Highlights of Mexico Infrastructure Summit 2014
Highlights of Mexico Infrastructure Summit 2014
Senator David Penchyna inaugurated the summit with a speech that both praised and explained the benefits of the Energy Reform, claiming that the summit provides a great opportunity to think about the current state of the country. He emphasized that the Energy Reform is one of the most important legislative changes Mexico has seen in the past 60 years because it replaces an obsolete model with one that will maximize Mexico’s hydrocarbons potential.
“There are representatives of both national and foreign companies in this room that are interested in Mexico’s business opportunities. The old monopoly model did not allow the flow of foreign investment, but now there is judicial certainty.” Penchyna also noted that Mexico cannot be isolated from the models that operate in the rest of the world; therefore the Energy Reform provides adequate international standards that allow for better economic development.
The President of the Senate’s Energy Commission explained that a trait of contemporary democracies is an often limited ability to reach agreements at the legislative levels. “After 15 years of failed attempts to restructure the energy sector, the country’s political forces decided to stop blaming each other and work to reach agreements instead.” He claims the “Pacto por México” led to two-thirds of Congress approving the Energy Reform, and the number of reforms passed in the last 18 months surpassed the number of reforms passed in the past 25 years.
Addressing those who oppose the Reform, Penchyna said: “It would be enough to read the Constitution to see that no one is selling Mexico’s oil reserves; we are simply creating a competitive model to maximize the energy sector.” He highlighted that the ongoing debate on the secondary legislation comes from constitutional premises that have already been approved. The Constitution points out strategic sectors that are under the government’s economic regulation. In this sense, Penchyna urges legislators to be critical and to understand the regulatory framework being crafted with the secondary laws. “Back in the 1990s, the reforms on the telecommunications sector did not result in an appropriate legislative framework, which led to a monopoly. We took chances in opening this sector and we did not do it properly. Mexico now has little if any competition in this area and the monopoly does not provide the Mexican people with services similar as those offered in other countries. This was a valuable lesson for legislators and policymakers, and this will definitely not be the case for the energy sector.”
Senator Penchyna mentioned more cases in which opening a sector backfired and detailed how these lessons were applied to the Energy Reform. He noted that Mexico, as a society, is not used to liberalizing its industries and many actors take advantage of this resistance for political purposes. The senator stressed that the government does not want to impose partners on PEMEX; what it wants is a transparent sector where years of corruption can be fought through healthy competition, which will only yield results through a solid regulatory framework.
The forum continued with a presentation by SENER’s Director General of Investments, Gabriel Heller, whose presentation dealt with the opening of the oil and gas industry. He began by saying that there is external investment coming to Mexico, but there is also interest in seeing what the domestic market will bring to the table, particularly regarding SMEs. “We should help national SMEs become highly important enterprises that can someday both export their technology and expand overseas.” He stressed that the Energy Reform seeks free competition in which the productive enterprises of the state can participate with other NOCs and IOCs in equal circumstances. This will be achieved by the creation and empowerment of flexible, independent government agencies that give companies legal certainty.
Heller talked about the upstream segment, saying that in Round Zero, PEMEX already gave SENER a list of the fields it would like to keep or develop. In the upcoming Round One, both private and state companies will participate in tenders. However, Heller said that there are discussions regarding the possibility of a pre-qualification round as not all contracts will be the same. “Each contract will have its own rules and the winning company will be the one to offer the best conditions. We are now implementing a process that is new to us and that makes transparency an extremely crucial factor.” Heller says the new scheme will seek 25% of national content annually in E&P projects. The percentage will vary according to each contract. For instance, deepwater projects will seldom require high national content, but the percentage will be leveraged in mature fields and shallow waters.
He explained that in the new model, oil revenues equal to 4.7% of the GDP will go to public expenditure, remaining profits equivalent to 3% of the GNP will go to a long-term savings fund, and the rest will be destined to social programs.
Regarding midstream, Heller reminded the audience that after the Reform industrial transformation is no longer considered a strategic sector. This means PEMEX is no longer the sole responsible party and SENER can grant permits to private actors. He mentioned how the National Center of Natural Gas Control (CENAGAS) has already contemplated expanding infrastructure for transportation and storage. This agency has 18 works for natural gas transportation planned for 2018, involving 10,000km of pipeline and an investment of US$13.3 billion. “We expect these developments to be ready by 2018. This network will be one of the country’s industrial motors.”
Heller talked about gasoline and diesel, telling the audience that he, in representation of SENER, does not feel that the current infrastructure fosters competitiveness. As part of the transition that accompanies the Energy Reform, a maximum price for gasoline will be gradually established from 2015 until 2019. Nonetheless, gasoline prices will adjust to inflation during this period. According to Heller, prices will be liberated and guided by international, markets in 2020. “In 2017 we will start seeing gas stations of foreign companies selling PEMEX products but with differentiating factors. They might import their products, but we will stick to the maximum price scheme until 2020,” explained Heller.
Luis Vielma Lobo, President and Director General of CBM Ingeniería Exploración y Producción drew on his extensive experience across Latin America to praise Mexico’s Energy Reform. He said that both he and other senior oil executives had been surprised by the depth of the Energy Reform and said it surpassed similar efforts seen in Colombia and Ecuador. He said that the optimism shared by these executives is a powerful symbol of the intentions of their companies, and others, to participate in the Mexican oil and gas sector.
Vielma Lobo pointed to SENER studies that placed Mexico in the top 5 countries worldwide for shale gas and oil. These opportunities are bound to attract a lot of international capital, so CBM is now part of the efforts to match Mexican fields with the technologies they need. “For example, mature fields do not need complex technology, medium technology is used for associated fields like Chicontepec, and finally, the challenges associated with deepwater require the most complex technology,” said Vielma Lobo.
He explained that Mexico’s recovery factors are below those of US fields, showing the need for improved recovery techniques. He provided the example of fields containing shale gas, where companies will look for sweet spots with a substantial accumulation of resources. Seismic studies, such as those that implement 3D technology, will be the key to finding these sweet spots.
The right drilling technologies must also be taken into consideration, given their environmental impact. In the US, certain states have harsher regulations, impacting the location of clusters and the ability to fracture wells from the start to improve efficiency. As such, Mexico will have to measure how and where these should be deployed, to avoid unpleasant environmental side effects.
The third kind of technology is associated with deepwater sites. Given the amount of investment needed to drill in deepwater, 3D scanning and imaging technology play an important role in helping companies strike the jackpot from the start. Vielma Lobo pointed to Petrobras as having pioneered drilling solutions to avoid unnecessary steps, and when dealing with tricky geologic formations. Robotics have also allowed the development of subsea facilities that outpace conventional methods. “All these technologies are looking to maximize the value creation for anyone who wants to invest in these regions,” he said.
As such, SENER and CNH have to match operators with companies to generate the best profit and yield possible. Leading third-party companies are already experts in extracting shale gas from reservoirs due to their experience, according to Vielma Lobo. “They know from the outset how to define the spacing of clusters, the well architecture, at what speed to extract, and how to be environmentally and socially responsible. These elements are what will make the difference. The design must be done immediately to allow for injection methods and artificial lifting of heavy oil to be possible. Mexico has a wealth of expertise for such operations, but the challenge is to understand the characteristics of each particular well in a variety of fields.” For Vielma Lobo, the availability of drilling equipment and of new facilities matching those of PEMEX will prove seminal in creating the right spirit of competition in post Energy-Reform Mexico.
From left: Jose Pablo Rinkenbach, Cesar Vera and Ernesto Marcos Giacoman
Jose Pablo Rinkenbach, Managing Partner of Ainda Consultores chaired a panel with Ernesto Marcos Giacoman, President of AMESPAC, and Cesar Vera Mendez, Area Manager at Nabors Industries, discussing the key factors that will contribute to the success of the private oil and gas companies following the sweeping reforms to the industry.
Rinkenbach opened up the panel with a discussion surrounding the state of the private industry as it stands today in Mexico, presenting facts and figures elucidating the extent of investment. Rinkenbach explained that there are almost 1000 private companies operating within the National Energy sector, 370 of which are dedicated to the well services segment, which makes up 50-60% of the industry’s CAPEX. 20 services lines currently support well construction, and 20 national companies operate within this area. The focus of the remainder of the panel discussion covered what needs to be done to grow the sector and support new companies starting up, particularly national ones.
Cesar Vera Mendez discussed the role of PEMEX in supporting the development of the private sector, saying that the historic monopoly has played the major role in establishing the industry and will continue to be a crucial client. Private companies need to be a part of PEMEX’s procurement projects and therefore the reform and opening of PEMEX practices is key. Vera also purported that going forward what exactly defines a national company needs to be established. “Talking about national content we need to look averages. It is easy to define when you are talking about tangible products, but what about when we are talking about services for example. Corporate structure is also relevant; if a foreign investor decides to start a company by issuing bonds or shares to a local investor, then that can be classified as local content,” Vera said.
Ernesto Marcos Giacoman asserted that what Mexico really needs is a Cemex for oil. In the meantime the Mexican companies that work for PEMEX must increase standards and internationalize so that they can become global actors. Marcos added that Mexico has begun to generate a national database for the companies that provide specific types of services, which the country has not had until now. This will help the financial sector, which currently has no idea of what the industry actually looks like. All parties agreed that the private sector should not wait for a 3rd party to provide guidance on how to improve human capital but rather start working with the educational and public sector to create the right conditions to support sector growth immediately.
Luis Ramos Martínez, Acting Subdirector for Planning and Evaluation of PEMEX Exploration & Production spoke about PEMEX’s ongoing strategy to continue being the leading producer of oil in Mexico. Ramos explained that the main PEMEX strategy is to align itself to work and reach several objectives and that a business plan is being defined for the requirements in terms of expenditure and growth. “We believe that the reform is going to allow for better management, better decision-making processes and more financial efficiency. We need to generate a culture directed to results,” said Ramos.
One of the key focal points, and one that Ramos spoke of at length, was the company’s strong focus on human capital development. He explained that there will be a different dynamism as PEMEX tries to improve its offerings as an employer. The payment model is going to be different and will be adjusted to international best practices in order to retain and attract the right people. “We are going to try and generate rotation schemes that will encourage knowledge regeneration. We are going to work on payback schemes that are on a par with international practices,” said Ramos. There will be higher salaries for expert positions, as well as long-term development strategies. When asked by the audience how PEMEX planned to recapture lost talent Ramos also confirmed that they are working with retired engineers to provide coaching services. Ramos also explained PEMEX’s goal to prepare for non-conventional sites in deep waters, adding that the challenge ahead is to monetize the current hydrocarbons base.
In the first of two presentations on how to address mature fields, Miguel Angel Lozada, PEMEX’s Administrator for Cantarell said that the major challenge in mature fields was to increase the recovery factor in the long-term. “We need to rejuvenate these mature fields. We want to accurately project the states of the fields, project when we need to apply enhanced recovery methods. This challenge involves IT, technology and financing,” he outlined.
He also gave some statistics as to how Mexico’s production will fare compared to the rest of the world. Mexico’s 1P reserves will allow it to produce for 10.6 years at current global average production rates, as opposed to over a century of production for the world in total. For 2P reserves, there are fields that will see their reserves exhausted in 20 years, although others may last up to 60 years, making their particular exploitation of great interest. For example, Akal has a remnant reserve of 2.3 billion barrels. “The challenge lies in that the recovery factor in PEMEX’s fields reaches 35%, but our forecasts shows this rate could jump by 10% once the right technology and applications are in place,” said Lozada.
However, he added that the cost of operations can almost double if enhanced recovery factors take the recovery factor from 35% to almost 50%. When this goes over 50%, costs increase significantly again, leading Lozada to caution that thought would have to be given to Mexico’s tax regime and PEMEX’s investment allocation to match these rises in cost.
Lozada explained that since the boom in IT development for horizontal well drilling and multi-stage well drilling in the 1990s, Mexico has seen a regular increase in production from the application of these techniques. He calls for the same logic to be applied to newer technologies such as horizontal wells. “Mexico has stressed the importance of increasing production from existing wells. The enhanced recovery methods used led to an increase in production from declining wells. Artificial lift systems, water injection, gas injection were all used to illustrate the proper management of such wells,” added Lozada.
Giving specific examples of fields, he pointed out that Cinco Presidentes began declining in 2001. But 3D seismic data elucidated new resources that had not been drilled and horizontal wells were used to recover them. In the Northeast Marine Region, Ek-Balam produced 6,000 bpd but this now stands at more than 60,000 bpd, in large part due to the use of horizontals wells. He added that sand control technology will be implemented and horizontal drilling would be maintained until Ek-Balam reached 100,000 bpd.
Edgar Rangel, Commissioner of the National Hydrocarbons Commission (CNH), took over to explain that IOR and EOR would help Mexico be successful in its brownfield projects and in mature fields, as these methods aim to extract up to the last drop of available. However, the way in which they are used must depend on the conditions of each field involved. “We have different strategies available to use IOR and EOR that can be combined to get better displacement and retrieve the hardest to reach oil by getting to the furthest corners of a well and use chemicals to extract it,” he said.
IOR methods involve any post-primary recovery methods and EOR, is a tertiary recovery technique which typically recovers remanent oil by injecting chemicals such as surfactant polymers. Rangel confirmed that the wise combination of IOR and EOR would significantly improve the recovery factor, while not wasting resources like water and gas. “Mexico has a lot of potential for the use of all these technologies. Pilot tests will prove the viability of IOR and EOR and then lead their utilization to become massive,” he said. As part of PEMEX’s catalog, the country has a commitment to meet outputs of 3 billion barrels a day and then 3.5 billion barrels. He concluded that IOR and EOR will determine how efficient authorities can be in reaching that production level.
From left, Bud McGuire, Ernesto Iniesta, and Juan Trebino”
Bud McGuire, Principal and Co-founder of Alpha Petroleum Services, moderated the panel entitled ‘Blueprint for Mexico’s Deepwater Future.’ He pointed out that the challenge to deepwater development is not technology, but licensing terms that are competitive with other investment opportunities in other parts of the world. “A contract is not good unless it is good for both parties. This approach will attract the technology that Mexico needs,” McGuire said and insisted that capital follows projects that yield good returns. He stressed that deepwater developments require a tremendous amount of capital. “These are mega projects of US$1 billion or more. Projects require capital and very long planning, as mistakes are really expensive.” McGuire also mentioned qualified personnel as a crucial element for deepwater that Mexico does not have. Because foreign companies will bring their talent, McGuire suggests native companies such as PEMEX should recruit from the global market.
Commenting on how Mexico can push its deepwater segment, Juan Trebino, Vice President and Partner at Strategy&, said Mexico is competing not only with international players, but also with different types of hydrocarbons that the market wants to develop. In this sense and before technological discussions, Trebino says Mexico has to ensure an environment without legal or environmental restrictions so that national champions and international participants can compete and attract capital. “Deepwater developments are enormous projects with very long life cycles that force us to create contractual frameworks. It is important for parties asking for loans to be able to use the oil molecule as hedging.”
As for technology, Trebino expressed the importance of creating technology centers in Mexico. “There are four deepwater technology poles in the world: the Gulf of Mexico, Brazil, Singapore, and the North Sea. Mexico should join these poles through its Gulf of Mexico operations. This is not about simply creating specific capacities, but to develop the entire deepwater value chain, from subsea well completions to transportation tankers.”
Panelist Ernesto Iniesta, FMC Technologies’ Commercial Director of the Subsea Division Latin America, said drilling in deepwater is mostly intended to explore and estimate reserves. When a reserve is found, he tells, an exploratory well is drilled. But in deepwater, three or more exploratory wells have to be drilled. “Mexico has been exploring deepwater reserves for 14 years. The country began with 400m and now it almost has 3,000m in Perdido.” For him, the challenge is to bring the fluids up to the surface. “Chevron managed to drill to depths of 2,400-2,900m. It took nine years to develop the technology to bring oil to the surface in Perdido. We need to improve efficiency in this area. Given the deepwater conditions in the Gulf of Mexico, there is not a system that can meet Mexico’s deepwater production targets,” Iniesta said. He added that the country will face companies that have a 30 year technological advantage over PEMEX. Therefore Mexico has to develop the technological and human resources to reach the heights of other international players. “The northern area of Perdido is very complex and production will require at least six players.”
In a panel seeking to answer major questions about the future of unconventional resources in Mexico, Arindam Bhattacharya, the Director General of Schlumberger Mexico, sat down with Vinicio Suro Pérez, Director General of IMP, and Rogelio Montemayor Seguy, the President of the Mining and Petroleum Cluster of Coahuila.
Bhattacharya began by outlining differences between the US and Mexico. “The US has 60 billion barrels of oil equivalent in unconventional resources and 32,000 wells have already been drilled to tap into these reserves. Can Mexico match that level of activity?” he asked. He divided the challenges associated with unconventional resources into above and below ground. Above ground, efficiency must be maximized in unconventional operations. To do so, logistics, infrastructure, resource management (water, sand), and community relations are all essential.
For subsurface activity, a lot of wells are vertically drilled and new scientific advances have not yet been applied in the shale assets of the Mexican oil and gas industry. Schlumberger has sought to help science catch up, by investing a lot in technology and shale exploration. “Science-guided exploration will help find sweet spots, optimize the completion design to ensure we only complete where we can return our investment. We have to maximize production while minimizing resource usage. This is why a complete unconventional field development plan is needed. This would involve identifying specific drilling techniques and optimum circulation techniques on a well-by-well basis to help ensure resource optimization,” said Bhattacharya. He added that doing so could improve resource utilization between 20 and 50% on different wells as well as improving efficiency by focusing on sweet spots only. He added that the successful development of shale resources would depend on collaboration between many stakeholders, including education, security, social, fiscal, logistics, resource management and infrastructure.
From left: Arindam Bhattacharya, Vinicio Suro and Rogelio Montemayor”
Suro admitted that so far, IMP had treated unconventionals much in the same way as conventional resources, even using the same tools. “We explore with seismic data, we drill with the same equipment, and we use resources in the same way. We have to free ourselves from the conventional line of thought, and treat unconventionals differently,” he said. He added that while sweet spots might be easy to fracture, engineers need to find them, meaning that close attention must be paid to each formation’s saturation, such as those with deeply embedded hydrocarbons. He said that carrying out such a careful analysis of the lithology would define the saturation, revealing the sweet spots and indicating where to frack.
Montemayor, from his vantage point, spoke about how Coahuila is aware of the important unconventional resources within its borders. He extended a formal invitation to Mexican corporations to participate, although he said the state was aware of its border with the Eagle Ford and of the differences in infrastructure it had with the US giant. “Nevertheless, we have kept fighting to create links with universities, including 11 in Coahuila, and to help graduates work in the oil and gas industry. Coahuila is always asking itself how to improve its educational offering in the near future, while also improving needed infrastructure in dozens of places in the state.”
He spoke of an institutional weakness at the federal and local levels that the six committees of the Coahuila cluster are aiming to pally. But as the obstacles in the way of the Energy Reform are overcome, such as the legal framework, he expects that such weaknesses should begin to fade. “The reform will help solve local issues faster. Our association is working to help solve these through fast procedures and permitting processes that carry no surprises. We are working to shorten administrative time and improve project productivity.” Montemayor concluded that institutions like the cluster could take the initiative to convince companies already working in the Eagle Ford to cross the border. Bhattacharya agreed, saying that the Eagle Ford already has 60 operators. “The appraisal of each side of the border will reveal the need for operators on each side. The projects in the US and Mexico are at utterly different levels of development so the country needs to catch up,” he said.
Arturo Henriquez, Chief Procurement Officer of PEMEX, spoke about the importance of the new centralized procurement function at PEMEX; the importance of this new office is such that its consolidation process has been accelerated to match the passing of the Secondary Laws. US$120 billion is produced by PEMEX every year and this is expected to increase steadily with the new reforms. The vast infrastructure involved in its operations makes PEMEX a national heavyweight; this infrastructure includes six refineries, eight petrochemical complexes, 60,000 km of pipelines, storage units, cars, roads, tractors, hospitals, and more. The procurement division of PEMEX is also a force to be reckoned with; its operations involve anywhere from US$20 to US$30 billion a year, and 20,000 contracts. There are 100 contracting offices and more than 3,000 employees dedicated to procurement at PEMEX. This has been taking place in a very decentralized and unstructured environment. Last year, PEMEX visited global oil companies to study their procurement divisions, as well as getting advice from international consultants. Henriquez explained that PEMEX wants to create a unified procurement division which results in centralized planning. Most major oil companies are working on a centralized or hybrid-centralized procurement model today, and PEMEX intends to follow this.
Centralizing the procurement role and having a Chief Procurement Office that will report directly to the CEO gives procurement the importance it has always had from a strategic standpoint. PEMEX is going to be conducting strategic sourcing through category management. Category management means taking a step back and analyzing purchasing needs through spend analysis, rather than taking a needs-based reactive approach. Spending is identified, categorized, and sub-categorized. The hope is that this will make PEMEX procurement officers specialists in their fields.
Henriquez explained that the other pillars of the procurement department overhaul will be integrated shared services, strategic sourcing, technology and human capital development. In terms of the last and much discussed point, human capital development, Henriquez explained that in terms of procurement the focus will be on making current specialized employees generalists, and then specialists in procurement. Further procurement employees need to be experts in what PEMEX buys while also understanding the technical, legal, and commercial aspects of procurement.
Henriquez concluded by admitting that, historically, doing business with PEMEX has been very challenging for suppliers because of its bureaucratic nature, but that the implementation of international best practices on three main subjects (strategy, suppliers, and procurement) aims to resolve this.
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