion of US President Barack Obama, Mexican President Enrique Pea Nieto and Canadian Prime Min-ister Stephen Harper - Petrleos Mexicanos (Pemex) CEO Emilio Lozoya asserted that, North America will become the worlds cheapest source of energy if Canada, Mexico and the US pool their resources to reduce costs and generate industrial growth across the continent. He continued to say that the trio should work together on matters such as regulation and infrastructure to make the most efficient use of the continents growing energy production, currently reshaping global markets.
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Mexicospicing Up the north AmericAn energy revolUtion
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70 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal May 2014
Prime Minister Stephen Harper, left, Mexican President Enrique Pena Nieto, and U.S. President Barack Obama, arrive at the North American Leaders Summit Meeting in Toluca, Mexico Feb. 19. (Photograph by: Jacquelyn Martin, The Associated Press, Postmedia News)
Indeed, the energy potential of the North American region has
changed dramatically in recent years. In the United States, the rise of
shale oil and gas has shifted the debate from one centered on energy
security to energy independence and even abundance. In Canada,
new technologies are unlocking the vast resources of Albertas oil
sands, while rising temperatures are opening up potential new finds
under the Arctic ice. In the latest turn of events, the regional energy
landscape took another sharp turn when, in December 2013, Mexi-
cos Congress approved the energy reform, effectively ending the
decades-long state monopoly on crude production.
For many years, Mexico and Canada have been the United States
top oil suppliers. Pemex is the third largest oil exporter to the USA,
after Canada and Saudi Arabia, but ahead of Venezuela and Nigeria.
Concurrently, Mexico and Canada are buying US natural gas whilst
Canada and the US share the largest integrated energy market in the
world with energy trade between the two exceeding US $100 billion
in 2011.
Over the past few years, a new energy dynamic has emerged be-
tween the United States and Mexico. Unable to match domestic con-
sumption with production, Mexico has grown increasingly reliant on
imported natural gas. Coinciding with the shale boom in the United
States, which catapulted US natural gas production by 22 percent in
just 15 years (from 18,856 billion cubic feet (Bcf) to 22,916 Bcf), the
US is a key exporter of natural gas to its neighbors. Enabled by ex-
panding infrastructure and driven by new power generation and in-
dustrial use, demand growth for natural gas in Mexico is robust and
on the rise: according to a report from Barclays Capital, US natural
gas exports to Mexico will more than double in three years, from an
average of 2 Bcf/d in 2013 to 4.5 Bcf/d in 2016.
With eight major pipelines scheduled to start operations within
Mexico from 2013 to 2017, with a total daily capacity of 5.6 Bcf, the
country will be increasingly reliant on external sources for natural gas
until it starts tapping its own shale gas reserves. Until then, the US is
likely to remain Mexicos main provider of natural gas.
On another front, within days of Mexicos energy reform approval
in December of last year, US Congress finally passed the long-awaited
Transboundary Hydrocarbon Agreement (THA) with Mexico signaling
their interest in collaborating, particularly in the Gulf of Mexico
(GoM). The accord allows, and effectively encourages, US companies
to partner with Mexicos Petroleos Mexicanos (Pemex) to jointly de-
velop transboundary reservoirs across some 1.5 million acres. This has
implications for the Perdido foldbelt area: a significant petroleum
province with discoveries and production made at Great White, Baha,
Trident and Tobago fields on the US side of the boundary. Pemex has
also announced the existence of significant resources in the Mexican
part of the Perdido foldbelt with interesting potentials for high qual-
ity extra-light crude oil.
At current production levels, the US, Canada
and Mexico together already represent 18.2 per-
cent of world crude output. By comparison, OPEC
member countries produce approximately 40 per-
cent of the worlds crude oil. Guillermo Pineda, en-
ergy industry leader at the multinational profes-
sional services firm PwC, believes that the North
American trio is now closer to mimicking or even
rivaling production levels observed in the oil rich
Middle East. Technological advancements, along
with the right regulatory environments, will truly al-
low the North American region to undergo an en-
ergy revolution and Mexico is an integral compo-
nent of that, says Pineda.
Although no formal discussions have taken
place yet, Guillermo Garca, director general of ex-
ploration and exploitation of hydrocarbons at Mex-
icos Secretariat of Energy (SENER, Mexicos ener-
gy ministry), acknowledges that: we will have to
work closely with our North American partners to
coordinate a regional energy strategy. [] We are
optimistic that the region as a whole will not only
develop strong levels of energy self-sufficiency, but
will actually become one of the major energy ex-
porting hubs of the world.
During Februarys Toluca summit, Canadian
Prime Minister Harper noted that a larger cooperation in the energy
sector would make North America the largest provider of fuel in the
world. In recognition of the opportunities that lie ahead, the so-
called three amigos concluded the summit by agreeing to organize
a meeting of North American energy ministers this year in an effort to
advance the talks on cooperation in energy.
Mexico has the opportunity to be the party that extracts the larg-
est benefit from the North American energy revolution, believes
Ernesto Marcos, founder and senior partner at Marcos y Asociados,
Guillermo Pineda M., energy leader, PwC
Guillermo Garcia Alcocer, director general exploitation and exploration of hydrocarbons, SENER
Dr. Ernesto Marcos, founding partner, Marcos y Asociados
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72 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal May 2014
In 2013, CP Latina acquired two Keppel Fels premium 400ft jackup
rigs, and secured two 7 year drilling contracts with PEMEX, Mexicos
national oil company, for deployment in offshore Mexico.
In 2014, CP Latina will continue to leverage upon the strong Mexican
energy market fundamentals and its inner strengths to grow towards
creating a leading Mexican integrated oil & gas services platform.
We reiterate our support and commitment towards Mexico and
PEMEX in this stage of modernization and growth, and are excited
about future opportunities for expansion, specifically in the area of
Exploration and Production.
Constructora y Perforadora Latina
Paseo de La Reforma 540 Col. Lomas de Chapultepec
11000 Mexico D.F.
www.cplatina.com
ABOUT US
Constructora y Perforadora
LATINA (CP LATINA) is a
Mexican private drilling
company focused on the
energy sector, with more than
40 years of experience in the
exploration, development,
operation and maintenance
of oil, gas, and geothermal
projects in Mexico and
Central America.
GruLatFR_OGFJ_1405 1 4/23/14 5:14 PM
Despite an increase in investment in exploration andproduction, Mexican oil production has declined from3.4 million barrels per day in 2004 to 2.5 million in 2012
3.0
3.4 20.7
2.5
103
11.7
31
4.7
1313
1997
1999
2001
2003
2005
2007
2009
2011
Investment inexploration and extraction
(Billion of dollars)
Oil production(Million of barrels per day)
Price of Mexican crudeexport mix (dollars per barrel)
2012
History of E&P Investments, Oil Production (mbpd), and Mexican Crude Price
sources: average price of the mexican crude export mix, Pmi comercio internacional
1997 2012. Production: Pemex institutional database, 1997 2012. investment:
Pemex annual statistics, 1997-2012.
the only financial and business development consultant specializing in
the Mexican energy industry, and former CFO at Pemex. The coun-
try shares the abundance of resources, both conventional and non-
conventional, and has an industrial base which means the country is
the largest exporter of manufactured products in Latin America; more
than all the Latin American countries combined. There is no previous
case in history of a country opening its energy sector as Mexico has,
whilst having such a large industrial capacity. The opportunities to
attract foreign direct investment at this moment are substantial. For
Mexico and the international energy sector, this is a decisive
moment.
EnErgy rEforms 101Mexicans today have two major challenges with respect to oil and gas
industry. First is securing a steady flow of affordable power to enable
greater industrial and national developments. Average electricity pric-
es in Mexico are 25 percent higher than those in the US, placing a
high burden on consumers and the government, as well as the coun-
trys manufacturing base. Second is Pemexs inability to tap into indi-
vidual companies experience, technology and the risk, leading to
production decline despite increased investments in E&P: having
pumped an average of 2.523 million barrels a day in 2013, Mexico and
Pemex have faced nine consecutive years of production declines.
Natural gas shortages have compelled Mexico to purchase lique-
fied natural gas at rates nearly five times higher than the US pipelined
alternative. Combined with reduced government subsidies, this has
led to considerable price hikes for electricity. In a country with a manu-
facturing base that accounts for 35 percent of its GDP, keeping energy
prices (an important input for many manufacturers) low is crucial.
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May 2014 Oil & Gas Financial JOurnal | www.OGFJ.cOm | enerGybOardrOOm.cOm 73
In 2013, CP Latina acquired two Keppel Fels premium 400ft jackup
rigs, and secured two 7 year drilling contracts with PEMEX, Mexicos
national oil company, for deployment in offshore Mexico.
In 2014, CP Latina will continue to leverage upon the strong Mexican
energy market fundamentals and its inner strengths to grow towards
creating a leading Mexican integrated oil & gas services platform.
We reiterate our support and commitment towards Mexico and
PEMEX in this stage of modernization and growth, and are excited
about future opportunities for expansion, specifically in the area of
Exploration and Production.
Constructora y Perforadora Latina
Paseo de La Reforma 540 Col. Lomas de Chapultepec
11000 Mexico D.F.
www.cplatina.com
ABOUT US
Constructora y Perforadora
LATINA (CP LATINA) is a
Mexican private drilling
company focused on the
energy sector, with more than
40 years of experience in the
exploration, development,
operation and maintenance
of oil, gas, and geothermal
projects in Mexico and
Central America.
GruLatFR_OGFJ_1405 1 4/23/14 5:14 PM
The local perspecTive
Given the broad implications of the reforms and the potential opportunities they are expected to generate for inves-tors, two entrepreneurs and business leaders share their views on the importance of an industry-wide collective effort for a successful reform, and the breadth of opportunities to be had.
A collective effort for A successful reform Eric Bustamante, chief executive officer at OIS Corpo-ration, a group of companies dedicated to generating added value to its customer through products, ser-vices and solutions within the energy sector, offers his view on the potential opportunities that lie ahead in light of the energy reform, and how its success hinges on an industry-wide effort.
I would very much like to see our country be-come an integral player in the global energy land-scape, states Bustamante. Although the energy reform making headlines today is a significant step in the right direction towards making that a reality, the active contribution of all the organizations constituting our energy sector is essential. We all have to commit our talent, resources and efforts to each and every project we pursue and continuously push the boundaries of our capabilities. In this respect, every Mexican firm has the responsibility to realize the vision of our country and sector. We are all in this together and we will only succeed by working together.
Plenty for AllIncreased competition can always be viewed as a chal-lenge but we do not like to look at it in that way, asserts Jose Olarte, director general of Grupo Legotec, a Mexi-can firm specialized in the maintenance and restoration of drilling rig components.
If executed as intended, not only will the energy re-forms bring in increased investment and a broader cli-ent pool, it will also attract increased competition. While this would be a cause for concern, Olarte believes that increased competition will encourage us to improve our competitiveness through the enhanced quality and specifications of our products and services, enhancing our growth prospects. After all, a lack of competition can be dangerous as it often leads to complacency. However, the opening up of the market will change all that as local companies strive to match the standards of the international industry.
Olarte goes on to add that, the opportunities present in the market are far too many for any one company to satisfy alone and as such, we welcome our international counterparts. The cake is going to be very big and we cannot eat it all, there will to be plenty to go around for everyone.
Jos Gabriel Olarte, director general, Grupo Legotec
Eric Bustamante de la Parra, CEO, Oil International Services
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PAEFR_OGFJ_1405 1 4/23/14 5:18 PM
enerGy reForM whaT do we Know so Far
Despite their historic significance, Mexicos energy future was not definitively settled by the constitu-tional amendments alone. Instead, much of the details concerning processes and content has been delegated to Congress, where it will be debated under much less public scrutiny in the form of secondary legislation. As always, the devil will be in the detail and the potential for backsliding will be high. As Monica Santoyo, at-torney at Santamarina y Steta, a firm dedicated to the practice of law across various industries, bluntly puts it, the constitution informs us of our desired destination, but it is the secondary laws that govern how we get there, or if we get there at all!
Some of the building blocks of the forthcoming energy framework are now beginning to fall into place, but many critical questions remain unan-swered. Heres what we know so far.
orgAnizAtionAl shAke-uPThree government ministries will have a hand in molding the new energy landscape. The Energy Ministry (Secretara de Energa or SENER) remains the dominant force within the sector retaining overall responsibility for the setting of energy policy, while assuming additional responsibility for select-ing the areas that will be opened up to E&P activities under each bidding round. SENER has been further tasked with adjudicating which assets and contracts Pemex will be allowed to keep out of its existing inventory dur-ing the much-awaited Round Zero phase. Meanwhile, the Ministry of the Environment (Agencia Nacional de Seguridad Industrial y Medio Ambiente
or SEMARNAT) is to acquire a new directorate mandated with overseeing in-dustrial safety and environmental protection across the energy sector. Finally, the Finance Ministry (Secretara de Haciena y Crdito Pblico or SHCP) has been charged with defining the fiscal terms applicable to the various energy contract types and with designing the parameters of a brand new sovereign wealth fund, modeled on the Norwegian system, to be financed exclusively from oil revenues.
indePendent regulAtorsSignificantly, both the Hydrocarbon Regulator (Comisin Nacional de Hidro-carburos or CNH) and Energy Regulatory Commission (Comisin Reguladora de Energia CRE) have been granted autonomy and had their functions boosted. The CNH will oversee regulation of upstream activities, which will entail the technical management of the bidding process and supervision of compliance with production requirements laid out in the licenses. Meanwhile, the CRE will regulate midstream and downstream activities by awarding and monitoring permits for the storage, transport and sale of petrochemicals.
oPerAtors unleAshedPemex and the Federal Electricity Commission (Comisin Federal de Electricidad or CFE) must transition from monopoly status to productive enterprises. Neither has been privatized, so each will continue to be publi-cally owned, but both will be exposed to competitive market forces and obliged to create economic value in the same way as classic private sec-tor actors. Two new entities the National Natural Gas Control Center (CENAGAS) and National Electricity Control Center (CENACE) will own and operate the national pipeline system and electricity grid, respectively.
Mnica Santoyo Galvn, attorney, Santamarina y Steta
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GastFR_OGFJ_1405 1 4/23/14 5:33 PM
ENERGY REFORM continued
Increased transparency and mechanisms to reduce corruption within Pemex will be introduced; Pemexs executive board will be split between government appointees and independent consultants and the power of the labor union in Pemex will be reduced.
ownershiPIt is now up to the main Mexican political parties to determine whether or not private operators coming to Mexico will have ownership over the hydrocarbons they produce, with major energy companies around the world lobbying for this right to be introduced in the secondary legislation.
seismic dAtAE&P companies will also require access to Mexicos seismic data or a way to gain their own data before they can consolidate their investment decisions. So far there has been little indication of how or what data will be released. It has been mooted that the newly empowered CNH could allow seismic companies to shoot and sell data immediately prior to the proposed 2015 bidding rounds, but whether these terms would be deemed acceptable to the majority of po-tential new entrants is, as yet, unknown.
soft lAndingCongress will also be called upon to strike a delicate balance between cushion-ing Pemexs exposure to the rigors of the free(r) market, and ensuring a level enough playing field that will attract outside and indigenous investment. Spec-ulation is rife that the three of Pemexs four operating subsidies that are chroni-cally lossmaking will be bundled into a single bad entity with the profitable exploration unit being spun off. Associated issues such as the extent of local content requirements that may or may not be applied have still to be resolved.
Pemex will submit to the Ministryof Energy, applications for exploration areas and production elds that it is able to operate through entitlements. (90 days)
The Energy Ministry,with technical assistancefrom the National Hydro-carbons Commission(CNH) shall review Pemexsrequest and issue thecorresponding resolution.(180 days)
Pemex will maintainexploration entitlementsin those areas where it has made commercial or discover-ies exploration investments. (3-5 year period)
Pemex will maintainextradition entitlementsin producing elds.
Pemex may proposeto the Ministry ofEnergy for its approval,migration of allocatedentitlementsinto new contracts.
The Ministry shall determinethe technical and contractualguidelines of bidding roundswhile the Ministry of Financewill establish scal terms, andthe CNH shall conduct thebidding round to select thecontractor.
Source: Secretara de Energa. Direccin General de Exploracin y Explotacin de Hidrocarburos.
456
1 2 3
WHATS NEXT FOR PEMEX?Round zero for Pemex
Although the countrys historic and ongoing energy reforms are
intended to reverse this trend, it was not the decline in production that
served as the tipping point that gave way to the energy reforms. Guill-
ermo Garca, director general at SENER, explains that even though
the oil production we lost over the course of a decade equated to the
entire production of a country like Colombia, the rising price of oil
overcompensated for the decline in volumes and so failed to really
impact the national psyche. While declines in production were steep,
the increases in prices were even steeper, so the effects were barely
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76 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal May 2014
noticeable. Volatile gas prices, on the other hand,
and concerns about energy security have made a
big impression on both the politicians and people
and this has ultimately provided the incentive for
the radical changes we are witnessing today.
Marco Bernal, chairman of the energy commit-
tee at the Mexican Chamber of Deputies, points
out that energy security is a high priority as it is
essential for us to have the certainty that Mexico
will be an important producer of energy over the
next 25 years. Another sensitive topic is the need to
reduce the prices of gas as soon as possible; this
could be something that will boost the economy
over the next six years. The petroleum sector is and
will remain relevant for us, but the gas industry is of
pressing concern at the moment.
At the height of its production, between 2000
and 2004, Pemex was delivering 3.4 million barrels
a day (mbpd). From 2005, production started de-
clining until it reached an average daily amount of
2.5 million barrels in 2013. The energy industry
overhaul is expected to increase Pemexs annual
output to as much as 4 million barrels a day by
2025.
Mexicos energy reforms therefore seek to ad-
dress these challenges in a number of ways. Al-
though wide in scope, the reforms broadly seek to
increase investment and employment, as well as
strengthening Pemex by granting it greater free-
dom in its decisions toward partnerships, modern-
ization and better results. Moreover, the energy
reforms will help to strengthen the stewardship of
the state as the owner of oil and gas resources and
as regulator of the industry, and ultimately to gen-
erate greater economic and social wealth through
lower energy prices and increased investment.
Following the passage of the reforms at the constitutional level,
Pemex will have preference in the assignment of areas for explora-
tion or production in a so-called Round Zero. The company will also
make the transition from being a government entity to a state pro-
ductive company over a two year time period. Luis Vielma, CEO at
CBM Exploration and Production Engineering, a specialist consul-
tancy focused on the upstream sector, clarifies. Pemex will explicitly
define the projects it aims to retain in the future, and those it will
seek partnerships in, based on the execution capacity they have. In
doing so, he believes that Pemex is now being challenged, for the
first time, to carefully select those resources it can effectively and ef-
ficiently exploit. It is required to do so by law, adds Vielma.
Transformed into a competitive entity, the NOC will have the abil-
ity to make financial, procurement, and internal organizational deci-
sions. The government is effectively centralizing Pemex [], they are
providing Pemex with the tools to tackle the issues it has with its ex-
ecution capacity, explains Vielma.
Taking Pemexs experience and execution capacity into consider-
ation, industry experts are in general agreement as to which areas the
state giant will propose to retain, and those which it will relinquish to
private investors. Owing to its decades-long monopoly, Pemex has
amassed a wealth of experience in certain E&P areas. For instance,
Vielma points out that Pemex is perhaps one of the most experi-
enced oil companies in the world in terms of exploiting reservoirs in
shallow water (from the shoreline up to a depth of 700 meters). This
view is shared with Ernesto Iniesta, subsea systems commercial direc-
tor for LatAm at FMC Technologies, a leading global provider of tech-
nology solutions for the energy industry. The drilling of [shallow wa-
ter] wells is more efficient than years ago, and as a result, Pemex has
been able to improve the drilling time, utilizing more efficient pro-
grams, sophisticated rigs and advanced equipment, said Ernesto Ini-
esta. The advanced equipment provided by FMC Technologies has
contributed substantially to reducing rig time in the well completion
phase also.
So strong are Pemexs capabilities in shallow water that even the
Norwegians came to Mexico to study Pemexs techniques and meth-
ods, declares Guillermo Garca.
As such, Luis Vielma concludes it is safe to assume that Pemex
will look to maintain its grasp on the shallow water areas that still hold
vast amounts of reserves, as well as in the mature areas that exhibit
recovery factors that would permit the life extension of the reservoir.
In terms of the areas in which Pemex lacks experience, Jose
Rinkenbach, managing partner at Ainda Consultores and strategic
partners with CBM Exploration and Production Engineering, who to-
gether have advised Pemex and the local authorities on a variety of
notable technical and organizational matters, suggests that Pemex
should be more cautious in how it proceeds with the development of
shale resources given the relative nascence of the industry worldwide.
This is clearly demonstrated by Shells recent exit from the attractive
Eagle Ford Formation in the US because it could not turn an attractive
profit there, despite being the leading IOC in the world.
In late March 2014, Pemex finalized and presented Mexicos up-
stream regulator, the CNH, with a list of the areas it wants to keep as
part of the round zero. Although the NOC did not provide further
details about how much acreage it wanted to retain, it did say the list
comprised areas where it was currently producing oil and gas, or had
undertaken exploration work. According to a Pemex presentation to
investors, the firm is seeking to keep 83 percent of its proven and
probable (2P) reserves in the country, as well as 71 percent of proven,
probable and possible (3P) reserves.
Ernesto Iniesta, subsea systems commercial. LatAm at FMC Technologies
Jos Rinkenbach, director, Ainda Consultores
Luis Vielma Lobo, CEO CBM Ingenieria Exploracion y Produccion
Marco Bernal, chairman, Energy Committee, Mexican Chamber of Deputies
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NavixFR_OGFJ_1405 1 4/24/14 11:29 AM
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78 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal May 2014
Pemexs Round Zero request suggests that the firm is leaving
significant room for private investors in unconventional as well as
deepwater oil and gas projects which the firm lacks the resources
and expertise to develop on its own. I believe that deepwater,
shale gas and shale oil and other complex wells that rely on cutting
edge technologies and significant investments for development, are
the areas in which we will see the greatest collaborative activities,
says Jos Serrano, president of Colegio de Ingenieros Petroleros de
Mxico (College of Petroleum Engineers, CIPM). It has been dem-
onstrated over the past decade that Pemex has not been able to
face the entire range of challenges characterizing the sector and so
the Mexican petroleum industry will need to pursue technological
and financial partnerships not only to tap into the unexplored re-
sources and revitalize its production, but also to gain experience in
these technically challenging fields.
Having supported Pemexs production development plans across
a number of areas order to improve its prospects, especially in off-
shore GoM, FMCs Ernesto Iniesta elaborates that by engaging in
partnerships in deepwaters areas where it lacks experience, Pemex
could, in turn, become knowledgeable enough to be a participant,
or major operator, of subsea projects.
Enhancing rEcovEry ratEs Although Mexico has more than 500 reservoirs,
only about 100 of these account for about 80
percent of total current production. As these are
concentrated in mature fields with low recovery
factors, enhancing recovery rates will be central
to the companys ambitions to boost production
levels, particularly over the short to mid-term.
Highlighting the extent of the issue, Sergio
Rivas, president of the Nordic Chamber in Mexi-
co, points out that at the moment, Norway
achieves a 60 percent recovery rate compared to
a mere 23 percent in Mexico.
However, Harry Bockmeulen, CEO at Petro-
fac, the first foreign company to operate state oil
fields in Mexico for more than 70 years, argues
that this isnt necessarily an indication of Pemexs
poor performance per se. As an organization
trying to maximize the use of their limited re-
sources, says Bockmeulen, this illustrates that the NOC simply
had more attractive projects to pursue. Had it not been for the vast
wealth of hydrocarbons in Mexico, which until recently were easily
accessible, Pemex would have been an entirely different entity, and
recovery factors would have been higher. It is technological and fi-
nancial resources that will help to drive recovery factors up in Mexi-
co. As such, it is the mature and other technically challenging fields
that are likely to constitute the portfolio of assets Mexico will offer
to foreign operators. It is this focus on enhancing recovery factors
that will drive production growth in Mexico over the mid-term, since
output from new exploration and production will take about a de-
cade or so to materialize.
Indeed, enhancing recovery factors can have a
profound impact on reserve and production lev-
els. Jos Rinkenbach, managing partner at Ainda
Consultores illustrates the fact through one of the
projects they took on with Pemex addressing the
famous Chicontepec formation. With an initially
dismal recovery factor of just 5.5 percent, Rinken-
bach explains that by looking at fields that are
comparable in characteristics to Chicontepec, we
were able to determine that Chicontepecs recov-
ery factor could be enhanced by a factor of four. To this end, we
suggested the formation of a number of individual, yet collabora-
tive, operational field labs that would work together to maximize
the field resource potential while viewing their third party service
providers as allies rather than contractors. This translated into
changing Pemexs mindset in that it would first focus on its business
model, then its technology requirements, followed by the support
functions and finally the organizational requirements. After estab-
lishing the five field labs, Pemex was able to realize a highly signifi-
cant increase in Chicontepecs production levels in the thousands of
bpd while also reducing the companys drilling activities. As of mid-
2013, those labs represented a third of Chicontepecs entire
production.
managing transitions For many, 2014 will be more about strategic anal-
yses of the reforms and understanding the new
changes and legal frameworks they introduce, be-
lieves Nicolas Borda, partner and energy specialist
at Greenberg Traurig, a leading international law
firm with a strong presence in Mexico.
In other words, this era of understanding
means that activities across the value chain have
slowed. John Lawrence, founder and managing director of
DTK-Group, a global products and services provider for the optimi-
zation of petroleum exploration and production, illustrates that,
Due to the introduction of the extensive energy reforms currently
taking place in Mexico, new exploration activities are on hold for the
time being. Of course, we are working on a number of assignments
now, but the overall level of activity is comparatively less than be-
fore as the industry is transformed and certain responsibilities are
being reassigned from Pemex to the SENER and the CNH. We are
therefore not expecting much growth in Mexico this year.
Harry Bockmeulen, CEO, Petrofac
Jos R. Serrano Lozano, president, Colegio de Ingenieros Petroleros de Mexico
Sergio Rivas, president, Nordic Chamber in Mexico & Intsok Oil and Gas Advisor
Nicolas Borda, partner, Greenberg Traurig
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PetrofFR_OGFJ_1405 1 4/24/14 11:26 AM
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80 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal May 2014
easinG The burden
Following the anticipated implementation of the energy reforms this year, international in-vestors will be looking to penetrate the domestic market and capitalize on the available opportuni-ties. Streamlining the market entry process can be highly advantageous for companies, helping them save precious resources, focus on their core activi-ties and in some cases gain a first movers advan-tage. Ulises Muiz, vice president North America of Mexican based Grupo PAE, a smart solutions pro-vider in the area of human resources with 20 years experience and a presence across nine countries, explains how they can help.
how do you expect the reforms to impact Mexicos energy sector from an hr perspective?
After reviewing the main points of the energy reform, my opinion is that there are a large number of big companies that are interested in invest-ing in Mexico. Simultaneously however, many of them that already have operations in our country and were anticipating the highly publicized energy reforms which will open a range of new investment opportunities for them. My observation is that all these players will face a tremendous amount of challenges at the implementation of the new legislations and procedures. That will be the time when they will turn their attention to-wards companies such as Grupo PAE that can lessen that burden.
in terms of the clients you Grupo pae works with, what opportunities have you identified for expanding your client base in Mexico?
With the major amendments in the tax laws ahead, we are focused on finding and implementing a solution allowing our foreign clients that wish to invest in Mexico to do so in an efficient and safe manner. We intend to help them streamline the cost of doing business in Mexico by, for instance, developing the most efficient tax structures which simulta-neously minimize the risks they incur. In this regard, I would say that in 2014, we will see an increased level of activity in the market, although the players will be more or less the same.
Present in Europe and the Americas, Mexico has, and will continue
to be, a central component of DTK-Groups operations. Although the
company has experienced strong growth over the recent years, par-
ticularly in its core analysis and mudlogging services business lines,
the company is now looking to leverage its experiences and pursue
international expansion. As our business in Mexico matured, the
new strong growth we have forecasted for the company will largely
stem from international markets, explains John Lawrence. We have
also established a new laboratory in Abu Dhabi, U.A.E. that is set to
be operational before the end of April, 2014. We have also set out to
build a new lab in Houston, Texas.
In light of the depth of the reforms and the complexity of the pro-
cesses involved, Guillermo Garca says it will likely take until late 2015
or early 2016 for new contracts to be awarded to private players.
However, because Pemex can now engage in private sector partner-
ships in the areas it choses, we dont have to wait until 2016 for the
private sector to come in and start work on Mexican fields. Interna-
tional companies will be keen to embrace the
chance to work with Pemex.
Partly in anticipation of this slowdown in activi-
ty, companies like Constructora y Perforadora La-
tina (Latina) have taken another approach. With
over 60 years experience in the energy sector, the
Mexican firm first began operations in geothermal
drilling and later extended its services to include
onshore oil and gas drilling. Eager to maintain that
momentum, the company dove into offshore ac-
tivities by making a string of offshore rig acquisi-
tions in 2013.
In light of the reforms, Latina worked diligently
throughout the year to secure and lock in contracts
for its newly-acquired offshore rigs, says Santiago
del Valle, chairman of Latina. After all, what hap-
pens following the reforms is anyones guess and we wanted to limit
our exposure to that risk.
Del Valles colleague and Latinas CFO, Enrique Romo, adds that,
our ability to secure these contracts during these relatively turbulent
times represents a key strength of our organization. We are rather
proud of that. In fact, CP Latina is the only company that was able to
lock in not one, but two, seven-year contracts with Pemex for the
charter of offshore drilling rigs. This is rather unusual as by compari-
son, the average tenure of a similar contract around the world is far
less than that, lasting between six and twelve months at a time. This
clearly demonstrates Latinas operational and managerial capabili-
ties, especially once you take into consideration the stringent techni-
cal and operational requirements that Pemex expects of its
contractors.
financing growthIt must be said, proclaims Manuel Rodriguez, CEO of GBM Infrae-
structura, Mexicos largest infrastructure and energy fund, that a
majority of the hype surrounding the reforms has been dispropor-
tionately placed on the upstream segment, and with undeservedly
little attention being paid to the midstream, downstream and electric
power sector. The respective implications to the latter sectors are
also huge.
The huge opportunities unlocked by the reforms across the board
will require equally large financing in an industry characterized by
capital-intensive projects. However, as Didier Mena, CEO of Navix, a
recognized player specialized in the financing of energy projects in
Mexico, points out, Unfortunately, the financial sector is far from
ready for that. The banking sector has thus far expressed a general
lack of dedication and focus to the energy sector.
Ulises Muiz Patio, vice president, North America Grupo PAE Empresarial
Enrique Romo, CFO, Constructora y Perforadora LATINA
John D. Lawrence, CEO, DTK-Group
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May 2014 Oil & Gas Financial JOurnal | www.OGFJ.cOm | enerGybOardrOOm.cOm 81
DTK Group
Av. Universidad No. 288Col. El Recreo
86020 Villahermosa, [email protected]
Reliable Formation
Evaluation Services
Innovative and
Proven Technology
LABORATORY SERVICES
Conventional core analysis Digital rock analysis
Micro imaging e-Core technology
WELLSITE SERVICES -
MUDLOGGING
MATERIALS FOR
DRILLING FLUIDS
London Houston Villahermosa
Bogota Maracaibo Dammam
Abu Dhabi Trondheim
DTKFR_OGFJ_1405 1 4/23/14 5:24 PM
a real caTalysT For social wealTh
Not only is the oil industry of strategic importance to Mexico, it has been central to the countrys economic development and formative in Mexicos distinct sense of nationalism. When then-President Lzaro Crdenas national-ized the energy sector, seizing fields from US and British companies in 1938, he constitutionally guaranteed Mexican people legal property of the blackgold.
Addressing the critics of the energy reforms who believe that opening the sector to private investment will limit the benefits Mexicans derive from the resource, Didier Mena, CEO of Navix, a Mexican finance company with a strong focus on the oil and gas industry, offers a different view. Together with its controlling shareholder, Axis Capital, the two firms are the single largest independent managers of Mexican pension funds, with a combined US $768 million under management.
Having carefully invested capital raised through local pension funds, Navix has supported the growth of successful Mexican services providers to the oil industry. One such example is Oro Ne-gro, a company focused on becoming a leading player in the industry by offering technologically advanced integrated services and customized solutions.
There is no better way in which Mexicans can benefit from the industrys growth than by making them shareholders of the companies active in the sector, says Mena.We want to replicate the sort of success we achieved with Oro Negro in which the pension funds, through Axis, are the single largest investors with a 46.5 percent holding.
Not only are the opportunities to redistribute the value created in the sector to the Mexican pension holders, but there is much room for growth. Some fifty percent of the assets under man-agement of the pension funds are government securities. However, only 4 percent of local pension funds assets are invested in the instruments that expose them to such opportunities. Not only does this leave much room for growth opportunities for the pension funds, it also represents a significant source of financing for our industry, concludes Mena.
Although Mexican banks are rather liquid and robust in terms of their
capital ratios, they are also rather risk averse and reluctant to enter the
energy sector, explains Mena. As a result of the 1994/5 banking crisis in
Mexico, most of the sector was taken over by international banks and the
government did its part by issuing government securities to clean their
balance sheets. Today, the balance sheets of the banking system are heavily
weighted with investment in securities, representing close to 30 percent of
the banks balance sheets. Instead of branching out into unfamiliar territo-
ries, local banks understandably chose to pursue their more traditional lines of business; pro-
viding mortgages, credit card loans, personal lines of credit, and so on. The local banking
sector has therefore never developed the expertise unique to the financing of energy proj-
ects, leading to a significant gap in the market.
As a result of the domestic financial industrys relative inexperience with the energy sector,
some Mexican companies were left with little choice but to look elsewhere for their financing
needs. In financing its recent offshore rig acquisitions, Latina for instance had to turn to Nor-
wegian investors. Through its indirect subsidiary, the company successfully raised USD 175
million of five-year senior secured callable bonds to fund the completion and take delivery of
its first new build jack-up drilling rig.
When asked about their local project financing endeavors, Juan Reynoso, founder and
CEO of Blue Marine Technology Group, a leading oil and gas services company dedicated to
providing infrastructure, technology and specialized equipment solutions, says: without a
doubt, that was a challenging experience.
Despite the bitter taste left by those experiences, Reynoso explains that, because capital
for energy projects is typically raised through public and private investments, Mexicos public
financing market needs to enhance and align its process and structure to the requirements of
Didier Mena, CEO, Navix
Manuel Rodriguez Arregui, CEO, GBM Infraestructura
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82 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal May 2014
Onshore Drilling. Courtesy of Pemex
the market. It needs to enhance its transparency,
establish clear rules and provide investors with se-
curity, for instance. We have seen these issues im-
proving recently and we can expect to see energy
companies financing larger projects through the
local market.
At the same time, instead of just waiting for the
financial industry to catch up, Reynoso and Blue
Marine have taken matters into their own hands
and established the Blue Energy Fund, which allows individuals to
invest in a diverse pool of assets. Our fund targets investors that
understand the potential of the energy reforms and the market as a
whole, but do not necessarily have in-depth knowledge of the indus-
try. This creates strong synergies between our organization and inves-
tors, allowing us to raise the funds we need to acquire assets and al-
low investors to participate in the industrys growth. We have already
identified many potential investors, domestic and foreign, that are
successful in their own domains but do not necessarily possess exper-
tise in our field, he explains.
a lEss than pErfEct history of rEformsIn 2008, then-President Felipe Caldern sought to reform the coun-
trys energy sector, the first attempt to do so since the sectors nation-
alization in 1938. Seeking to reverse the countrys fortunes, Calderns
government passed the reforms which aimed to achieve the same
goals as the current energy reforms, but to the disappointment of
most stakeholders, the implementation of the 2008 reforms was large-
ly unsuccessful due to political reasons, according to Jose Rinken-
bach at Ainda Consultores, who was involved in the design of the bills
key elements.
Despite Mexicos questionable history with reforms, industry lead-
ers have expressed great optimism, and in some cases even disbelief,
with regards to the extent and depth of the governments renewed
attempt to reform the sector. Aindas strategic partner, Luis Vielma of
CBM Exploration and Production Engineering says: if someone were
to tell me that the congress would approve the deep and multidimen-
sional energy reforms that they did with such swiftness and few altera-
tions on December 16th, I would have struggled to believe them.
Similarly, having witnessed the generally disappointing 2008 ener-
gy reforms, Ernesto Iniesta of FMC Technologies explains how reas-
suring it is to see that the policy makers have learned from their past
experiences and are now far better informed about the industry, its
challenges and the different approaches to address these challenges.
They are well supported by industry experts in making their decisions
and I expect that the final outcome will mirror international standards
and best practices in many ways. The success of the reforms will large-
ly depend on how well aligned these latest efforts are with investors
hopes and expectations.
Indeed, the reforms have already generated a great deal of opti-
mism, particularly at the local level. As Joaquin Castro, founder and
managing director at Ensayos No Destructivos, a company dedicated
providing solutions and equipment for nondestructive testing (NDT),
puts it, if the reforms are successful in their goals, the increased
levels of production and activity will undoubtedly have a trickle-down
effect across the industry value chain. Increased production needs to
be complemented with a proportional increase in exploration and
production assets, infrastructure of all sorts including pipelines, as
well as more refining capacity, among others. The potential opportu-
nities unlocked by these are so great that not only will this have a
positive impact on our company and niche, but on all players active in
the industry, if not more.
Having drawn the global industrys attention with the reforms at
the constitutional level, domestic and foreign investors alike are now
eagerly anticipating the final hurdle that arguably lies between the
boom or bust of the Mexican energy industry. Harry Bockmeulen of
Petrofac summarizes the point. As a private company with an estab-
lished presence in the country, the secondary legislations are critical
in outlining what can and cannot be done in the industry. Although
the general consensus agrees that the secondary laws will promote
international participation and investment, we would be hard-pressed
to make any strategic decisions before we have had the opportunity
to study these closely.
Having played all its cards right so far, will Mexico finally break the
trend and implement a comprehensive set of energy reforms? Will
Mexico and Pemex continue to risk missing valuable foreign invest-
ment opportunities? Will Mexico be allowed to play its part in the
North American energy revolution? Only once the details of the sec-
ondary legislation are defined and made public will we be able to
answer these questions. Having missed the planned April 20 dead-
line, the ball is still in the legislators court.
Juan Reynoso Durand, CEO, Blue Marine Technologies