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 Peña Nieto and Canadian Prime Minister Stephen Harper - Petróleos Mexicanos (Pemex) CEO Emilio Lozoya asserted that, "North America will become the world's 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 continent's growing energy production, currently reshaping global markets.
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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 Alberta's 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, Mexico's 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 between the United States and Mexico. Unable to match domestic consumption 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 expanding infrastructure and driven by new power generation and industrial 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 Mexico's main provider of natural gas.
On another front, within days of Mexico's 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 Mexico's Petroleos Mexicanos (Pemex) to jointly develop 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 quality extra-light crude oil.
At current production levels, the US, Canada and Mexico together already represent 18.2 percent of world crude output. By comparison, OPEC member countries produce approximately 40 percent of the world's crude oil. Guillermo Pineda, energy industry leader at the multinational professional 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 allow the North American region to undergo an energy revolution and Mexico is an integral component of that," says Pineda.
Although no formal discussions have taken place yet, Guillermo García, director general of exploration and exploitation of hydrocarbons at Mexico's Secretariat of Energy (SENER, Mexico's energy 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 exporting hubs of the world."
During February's 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 largest benefit from the North American energy revolution, " believes Ernesto Marcos, founder and senior partner at Marcos y Asociados, the only financial and business development consultant specializing in the Mexican energy industry, and former CFO at Pemex. "The country 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 101
Mexicans 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 prices in Mexico are 25 percent higher than those in the US, placing a high burden on consumers and the government, as well as the country's manufacturing base. Second is Pemex's inability to tap into individual 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.
The local perspective
Given the broad implications of the reforms and the potential opportunities they are expected to generate for investors, 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 Corporation, a group of companies dedicated to generating added value to its customer through products, services 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 become an integral player in the global energy landscape," 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 all
"Increased competition can always be viewed as a challenge but we do not like to look at it in that way," asserts Jose Olarte, director general of Grupo Legotec, a Mexican firm specialized in the maintenance and restoration of drilling rig components.
If executed as intended, not only will the energy reforms bring in increased investment and a broader client 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."
ENERGY REFORM – WHAT DO WE KNOW SO FAR
Despite their historic significance, Mexico's energy future was not definitively settled by the constitutional 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, attorney 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 unanswered. Here's what we know so far.
Organizational shake-up
Three government ministries will have a hand in molding the new energy landscape. The Energy Ministry (Secretaría de Energía or SENER) remains the dominant force within the sector – retaining overall responsibility for the setting of energy policy, while assuming additional responsibility for selecting 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 during 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 industrial safety and environmental protection across the energy sector. Finally, the Finance Ministry (Secretaría de Haciena y Crédito Público 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 regulators
Significantly, both the Hydrocarbon Regulator (Comisión Nacional de Hidrocarburos or CNH) and Energy Regulatory Commission (Comisión 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 unleashed
Pemex and the Federal Electricity Commission (Comisión Federal de Electricidad or CFE) must transition from monopoly status to productive enterprises. Neither has been privatized, so each will continue to be publically owned, but both will be exposed to competitive market forces and obliged to create economic value in the same way as classic private sector 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.
Increased transparency and mechanisms to reduce corruption within Pemex will be introduced; Pemex's executive board will be split between government appointees and independent consultants and the power of the labor union in Pemex will be reduced.
Ownership
It 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 Data
E&P companies will also require access to Mexico's 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 potential new entrants is, as yet, unknown.
Soft landing
Congress will also be called upon to strike a delicate balance between cushioning Pemex's exposure to the rigors of the free(r) market, and ensuring a level enough playing field that will attract outside and indigenous investment. Speculation is rife that the three of Pemex's four operating subsidies that are chronically 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.
Natural gas shortages have compelled Mexico to purchase liquefied 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 manufacturing base that accounts for 35 percent of its GDP, keeping energy prices (an important input for many manufacturers) low is crucial.
Although the country's 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. Guillermo García, 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 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 committee 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 declining until it reached an average daily amount of 2.5 million barrels in 2013. The energy industry overhaul is expected to increase Pemex's annual output to as much as 4 million barrels a day by 2025.
Mexico's energy reforms therefore seek to address these challenges in a number of ways. Although wide in scope, the reforms broadly seek to increase investment and employment, as well as strengthening Pemex by granting it greater freedom in its decisions toward partnerships, modernization 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 generate 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 exploration or production in a so-called ‘Round Zero'. The company will also make the transition from being a government entity to a ‘state productive company' over a two year time period. Luis Vielma, CEO at CBM Exploration and Production Engineering, a specialist consultancy 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 efficiently exploit. "It is required to do so by law," adds Vielma.
Transformed into a competitive entity, the NOC will have the ability to make financial, procurement, and internal organizational decisions. "The government is effectively centralizing Pemex […], they are providing Pemex with the tools to tackle the issues it has with its execution capacity," explains Vielma.
Taking Pemex's experience and execution capacity into consideration, 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 experienced 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 director for LatAm at FMC Technologies, a leading global provider of technology solutions for the energy industry. "The drilling of [shallow water] wells is more efficient than years ago, and as a result, Pemex has been able to improve the drilling time, utilizing more efficient programs, sophisticated rigs and advanced equipment," said Ernesto Iniesta. The advanced equipment provided by FMC Technologies has contributed substantially to reducing rig time in the well completion phase also."
So strong are Pemex's capabilities in shallow water that "even the Norwegians came to Mexico to study Pemex's techniques and methods," declares Guillermo García.
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 together 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 Shell's 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 Mexico's upstream 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.
Pemex's 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 José Serrano, president of Colegio de Ingenieros Petroleros de México (College of Petroleum Engineers, CIPM). "It has been demonstrated 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 resources and revitalize its production, but also to gain experience in these technically challenging fields."
Having supported Pemex's production development plans across a number of areas order to improve its prospects, especially in offshore GoM, FMC's 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 company's 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 Mexico, 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 Petrofac, the first foreign company to operate state oil fields in Mexico for more than 70 years, argues that this isn't necessarily an indication of Pemex's poor performance per se. "As an organization trying to maximize the use of their limited resources," 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 financial resources that will help to drive recovery factors up in Mexico. 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 decade or so to materialize."
Indeed, enhancing recovery factors can have a profound impact on reserve and production levels. José 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, Rinkenbach explains that by "looking at fields that are comparable in characteristics to Chicontepec, we were able to determine that Chicontepec's recovery factor could be enhanced by a factor of four. To this end, we suggested the formation of a number of individual, yet collaborative, 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 Pemex's 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 establishing the five field labs, Pemex was able to realize a highly significant increase in Chicontepec's production levels in the thousands of bpd while also reducing the company's drilling activities. As of mid-2013, those labs represented a third of Chicontepec's entire production."
Managing transitions
For many, "2014 will be more about strategic analyses of the reforms and understanding the new changes and legal frameworks they introduce," believes 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 optimization 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 before 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."
Easing the burden
Following the anticipated implementation of the energy reforms this year, international investors will be looking to penetrate the domestic market and capitalize on the available opportunities. Streamlining the market entry process can be highly advantageous for companies, helping them save precious resources, focus on their core activities and in some cases gain a first movers advantage. Ulises Muñiz, vice president North America of Mexican based Grupo PAE, a smart solutions provider 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 Mexico's 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 investing 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 towards 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 simultaneously 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-Group's operations. Although the company has experienced strong growth over the recent years, particularly 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 processes involved, Guillermo García 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 partnerships in the areas it choses, "we don't have to wait until 2016 for the private sector to come in and start work on Mexican fields. International companies will be keen to embrace the chance to work with Pemex."
Partly in anticipation of this slowdown in activity, companies like Constructora y Perforadora Latina (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 activities by making a string of offshore rig acquisitions 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 happens following the reforms is anyone's guess and we wanted to limit our exposure to that risk."
Del Valle's colleague and Latina's 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 comparison, 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 Latina's operational and managerial capabilities, especially once you take into consideration the stringent technical and operational requirements that Pemex expects of its contractors."
Financing growth
"It must be said," proclaims Manuel Rodriguez, CEO of GBM Infraestructura, Mexico's largest infrastructure and energy fund, "that a majority of the hype surrounding the reforms has been disproportionately 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."
"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 territories, local banks understandably chose to pursue their more traditional lines of business; providing 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 projects, leading to a significant gap in the market."
As a result of the domestic financial industry's 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 Norwegian 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."
A real catalyst for social wealth
Not only is the oil industry of strategic importance to Mexico, it has been central to the country's economic development and formative in Mexico's distinct sense of nationalism. When then-President Lázaro Cárdenas nationalized 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 Negro, 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 industry's 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 management 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.
Despite the bitter taste left by those experiences, Reynoso explains that, "because capital for energy projects is typically raised through public and private investments, Mexico's public financing market needs to enhance and align its process and structure to the requirements of the market. It needs to enhance its transparency, establish clear rules and provide investors with security, for instance. We have seen these issues improving 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 industry. This creates strong synergies between our organization and investors, allowing us to raise the funds we need to acquire assets and allow investors to participate in the industry's growth. We have already identified many potential investors, domestic and foreign, that are successful in their own domains but do not necessarily possess expertise in our field," he explains.
A less than perfect history of reforms
In 2008, then-President Felipe Calderón sought to reform the country's energy sector, the first attempt to do so since the sector's nationalization in 1938. Seeking to reverse the country's fortunes, Calderón's 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 largely unsuccessful "due to political reasons," according to Jose Rinkenbach at Ainda Consultores, who was involved in the design of the bill's key elements.
Despite Mexico's questionable history with reforms, industry leaders 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. Ainda's 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 multidimensional energy reforms that they did with such swiftness and few alterations on December 16th, I would have struggled to believe them."
Similarly, having witnessed the generally disappointing 2008 energy reforms, Ernesto Iniesta of FMC Technologies explains how reassuring 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 largely depend on how well aligned these latest efforts are with investors' hopes and expectations."
Indeed, the reforms have already generated a great deal of optimism, 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 opportunities 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 industry's 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 established 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 investment opportunities? Will Mexico be allowed to play its part in the North American energy revolution? Only once the details of the secondary legislation are defined and made public will we be able to answer these questions. Having missed the planned April 20 deadline, the ball is still in the legislators' court.
