Mexico Oil & Gas Summit 2016 - Mexico Business Events (mbe)
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MOGS 2016
Mexico Oil & Gas Summit 2016

Mexico Oil & Gas Summit 2016 Highlights

DAY 1

The Transformation of the Mexican Oil and Gas Industry

Lourdes Melgar , Ubdersecretary of Hydrocarbons at the Ministry of Energy
MOGS 2017 PANEL1

Mexico’s approach to its Energy Reform has not only been fast but transparent, with regulators looking to adopt international best practices as the Reform moves forward, Lourdes Melgar, Deputy Minister of Hydrocarbons at the Ministry of Energy, told the third annual Mexico Oil & Gas Summit in Mexico City.

Melgar opened the two-day summit at the Sheraton Maria Isabel Hotel with a presentation highlighting the main points of the transformation over the past year, saying the Reform’s goal was to completely overhaul the industry.

Unlike other countries that have targeted energy reforms one sector at a time, the Mexican government launched an ambitious and comprehensive plan, although secondary legislation took a little longer, coming into law in August 2014. The Energy Transition law was among the most recent acts to be put in force.

Hand in hand with the new institutional arrangement, regulators CNH and ASEA have been strengthened to match international best practices. These regulators have a certain degree of autonomy but Melgar highlights their transparency above all else, saying that players can follow meetings with CNH on the internet, for example, because every meeting with providers is recorded.

Green energies are also a target of the Reform. There is an entire chapter in Hydrocarbon law to ensure activities are safe, Melgar said. Social licenses help avoid community confrontations during development projects and to protect and generate benefits for indigenous communities. “There has been groundbreaking work done in Mexico,” she said.

The country could continue producing 2.5 million barrels a day but the goal is for PEMEX to become a consortium to develop new areas of production. The Reform was not established solely to secure revenues but was intended to generate new jobs, to benefit the local population and the economy, Melgar said. The Energy Reform established local content requirements in all contracts to secure the growth of local industry. Melgar added that the Ministry of Energy is working closely with the Ministry of the Economy and the industry to ensure growth of all areas that support the oil and gas industry.

“I believe that Mexico could become an energy hub that could supply the whole world,” the Deputy Minister said. “Given our success in the manufacturing sector, we should be able to do the same [in oil and gas.]”

Melgar also cited Mexico’s enormous penetration in the automotive and aerospace industries worldwide as an example of how powerful the country could become and how important Mexico’s economy is.

The summit follows the previous day’s announcement of Round Two. The Ministry of Energy took lessons learned from the shallow-water bid into account and COPARMEX and international experts also weighed in with feedback. The blocks are similar to block 7, measuring 500km2, and many are thought to contain natural gas. This next round will take place in March 2017, with the first barrel to be produced in 2020.

Just one year after being awarded the first contract, 16 innovators are already operating in Mexico, Melgar said. “So many operators working in tandem with PEMEX means we will see energy security, job creation and greater production.” To date, 30 contracts have been awarded, 24 of which have already been signed while the remaining six will be closed in September. There are 26 companies prequalified for deep water drilling. The country is eagerly awaiting deepwater and ultra-deepwater bids.

Melgar spoke in depth about Natural Gas, saying, “we tend to talk about the development of the pipelines.” The current presidential administration is developing over 10,000km of pipelines throughout the country to bring natural gas to every state. Of course, this is together with increased links with the US, which enjoys the cheapest natural gas. “Today we can say we have gone almost two years without critical alerts,” she said.

Any company interested in developing a commercial pipeline can do so at their own risk with permission from the state, Melgar said. The government will manage those intended to push specific economic development to states that lack natural gas. The Ministry will present the new Natural Gas policy next Monday, wherein pricing will be reflected to ensure competitiveness for PEMEX to continue producing natural gas. Sound pricing will boost the development of infrastructure as well as domestic production, she said.

Melgar pointed out that Mexico consumes 53 percent of the gasoline produced here and 35 percent of LPG, suggesting an opportunity to supply this growing market. In terms of gasoline and diesel, the Ministry has launched branded competition, having already awarded several fully inclusive permits for the gasoline and diesel that is imported into Mexico.

“We have seen new brands established in Mexico, new brands of gas stations, and there is an urgent need to increase this as well as transportation and storage for refined product,” Melgar said. “These are areas of opportunity for investors. Mexico urgently needs to increase its storage of refined products, along the lines of those used in OECD countries.”

Politically speaking, Melgar said that there has been a lot of production of energy and that many contracts have been signed. “The industry knows that many barrels will come out of the Reform but not before 2018 when the government leaves office. We can measure success because of the high priority to achieve transparency.”

The Deputy Minister continued: “We have adjusted some terms regarding corporate guarantees or compliance guarantees and reporting, among others.” The country is moving toward common rules around the world and the Ministry of Energy has implemented adjustments to make contracts competitive by international standards.

Mexico’s fiscal strategy to optimize the competitiveness of upstream opportunities

Salvador Ugalde , Director of the Income Unit of Hydrocarbons at the Ministry of Finance
MOGS 2016 fiscal strategy

To optimize upstream opportunities and competition, the government is creating a fiscal framework that creates an attractive business case for potential operators by properly balancing state revenue, exploration and production costs and return on investment for operators that is in line with the corresponding risks, Salvador Ugalde, Director of the Income Unit of Hydrocarbons at the Ministry of Finance, told the Mexico Oil & Gas Summit 2016 in Mexico City.

The task is not an easy one, he told the audience at the Sheraton Maria Isabel Hotel during his presentation. Creating a jurisdiction with set fiscal terms can be difficult because Mexico’s different oil provinces have each have unique characteristics that affect the hydrocarbon production potential, risks, necessary technical and operational skills as well as investment requirements. Some areas even have different layers of hydrocarbon resources located on top of each other, such as shale oil and gas in the same area as conventional resources. “Identifying and fitting the rich amount of resources that Mexico has into a legal and fiscal structure is indeed a challenge,” Ugalde said.

The Ministry of Finance (SHCP) strives to implement progressive elements that will not disturb PEMEX’s investment decisions. However, the fact the state-owned company was the sole company in charge of all exploration and production activity limits flexibility. Furthermore, PEMEX’s costs are not clear and complicate the measurement of profitability. “Achieving competition within former monopolies is easier said than done.”

The idea is to attract a wide variety of players that have the necessary knowledge and technical skills to manage specific niches. In addition, it needs a wide spectrum of suppliers that can support the operators’ projects with the best equipment and technology.

The system incorporates international best practices to develop contracts with attractive terms and fair conditions. The Energy Reform borrowed from the experiences of countries such as Brazil, Indonesia and Norway. “Early on, we decided that the bidding rounds would be as transparent as possible. The process has simple rules used to determine which companies can exploit resources. It aligns the objectives of contractors and the government,” the Director said.

Ugalde said the government has been experimenting with four types of contracts in the rounds that allow players to choose their work strategies. It facilitates collaboration between companies and agencies in each area and provides better solutions.

Ugalde also said the strategy takes into consideration that projects develop under different time frames, and that some have quite long maturity periods. Investors may have to wait six years before seeing a drop of oil from projects like deepwater. In this case, corporate taxes have a leeway of 10 years to carry over losses. Companies can deduct costs without stranded deductions.

The rules determine how the payments are calculated and recorded. For instance, the hydrocarbons law has a set of royalties and payment conditions. “We also included a provision that guarantees fiscal security to assure stability. Changes in the constitution permitted the implementation of a flexible system that fully opens the sector. It readjusts itself accordingly to the area, type of player and associated costs,” he said.

Hydrocarbons have a progressive set of royalties that take into account the context of the industry. “A crude oil royalty rate that starts at 7.5 percent only increases with the price of oil,” Ugalde said. The state can then receive a higher percentage of profit without damaging companies. Similarly, if an area produces better quality oil than anticipated, taxation will be higher.

As the profitability of a project changes so should the government take. The idea is to bite off larger chunks only when positive trends in the market arise, such as in cases of larger discoveries or a company that exhibits greater economies of scale. It is not a fixed system as it can be readjusted throughout the life of the contract. “The mechanism can increase and decrease as outcomes change. It provides stability and certainty regarding the distribution of the profits.”

Ugalde perceives a healthy amount of competition and participation in the industry despite a tough economic environment. More investment is expected to appear in the short and long term,” he concluded

Mexican Petroleum Fund Not Likely to Contribute to Long-Term Fund

Mauricio Herrera , Director General of the Mexican Petroleum Fund
MOGS 2016 progress made

The Mexican Petroleum Fund (MPF) expects to close 2016 with revenues between 1.3-2.7 percent of GDP, which means it will not contribute to a planned long-term sovereign fund yet, Mauricio Herrera, Director General of the Mexican Petroleum Fund, told the 2016 Mexico Oil & Gas Summit. 

Speaking to an audience of industry stakeholders and decision-makers, Herrera explained the functioning of the MPF as a public trust, where the central bank acts as a trusty from the Finance Ministry. The MPF has three specific purposes: receiving and distributing hydrocarbon revenues, the administration of financial contracts and the creation and administration of a long-term sovereign wealth fund.     

According to Herrera, the hydrocarbon revenues that the MPF receives come from the income generated by PEMEX and private operators. The contracts that were signed last year and that came into effect in September contributed MX$3,499 billion, of which 99.9 percent were revenues transferred by PEMEX with only 0.1 percent coming from private enterprises. This percentage is expected to vary depending on the type of contract. Evaluation-phase contracts, such as those signed last year, only pay an exploration fee of MX$2 million, which explains the 0.1 percent contribution in 2015. Profit-sharing contracts are expected to make a more substantial contribution to the fund once the operators begin production.

Once the fund receives the financial resources, they are transferred to a federal government stabilization fund that aids federal entities. The transfers are established under the law and they must comply with a pre-set order of destination and calendar. These transfers will never exceed 4.7 percent of national GDP, Herrera said. When the MPF receives revenues that surpass 4.7 percent, the extra resources are directly allocated to a planned long-term sovereign wealth fund.

Last year, the MPF received revenues equivalent to 2.2 percent of national GDP, meaning the fund did not make any contribution to the long-term fund. This year to date the fund has received MX$112 billion pesos, or 0.6 percent of GDP. “The MPF expects to close 2016 with revenues between 1.3-2.7 percent of GDP, which means the fund will not be able to contribute to the long-term planned fund,” Herrera said.     

FINANCIAL MANAGEMENT

Herrera said that the MPF started operations in January 2015 and by February, it was receiving revenues from PEMEX on a monthly basis, totaling about MX$20 billion to MX$30 billion each month. Most of the fund’s activity during 2015 was to receive and transfer revenues as well as constructing the necessary infrastructure to administer the financial information from the new EP contracts, including the creation of a technological platform.

As of today, six contracts are pending. The contracts signed last year in Tenders 1 and 2 of Round One only paid exploratory fees. For Tender 3, 13 contractors will pay exploratory fees, regular royalties and additional royalties that were offered during the bidding process. The exploratory fee and the royalties will be paid up front while the additional royalties must be paid once production has started.

In his presentation, Herrera also discussed the monthly scheme that license contractors must follow. During the first 10 days of the month, the contractors and the National Hydrocarbon Commission must submit all information regarding the volume of production and the volume of product commercialization during the previous month. May 2016 was the first month that companies were required to present this information.  

On the 17th day of the month, the FMP must receive the contractual value of the previous’ month production. Additionally, the fund has to publish the calculations of fees and royalties the contractor must pay to the Fund. Finally, on the last day of the month, the MPF must issue a certificate of payment in kind if the contractor has no outstanding balance. If there are differences in favor of the government from what the contractor estimated, the MPF will notify the contractor that it needs to pay the compensatory amount.   

The tight monthly schedule makes it mandatory to have a technological platform that provides the authorities and contractors with the possibility to collect information in a timely matter. The Sistema de Información para los Pagos de las Asignaciones y Contratos de Hidrocarburos (SIPAC) was developed for this purpose. SIPAC has been ready since last September but it began working in June 2016.

Exploration and the Boom in Multi-Client Seismic

MOGS 2016 exploration and the boom

Moderator: Alma América Porres, Commissioner of CNH
Panelist:  Oscar Roldán, Chief of the National Hydrocarbons Information Center
Panelist: Marco Vázquez, Subdirector of Geophysics Solutions at PEMEX
Panelist: Karim Lassel, Geomarket Director and Country Manager Mexico of CGG
Panelist: Christiaan Vermeijden, CEO of EMGS

The industry knows that it will take time to see production increases as a result of the licensing rounds, but the last year has already delivered incredible results in exploration, said Oscar Roldán, Chief of the National Hydrocarbons Information Center, during the Mexico Oil & Gas Summit 2016 in Mexico City.

Speaking on a panel on “Exploration and the Boom in Multi-Client Seismic,” Roldán said that “the multiclient scheme managed under ARES requires a company to acquire information from others. Many companies will be accessing the same seismic information, creating opportunities to generate a differentiated product. The central information system will be completely available to all companies and is planned to be open in October of this year. Within the ARES scheme, companies will also be able to analyze current data.”

Asked by moderator Alma América Porres, Commissioner of CNH, how multiclient schemes can help corporations, Marco Vázquez, Subdirector of Geophysics Solutions at PEMEX, pointed to the state-owned entity as an example. PEMEX, he said, had only 5.6 petabytes of information in 2014, contrasting with the updated quantity of almost 20 petabytes. Mexico has had access to 2-D seismic data acquisition since the 1990s and there is a huge area of opportunity to increase certainty in the area. “We can focus resources on the famous salt water basins,” he said. PEMEX has invested considerable resources to obtain 3-D seismic data from these areas.

Although Pemex is not prepared to offer this type of service, it is partnering with companies that can support the NOC in data collection. For this reason, multi-client offerings can support industry improvements.

Joining Roldán and Vázquez on the panel were Karim Lassel, Geomarket Director and Country Manager Mexico of CGG, and Christiaan Vermeijden, CEO of EMGS.

Lassel reiterated the need to continue the accelerated growth of the Energy Reform, saying that Mexico was using its experience from the initial bidding rounds to make future capital investments more attractive. Improved legislation, tax regimes and the stimulation of the fiscal environment would encourage investors to trust the country’s industry, he said. It is necessary to put processes in place to retain stability for long-term investors. The focus is on adding to existing information, toward which investments must be targeted, increasing the success rate of exploration processes.

EMGS CEO Vermeijden suggested the acquisition of enormous amounts of data would accelerate exploration in Mexico. “The country holds the world record for gathering such a large amount of data in a surprisingly short time,” he said. This will help companies control decision-making and because the data will expedite exploration.

Vermeijden touched on the need for a skilled workforce that can utilize this data to benefit companies interested in using this information. Exploration activities evolve only with information, he said. “We can have thousands of existing wells but new technologies are the route to successfully investigate new commercial possibilities.”

Amid cuts to exploration budgets, despite demand for more activity, the EMGS executive said that smaller, smarter volumes of exploration activities would be more efficient. “Many new emerging or smart technologies will have to be used together because simply doing more of what we’ve done in the past will not be enough.”

Vermeijden believes that budget cuts, by two-thirds internationally for exploration projects, will demand increased efficiency to achieve the higher targets set by companies. EMGS is investigating new technologies that can increase the success ratio of exploration. “The conventional approach may not work,” he concludes.

Operators are speaking well of the contracts resulting from the Energy Reform, which has led to huge investments from companies that are promoting Mexico to their allies abroad, with the intention of introducing their partner suppliers to the country. The industry will not depend solely on information packages but on how future Rounds use the data going forward.

Ambitions and Objectives of Mexico’s New and Prospective Operators

MOGS2016 ambitions

Moderator: David Enríquez, Partner at Goodrich, Riquelme y Asociados
Panelist: Iván Sandrea, Director General of Sierra Oil & Gas
Panelist: Vicente González Dávila, CEO of Geo Estratos
Panelist: Matt McCarroll, President & CEO of Fieldwood Energy

Companies have been waiting decades for Mexico’s oil and energy markets to open and with the levers of change now turning, there is both excitement and caution in the air, panelists told the 2016 Mexico Oil & Gas Summit audience at Mexico City’s Sheraton Maria Isabel Hotel.

David Enríquez, Partner at Goodrich, Riquelme y Asociados, moderated the panel, “Ambitions and Objectives of Mexico’s New and Prospective Operators,” with participants Iván Sandrea, Director General of Sierra Oil & Gas, Vicente González Dávila, CEO of Geo Estratos, and Matt McCarroll, President and CEO of Fieldwood Energy.

Despite a backdrop of economic restructuring amid an oil price downturn, the panelists agreed that Mexico held many advantages for investment compared to other countries. Fieldwood Energy’s McCarrol said the shallow-water rounds made sense for the company, which successfully bid in Round 1.2. “The company feels fortunate to have found a Mexican partner that can offer local knowledge that complements its expertise. We hope to continue to bid in future rounds,” he said, adding that he is aware that Mexico is going through changes that are completely new to the government, regulatory agencies and to PEMEX. While McCarrol’s company has experience in the US, he said it was exciting to be breaking new ground with every move due to the Energy Reform. The company is one of the first four operators in shallow waters.

Sandrea of Sierra Oil & Gas concurred but added that any form of change needs a business plan with a high probability of success. “Although the interaction is intense, involving frequent meetings and analysis, the risk is surprisingly low,” he said. The Director General has been waiting for the market opening for many years. Constitutional changes and implementation were feared, he said, but the process has been efficient. “True risks are only found in the formation of new institutions but the application has been done well.”

Enriquez highlighted that the bidding results from Round 1.3 were substantially larger than expected. The market anticipated a success rate of 40-45 percent but al bocks were awarded.

The market’s opening also holds benefits for businesses in the tech realm, particularly domestic firms. “Free markets are a dream for Mexican technology companies like Geo Estratos,” said Gonzalez Davila of Geo Estratos. The opening of the energy sector guarantees the progress of technology development and application , he added but warned that Mexican companies need to prioritize added value to take advantage of the Energy Reform’s impact.

As a lawyer, Enriquez was also concerned about the legal implications of the Energy Reform. Many oil and gas producing countries only have one or two regulatory agencies and there is a lack of coordination laws, he suggested. McCarrol responded by emphasizing that agencies are jumping at the new opportunities to improve regulation. The issue in Mexico is that operators must deal with various different agencies and institutions that do not communicate with each other in an optimized manner and force companies to duplicate information supply. Fortunately, the President Commissioner of CNH wants to speed up the process, McCarrol said. “It is normal for the government to want to be involved but a practical balance needs to be found.”

Enriquez said it was important to analyze the design of the system and its interaction with the operators. “The industry is at an ideal moment to crystallize the role of these agencies,” he said.

For his part, Sandrea said his company’s experience with the government had been positive. “The process is solid, transparent and progressive. Without a doubt, the process in Mexico has a quality that meets, and in certain cases, exceeds benchmarks.”

Among the challenges will be recovery, said Gonzalez Davila. PEMEX must create contracts that integrate companies that are willing to share risks and benefits in a transparent manner. “The oil industry is declining due to lack of investment. Without drilling, there is no production,” he said. “The only way PEMEX can grow is if it allows the entrance of new players and under technical and objective requirements that are reasonable,” he said.

McCarrol also said that the migration of contracts through PEMEX farm-outs were difficult and that the NOC’s terms and conditions would take a long time to adopt. New players want to be more efficient than PEMEX and perceive collaboration with the state-owned company to be counterproductive. PEMEX could potentially be a financial partner but not an operational one, he said.

Contract Administration and CNH's Operational Framework Presentation: Gaspar Franco, Commissioner of CNH

Gaspar Franco, Commissioner of CNH
MOGS2016 contract administration

A level playing field for all players, whether domestic or international, is a key tenet of the Energy Reform and the National Commission of Hydrocarbons (CNH) is tasked with helping to ensure that parameter exists in the oil and gas industry, Gaspar Franco, Commissioner of CNH, told the Mexico Oil & Gas Summit 2016 at the Sheraton Maria Isabel Hotel in Mexico City.

“The key principles (of the Energy Reform) are that resources under the soil are crucial for the economy. Moreover, it aims to create an environment in which all the oil companies that will operate in Mexico have do so under the same conditions as any Mexican oil company,” Franco said to open his presentation dedicated to “Contract Administration and CNH's Operational Framework.”

Providing a general overview of the Energy Reform to date, Franco explained the principal advantages, starting with the Five-Year Plan. Many proposals from industry operators have been included in the plan.

The CNH’s duty, according to the Commissioner, is to create regulations, legislate exploration projects, and support SHCP among other entities. Technical areas focus on each important sector involved in all hydrocarbon projects. The principal aims of CNH include coordinating the licensing rounds, administrating upstream contracts and regulating all operational activities. Primarily, Franco emphasized CNH’s part in openly correcting any abnormality it may see in contracts and activities. “As the ‘referee’ of the industry, CNH can manage blocks from exploration to production and throughout the different stages of the contractual process,” he said.

Mexico has signed 24 contracts with private operators, 12 of which currently producing hydrocarbons, Franco said. The Commissioner also defended the amount of information required. This “bureaucratic process” he said, is crucial to comply with all the different clauses in the contract. Once approved, operators can begin to take steps toward commercialization and create a development plan for production.

Franco emphasized the need for excellent planning before any project begins. CNH has minimum requirements with which companies must comply. These ensure the company will exploit gas in a way that maximizes the recovery factor and optimizes value creation for the operators and the state, while ensuring safety and protecting the environment in line with laws and regulations.

CNH guides operators through the entire process because handing over operational fields is extremely complicated. “Mexico has no prior experience in this area because fields had never changed hands in the past,” Franco said.

Legislatively, the country needs the support of many officials to check on new operators. All the exploration and production plans are handed to CNH and that information is documented and made public on the Commission’s website.

This key information will provide the most important data regarding companies and their exploration of a potentially lucrative field. Ultimately, the entity aims to support growing oil and gas production volumes in Mexico. Franco urged the industry to request even more information from authorities, including from CNH.

How Will Operators Work With ASEA?

Carlos de Regules , Director General of ASEA
MOGS 2016 how will operators work

ASEA is responsible for guaranteeing industrial safety and environmental integrity by creating and implementing risk management standards and practices, Carlos de Regules, Director General of ASEA, told the Mexico Oil & Gas Summit 2016. “ASEA is the guarantor of safety and the successful implementation of the Energy Reform,” he said.

Speaking on ASEA’s working relationship with operators, De Regules said its strategy is based on five pillars that provide juridical certainty to decision-makers.

The first pillar is related to prevention. In May 2016, ASEA published the backbone of its risk management model. To guarantee the reduction of risk and the prevention of accidents, the agency took advice from several government ministries as well as operational advice from foreign governments and regulatory agencies and adopted recognized international best practices. The Mexican model sums up the API RP 75, ISO45001 and OHSAS 18001 best practices, De Regules said. Now that the guidelines have been published, ASEA is focusing on compelling companies and operators to comply with the regulation. “The correct implementation of the regulation will provide certainty to companies that the rules will be enforced,” he said.

The second pillar relates to the reactive element. The oil and gas industry is dangerous, with materials that have to be carefully managed. Companies need to be prepared to react once an accident happens. This includes having the capacity to respond financially.

In June 2016, ASEA published the necessary guidelines regarding the minimum insurance requirements for every industry, including the minimum coverage for every activity based on international benchmarks. However, the guidelines also incorporate a flexibility practice, De Regules said. “This flexibility practice allows enterprises to perform a Probable Maximum Loss (PML) study if they believe that the requirements asked by the agency are excessive. If the study agrees with the companies’ stance, then the agency is willing to accept the PML conclusions,” he said. The guidelines apply to Civil Liability and Environmental Liability insurance policies and to Well Control Policy insurance.

The third pillar is related to the technical regulation of an operation’s risks. ASEA has already published a technical norm for fuel stations but others are pending for vapor recovery systems, storage and distribution facilities and LP gas fuel stations. According to De Regules, the agency is working on six more upstream regulations, five midstream and retail regulations and 14 transversal regulations.

The fourth guideline is related to the inspection of facilities to make sure every operator is in compliance. The Agency does not have enough resources to inspect every company working in the oil and gas industry, which is why it has decided to perform inspections based on probable risks, De Regules said. Following several accidents in 2015 in the Gulf of Mexico, ASEA conducted an inspection that resulted in the publication of 262 preventive and corrective actions for the affected areas. These corrective and preventive actions have a mandatory nature and a failure to comply will result in administrative sanctions, he said.

The fifth pillar is based on a corrective enforcement policy. ASEAS’ goal is to improve the sector’s performance rather than impose fines or start litigation. With this approach, it hopes to reduce litigation at the origin, as 73 percent of the recommendations ASEA provides relate to corrective actions and only 37 percent are punitive. When companies believe that the agency’s conclusions are not fair they always have the option of using the legal Resource of Revision. This legal resource forces the agency to review its decisions regarding that particular company. The Resource of Revision reduces litigation.

“Complying with the established pillars means that the country and the industry have a real state of law,” De Regules said.

ASEA has also partnered with its counterparts in other countries. It has a letter of intent with the American Petroleum Institute and capacity-building agreements with environmental authorities in the UK and the Canadian province of Alberta. “The OECD is also performing a peer review, which means it is comparing ASEA to similar regulators in the world to detect what the agency could be doing better,” De Regules said.

DAY 2

PEMEX’s Strategic Priorities

Rodulfo Figueroa, Corporate Director of Planning, Coordination and Performance of PEMEX
MOGS2016 pemex strategic priorities

Rodulfo Figueroa, the Corporate Director of Planning, Coordination and Performance of PEMEX, speaking at the Mexico Oil & Gas Summit 2016 in Mexico City, presented the changes the present governmental administration has enforced on an enterprise that has been a pillar in the development of Mexico and a key player on the global oil industry.

Currently, PEMEX is the eighth largest oil producer in the world and even though it has always contributed to the income of the federal government, the development of the company in the past years has been less than harmonious. The decline in production, as a consequence of the steep decline of Cantarell’s production over the past 12 years, has taken a toll on PEMEX’s finances.

In his opening presentation, Figueroa mentioned that in the past, PEMEX’s investments and risks were assumed solely by the enterprise. “The targets and development priorities of the enterprise were determined by Congress and were focused on production goals rather than value creation. The legal framework enforced by the Energy Reform, transforms PEMEX’ objectives, shifting from production goals to value creating activities.”

Private participation is now allowed in the hydrocarbon market. Upstream activities are subject to the technical regulations of the National Hydrocarbon Commission (CNH). Industrial transformation activities are subject to economic regulations. The Ministry of Energy (SENER), the Ministry of Finance (SHCP) and ASEA also function as industry regulators.

The activities performed by PEMEX have been distributed among the newly created subsidiary companies, Figueroa said. Each company has a specific function, focusing on activities related to drilling, upstream, industrial transformation, cogeneration of products, fertilizers production, ethylene production and, logistics.    

In this new context, PEMEX’ activities have transitioned. However, the company now faces challenges derived from regulations of activities and asymmetric regulations. It is oriented to become a competitive enterprise focused on value creation, aiming to become an international reference.

Among the many changes faced by the enterprise is a new fiscal policy, which promotes competition among companies. “The prices are no longer set by the government and are left to be set by the market,” said Figueroa.

PEMEX is now subject to operational and financial goals set by its board of directors. The new working scheme is focused on increasing the company’s business portfolio, operational excellence, business model design and creating a high-performance culture. The new operating environment allows the company to enter alliances with private corporations in any activity in the production chain. The association with private enterprises provides benefits that extend beyond obtaining economic resources. It allows PEMEX to diversify risks, incorporate international best practices, acquire new technologies and increase its materiality.

Regarding production costs in shallow water and onshore fields, Figueroa mentioned that PEMEX is very competitive. However, it lacks the necessary infrastructure to maintain its cost competitiveness when it comes to production in deepwater and nonconventional fields, hence the importance of finding adequate partners for such ventures. PEMEX needs to leave its role as the monopolistic provider of hydrocarbons.

The government is well aware that PEMEX will maintain its dominance in the short term. “However, once private investors dabble in the industry, the national company will have to work within a competitive environment.”

Figueroa recognized that the volatility of international markets impacts the company. However, he mentioned that adjustments had been made to make sure the company’s strategies and the long-term goals are not affected. The estimated prices of the Mexican oil barrel have gone from US$50 at the beginning of the year to US$31.32. The adjustments help to re-dimension PEMEX without compromising its future production.

Regarding the expectations of the company, Figueroa said that PEMEX needs to strengthen its capabilities. The NOC must evaluate new ways to finance its operations alongside partners, sharing risks and benefits, as well as taking care of its main asset: its human capital.

To comply with the set objectives, the company must change the strategic focus strategy it followed for years. PEMEX needs to overcome the circumstances and elements that do not promote growth. Its current strategic plan is based on the stability and continuity of operations, operational and energy efficiency, reliability and safety of procedures, modernization and adoption of technologies and the incorporation of best practices.

However, changes in the production model and objectives are not enough to obtain a full transformation. In the short term, PEMEX is working on an internal re-organization, increasing its liquidity level, and reducing its debt level. In the medium-term, the company is going to be focusing on the strengthening of its capacities and on attending its objective markets’ needs. The long-term goal is to achieve business sustainability.

For the next five years, PEMEX intends retain its position as the main oil producer in Mexico while consolidating its presence in the market, with stronger financial and operational performance, and maintaining its role as a pillar on the development of the country.  

COPS & CIEPS: Timeline and industry impact

Gustavo Hernández, Director of Prospective Resources, Reserves, and Associations of PEMEX E&P
MOGS2016 cops  and cieps

Moderator: Ernesto Marcos Giacoman, President of Amespac
Panelist: Salvador Ayala, Vice President of Marketing, Sales & Technology of Schlumberger
Panelist: William Waggoner, President and CEO of Mexico Petroleum Company
Panelist: Mike Martínez, VP Business Development OPF of Wood Group
Panelist: Marco Osorio Bonilla, Director of Product Technology at the Mexican Petroleum Institute (IMP)

Foreign companies need to identify local resources they can use and those that must be brought in from abroad to ensure the development of a healthy supply chain, given the national content requirements enforced by law, a panel of leading experts told the Mexico Oil & Gas Summit 2016 in Mexico City.

Local suppliers and services companies need to reach out to the private operators that want to dabble in the Mexican market, says William Waggoner, President and CEO of Mexico Petroleum Company. They need to advertise their capabilities. Even though foreign companies might be tempted to use their own capabilities and existing international supply chains, they are also willing to work with Mexican suppliers and service providers.

Mike Martínez, VP Business Development OPF of Wood Group, said his company has been working with local operators. In his opinion, these opportunities have evolved not only as work relationships but also as relationships of trust. In the case of Wood Group, it decided to create a joint venture with a local company to have the best of both working cultures. “Local talent has been key to the growth of Wood Group,” he said during the panel, Critical Success Factors for a Healthy Supply Chain, moderated by Ernesto Marcos Giacoman, President of Amespac.

For a company such as Schlumberger, its VP of Marketing, Sales and Technology, Salvador Ayala, said that service supply in Mexico is quite well-established in terms of accessibility and logistics capabilities. Due to the geographical proximity of Mexico to the US, it is relatively easy for suppliers on the other side of the border to establish operations in Mexico since they are in their comfort zone. He added that the Energy Reform would provide important business opportunities for small suppliers.

Marco Osorio Bonilla, Director of Product Technology at the Mexican Petroleum Institute (IMP), said that communication and openness between operators and technology focused companies is needed because working as a team is important for the industry. Osorio said IMP must have a balanced project portfolio with research focused on industry needs. It also needs to push for the certification of suppliers as a way to provide private companies security regarding their investments.

The industry’s drive to reduce costs is also having an impact on how companies do business. Martínez said that Wood Group had to reduce its engineering costs by 50 percent. The cost-reduction mandate led it to create an innovation team that is in charge of reinventing procedures to make them more cost-effective. Standardization, he said, has played an important role in this process, while emphasizing that the Energy Reform in Mexico needed to also be a technological reform. The industry here needs a shift in its production mindset, he said. Local companies need to come up with new industry standards that reduce costs but that produce safety and quality.

Schlumberger’s Ayala added that until oil prices return to previous levels, companies need to get creative. Mexico has done a lot in a very short period of time and companies such as Schlumberger are very optimistic regarding the opportunities that are arising, he said.

The panel also turned its attention to the actions that IMP can perform to maintain the technological capacity that is often lost when crises such as the current one arise. Bonilla mentioned that IMP has had to incorporate different strategies that are needed to avoid losing technological capacities. These strategies are based on taking advantage of fiscal incentives and developing research aimed at solving short-term problems. He added that IMP is changing its working scheme and is ready to work with national and international companies and not just PEMEX. 

Waggoner encouraged Pemex to participate in joint ventures with private companies for deepwater exploration. He said that if the oil and gas expansion is going to take place PEMEX needs to look for opportunities in other types of ventures. When asked what else could be done by the Mexican authorities to improve the industry, Waggoner said that human capital needs to be prepared to face the industry challenges.

Critical Success Factors for a Healthy Supply Chain

MOGS2016 critical success factors

Moderator: Jaime Martínez, Business Development Director of ERM
Panelist: Javier Estrada, Director Oil&Gas at PwC México
Panelist: James Buis, District manager Mexico of Nalco Champion
Panelist: César Acosta, Manager for Analysis, Regulation and Public Affairs of Statoil México
Panelist: Claudio César de la Cerda Negrete, Deputy Director General of Investment Promotion and Industry Liaison at the General Direction of Exploration and Extraction of Hydrocarbons, Ministry of Energy 

Jaime Martínez, Business Development Director of ERM, told the audience at the Mexico Oil & Gas Summit 2016 in Mexico City that deepwater exploration and production is high risk but also highly profitable, hence the importance of managing risks. The ERM executive moderated the panel R1-L04: Transforming Deepwater Ambitions into Projects and Production at the Sheraton Maria Isabel Hotel.

Claudio de la Cerda, Deputy Director at the General Direction of Exploration and Extraction of Hydrocarbon at the Ministry of Energy, specified that there are several points regarding deepwater exploration and production that need to be taken into consideration. The first is that oil demand will remain strong for the coming years, and that deepwater accounts for 25 percent of global offshore oil production. Mexico has substantial prospective resources in deepwater and is determined to attract investment through the licensing rounds to explore and produce this oil with the support of the private sector in the near future. .

While the Energy Reform has been a success, Cesar Acosta, from Statoil Mexico, said the country has to challenge conventional wisdom if it wishes to remain competitive. According to Acosta, there are three important elements for the future success of the reform: first, blocks that are going to be offered in the bidding processes need to be correctly mapped. The second element is related to the need of creating a business environment that is friendly and predictable. Finally, regulations must be reasonable, if they keep increasing the requirements needed, companies might restrain from doing business in Mexico. The Energy Reform’s success must be measured by the number of exploration wells that are drilled in the first years of implementation. Mexico should have intensified exploration activities years ago, according to Acosta.

For Javier Estrada, Director of Oil & Gas at PwC Mexico, Pemex has taken interesting risks regarding deepwater exploration in the country. However, extraction is a venture that the Mexican company cannot undertake on its own. The presence of Trion farm-out in Round 1.4 is important for attracting international investment. It is estimated that Trion will require an investment of US$11 billion.

Javier Estrada stated that any development on deepwater implies high costs. Trion’s proximity to the border will help US companies to initiate economies of scale and might accelerate early production. However, common regulations between the US and Mexico are needed. But Mexican authorities also need to realize that alliances are not only about economic and financial terms, Estrada added. They pose interesting challenges such as defining who will be the operator and companies’ responsibilities.

James Buis from Nalco Champion stated that deepwater poses production challenges and that the chemical industry can help to overcome. Innovative chemistry is needed to reduce costs. For him, working to improve the flow of fluids is one of Mexico’s biggest challenges. That is where most technology is focusing on, he said.

Turning to Mexico’s appeal as an investment destination, Acosta said the country is very attractive and has great potential but that it is experiencing a hard time. Mexico must not forget that it is competing with other countries that are also looking for investment capital. The regulations are critical; they need to help the industry to reduce production costs by being efficient and economical. Acosta emphasized that Mexico needs to encourage deepwater exploration activities. For him, without exploration there are no discoveries and without discoveries, there are no royalties.

De la Cerda, stated that the global oil industry has been waiting for the Mexican industry to allow private participation. The government is working to renovate regulations. PEMEX, considering its restrictions, has proven it has the necessary technologies to succeed in the industry.

R1-L04: Transforming Deepwater Ambitions into Projects and Production

MOGS 2016 transforming deepwater

Moderator: Jaime Martínez, Business Development Director of ERM
Panelist: Javier Estrada, Director Oil&Gas at PwC México
Panelist: James Buis, District manager Mexico of Nalco Champion
Panelist: César Acosta, Manager for Analysis, Regulation and Public Affairs of Statoil México
Panelist: Claudio César de la Cerda Negrete, Deputy Director General of Investment Promotion and Industry Liaison at the General Direction of Exploration and Extraction of Hydrocarbons, Ministry of Energy 

Jaime Martínez, Business Development Director of ERM, told the audience at the Mexico Oil & Gas Summit 2016 in Mexico City that deepwater exploration and production is high risk but also highly profitable, hence the importance of managing risks. The ERM executive moderated the panel R1-L04: Transforming Deepwater Ambitions into Projects and Production at the Sheraton Maria Isabel Hotel.

Claudio de la Cerda, Deputy Director at the General Direction of Exploration and Extraction of Hydrocarbon at the Ministry of Energy, specified that there are several points regarding deepwater exploration and production that need to be taken into consideration. The first is that oil demand will remain strong for the coming years, and that deepwater accounts for 25 percent of global offshore oil production. Mexico has substantial prospective resources in deepwater and is determined to attract investment through the licensing rounds to explore and produce this oil with the support of the private sector in the near future. .

While the Energy Reform has been a success, Cesar Acosta, from Statoil Mexico, said the country has to challenge conventional wisdom if it wishes to remain competitive. According to Acosta, there are three important elements for the future success of the reform: first, blocks that are going to be offered in the bidding processes need to be correctly mapped. The second element is related to the need of creating a business environment that is friendly and predictable. Finally, regulations must be reasonable, if they keep increasing the requirements needed, companies might restrain from doing business in Mexico. The Energy Reform’s success must be measured by the number of exploration wells that are drilled in the first years of implementation. Mexico should have intensified exploration activities years ago, according to Acosta.

For Javier Estrada, Director of Oil & Gas at PwC Mexico, Pemex has taken interesting risks regarding deepwater exploration in the country. However, extraction is a venture that the Mexican company cannot undertake on its own. The presence of Trion farm-out in Round 1.4 is important for attracting international investment. It is estimated that Trion will require an investment of US$11 billion.

Javier Estrada stated that any development on deepwater implies high costs. Trion’s proximity to the border will help US companies to initiate economies of scale and might accelerate early production. However, common regulations between the US and Mexico are needed. But Mexican authorities also need to realize that alliances are not only about economic and financial terms, Estrada added. They pose interesting challenges such as defining who will be the operator and companies’ responsibilities.

James Buis from Nalco Champion stated that deepwater poses production challenges and that the chemical industry can help to overcome. Innovative chemistry is needed to reduce costs. For him, working to improve the flow of fluids is one of Mexico’s biggest challenges. That is where most technology is focusing on, he said.

Turning to Mexico’s appeal as an investment destination, Acosta said the country is very attractive and has great potential but that it is experiencing a hard time. Mexico must not forget that it is competing with other countries that are also looking for investment capital. The regulations are critical; they need to help the industry to reduce production costs by being efficient and economical. Acosta emphasized that Mexico needs to encourage deepwater exploration activities. For him, without exploration there are no discoveries and without discoveries, there are no royalties.

De la Cerda, stated that the global oil industry has been waiting for the Mexican industry to allow private participation. The government is working to renovate regulations. PEMEX, considering its restrictions, has proven it has the necessary technologies to succeed in the industry.

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