Mexico - EnergyBoardroom · 2017-09-07 · Mexico to further exploit its existing reserves in order to avoid a supply shock, making it dangerously dependent on mature reserves. When

FOCUS REPORTS 1February 2012 1

MexicoEnergy reportFebruary 2012

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Mexico: Time for action!

It is home to the world’s

second largest non-public

company by market

value, with assets totaling U$

417.75 billion; it has been the

US’ second or third biggest

oil provider in the last three

years with imports of more

than 1 million bbl/d; as of

2010, it ranked seventh among

world oil producers, ahead of

Norway, the United Kingdom,

Venezuela, Iraq, and Brazil; it is

a stable and plural democracy

with free trade agreements

with all major economies; its

oil and gas sector contributes

to more than a third of the

national government budget

and 15% of its exports; and

violence is actually lower than

in its other three major Latin

American oil and gas counter-

parts Colombia, Venezuela or

Brazil. It’s Mexico.

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www.ogfj.com • Oil & Gas Financial Journal February 2012 energy.focusreports.net 55

Cover. Courtesy of Pemex

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FOCUS REPORTS6 February 201256 energy.focusreports.net February 2012 Oil & Gas Financial Journal • www.ogfj.com

One must wonder how broken

the Mexican PR machine is. Although

most news that crosses the Rio

Grande is soaked in stereotypes of

slow-moving bureaucracy, production

and reserve declines (all of them true

to a certain degree), the opportu-

nities hidden south of the border

outweigh those challenges by far.

That is not to say that the Mexican

oil and gas industry is not at a crossroads. Its oil output has fallen

from 3.5 million bbl/d in 2004 to a projection of 2.6 million bbl/d in

2012. Though the government says it has reached the bottom, the US

Energy Department projects that, if current trends and policies are left

unchanged, the Mexican oil production will decline by an additional

600,000 bbl/d by 2020, transforming what was once the second biggest

oil exporter into a net importer. The consequences of such a scenario

would be devastating not only for Mexico itself but for the US as well.

If Mexico becomes a net oil importer, America’s desire to decrease its

energy dependency from “unreliable sources” elsewhere would be

seriously jeopardized.

But PEMEX, the NOC that holds

the monopoly over all hydrocarbons

under Mexican soil, has a some-

what different production scenario

for the coming years. Even though

reserves have fallen for the 12th

consecutive year up to 2010, when

proved reserves fell 1.4 percent to

the equivalent of 13.8 billion barrels

of oil, the company is hoping to

replicate its apparent success in 2011 in stabilizing its proved reserves.

From 2013 on, it hopes to increase its net proven reserves in order to

augment its production to around 3.3 million bbl/d by 2024 and add to

its current reserves’ life of about 10 years.

To increase production from 2.6 to 3.3 million bbl/d in more than

twelve years doesn’t seem like a very big challenge at first sight. Many

down play it by comparing it with Petrobras’ production targets for the

same period, where production would grow from around 2 to more

than 6 million bbl/d. However, such a comparison is misleading. In

contrast with countries like Brazil, which have continuously invested in

exploration due to its historical oil scarcity, Mexico has had it easy for a

Dr. Juan José Suárez Coppel, general director of Pemex

Ing. Carlos Morales Gill, director of E&P Pemex

Oil production evolution

Source: www.pemex.com

3,500

Cantarell

MesozoicChiapas-Tabasco

Ku-Maloob-Zaap

Teritary-age �elds and other ones (mainly Tampico-Misantla basin)

Other offshore �elds

60 61 62 63 65 66 67 68 70 71 72 73 75 76 77 78 80 81 82 83 85 86

Years

87 88 90 91 92 93 95 96 97 98 00 01 02 03 05 06 07 08 10 11

South-easternbasins

Tho

usan

d, b

/d

3,000

2,500

2,000

1,500

1,000

500

0

•In the 60s the oil production came mainly from Poza Rica and San Adres fields in the Northern Region, as well as from the Cinco Presidentes and Sánchez Magallanes fields in the Southern Region.

•In the mid-70s the Samaria, Sitio grande, Cactus, Agave and Cunduacán fields from the Chiapas-Tabasco Mesozoic were incorporated, all of them part of the Southeast-

ern Basins.•In the late 70s and early 80s, the development of the offshore fields Akal, Nohoch, Ku,

and Abkatún was initiated, all of them also located at the Southeastern Basins.•In 2004, the Cantarell field started its predicted natural production decline•Since 2009 the crude oil production has stabilized


CarKidd_OGFJ_1202 1 1/25/12 4:25 PM


long time.

The reason behind this is Cantarell Mega Field. Discovered in the

mid 1970s and located 50 miles offshore in the Bay of Campeche, it has

generated more than half a trillion $US in revenue for PEMEX. Produc-

tion in 1981 was 1.16 million bbl/d and had fallen to 1 million bbl/d by

1995. However, a nitrogen injection EOR project increased production

to 2.14 million bbl/d in 2004, when it reached its peak. Since then,

production has fallen to a staggeringly low 558,000 bbl/d. This obliged

Mexico to further exploit its existing reserves in order to avoid a supply

shock, making it dangerously dependent on mature reserves. When

compared with that of Saudi Arabia, Mexico’s production is one to four,

whereas the proven reserves of the former are one to twenty.

Faced with such a scenario, Juan Josè Sùarez Coppel, PEMEX gen-

eral director, tried to shed some light on optimistic future production

targets, “Our plan is to reach 2.7 million bpd by the end of 2012 and

hit 3 million bbl/d by 2017-2018. This will of course require significant

investments and we therefore need to invest in addition to the U$ 22-24

billion planned”. Besides strong investments in EOR, Suárez Coppel,

is also betting on the potential of natural gas in Mexico, “In the past, a

lack of investment led to the decline in non-associated gas production

in the Veracruz and Burgos basins. But today we have discovered very

Oil production scenario

Source: Pemex

2,700 3,000

Cantarell

Tsimin-Xux

Ku Maloob Zaap

Chicontepec

Future development onshore

Ayatsil-Tekel

Future development offshore

Deepwater

Exploitation

(without Cantarell, Chicontepec, Ku Maloob Zaap,Ayatsil-Tekel and Tsimin-Xux

3,500

3,000

2,500

2,000

1,500

1,000

500

0

Tho

usan

ds

of

bar

rels

per

day

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026

CarFCM_OGFJ_1202 1 1/25/12 9:58 AM

FOCUS REPORTS 9February 2012 9www.ogfj.com • Oil & Gas Financial Journal February 2012 energy.focusreports.net 59

volume. According to Morales, there is potential to extract at least

twice as much.

But PEMEX cannot do all this on its own. “We need to look at

additional capacity for those mature fields, which is why we are trying

to bring in people through new contracts. The first incentive-based

contracts (IBCs) biddings have been going on for a while and so far we

CarCiat_OGFJ_1202 1 1/20/12 11:21 AM

significant gas fields in deepwater and we expect production to start

by 2015. Last but not least, I believe we also have opportunities in our

shale gas potential.”

Carlos Morales, PEMEX E&P general director is more specific; “Two

years ago, we discovered Lakach deepwater natural gas field and more

recently Piklis, which together form part of the same sub-basin in the

Gulf’s deepwaters. This discovery also means that PEMEX has entered

into a challenging area of deepwater operations. At 1,900 meters

(6,000 feet) this is the deepest well that we have drilled.” The stakes

in these fields are high; Lakach together with Piklis has the potential

to produce approximately 800 bcf, which equates to 80 percent of the

country’s current gas imports.

“We have an assessment of approximately 28 billion barrels of oil

equivalent of prospective resources and we are going to speed up the

exploration process in deepwaters to hopefully deliver the expected

results”, says Morales. If PEMEX wants to bring its future production

targets any closer to its 3 million bbl/d, it had better invest heavily and

quickly.

After discovering the Mesozoic

basins in the South and the Gulf

of Campeche in the early 1970s,

PEMEX has essentially abandoned

mature fields without extracting

the reserves that were still in place.

Therefore, there is still a great poten-

tial for those fields, since the country

has only extracted 17 percent of their

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Exploitation 1,230 1,182 1,116 1,068 1,005 968 942 916 851 778 680 599 538 465 411

Cantarell 444 469 466 434 360 278 238 222 200 196 191 180 168 159 150

Chincontepec 79 82 84 89 118 152 203 246 293 363 433 485 521 530 542

Ku-Maloob-Zaap 847 834 850 855 846 840 751 627 556 457 382 337 294 254 214

Tsimin-Xux 2 27 71 107 125 120 112 101 84 72 59 40 23 14 9

Ayatsil-Tekel 0 0 16 41 66 93 102 101 98 91 80 69 46 41 36

FD onshore 0 11 48 100 157 211 256 290 337 384 405 429 456 481 488

FD offshore 0 0 3 27 120 259 394 486 547 605 663 717 763 800 835

Deepwaters 0 — — — — — — — 26 85 129 169 243 313 422

Total 2,602 2,605 2,654 2,721 2,797 2,921 2,998 2,990 2,992 3,031 3,022 3,025 3,052 3,057 3,107

Source: PEMEX

Dr. Juan Carlos Zepeda Molina - president of the CNH

OIl production Scenario — Thousands of barrels per day


CarDem_OGFJ_1202 1 1/20/12 1:21 PM


CarDem_OGFJ_1202 1 1/20/12 1:21 PM


take so long to start working with other international partners who have

the technology and expertise to safeguard Mexico’s energy security?

Politics, of course.

First reformWhen Felipe Calderón took office as President of Mexico in 2006, he

made the so-called “Mexican energy reform” the backbone of his

modernization roadmap for the Mexican economy during his six year

mandate. In the midst of a sharp oil production decline and the emer-

gence of other successful regional NOCs that were partially privatized

and exposed to a competitive environment, many expected Mexico to

follow suit and open up its energy sector for private competition, allow-

ing national and international companies to compete with PEMEX for

Mexico’s hydrocarbon reserves. However, those who thought so under-

estimated Mexicans’ strong nationalistic feelings towards its oil and gas

reserves. A national holiday recalling the day on which President Lázaro

Cardenas nationalized the oil industry (March 18, 1938) is the strongest

have had very good responses from the interested parties. We have 45

bases and 22 companies for sale and overall we believe we have very

strong offers on the table that are attractive to the industry”, Morales

acknowledged while the bids were still going on. These biddings

resulted in the signing of three IBCs in late 2011 with multinational

companies, one with Schlumberger and two with Petrofac.

The Mexican oil and gas industry most certainly offers a great deal of

challenges, as well as opportunities. The huge investments announced

for the coming ten years have raised eyebrows everywhere, and it is

undeniable that the country has woken up to the need to modernize its

oil and gas industry. The question of when Mexico will really loosen up

its grip on its hydrocarbon reserves is, as usual, more a question of how

much more pain will it take to convince Mexican legislators to ask for

help. Hopefully for Mexico and its neighbor to the north, it won’t take

too long.

If production peaked in 2004 and PEMEX was already clearly inca-

pable of maintaining and increasing production on its own, why did it

CarNuv_OGFJ_1202 1 1/20/12 1:54 PM


symbol of Mexico’s oil nationalism.

After years of political debate, the energy reform was passed in 2008, only to have important

parts of it taken to the Supreme Courts, which ultimately acknowledged its constitutionality. The

main aspect of the reform was the introduction of the new Incentive Based Contracts (IBCs),

replacing the multiple-service contracts (MSC) offered in 2003. The latter allowed PEMEX to hire

contractors only on a set-fee basis, operators owned no equity in projects and were unable to

book reserves. These contractors received no extra benefits if their work boosted production

beyond what was required by their contract. By contrast, the new IBCs offer performance-linked

rewards and more flexible remuneration for operators in the case of oil-price hikes.

“Clearly the reforms have provided a great level of flexibility to PEMEX. Now the company

has the flexibility to enter, design and implement contracts pretty much like any NOC or IOC, to

a great extent”, says Rogelio Lopez-Velarde of law firm LVHS. “One of the most important items

of the reform is that it changed the architectural institutional framework of Mexico. To some

extent now there is a definition of who is the policy maker (the Ministry of Energy); who is the

regulator (the CNH, which stands for National Commission for Hydrocarbons); and who is the

operator (PEMEX)”, he concludes. However, the reform failed to allow ownership of reserves, not

granting permission to build and run refineries either, as President Calderòn had proposed.

As explained by CNH’s president Dr. Juan Carlos Zepeda Molina, CNH’s responsibilities can

be summed up into four main categories: technical regulation and enforcement in the upstream

oil and gas industries; technical assessment of all exploration and production projects; determina-

tion of the country’s hydrocarbon reserves; and the provision of advisory activities for the Ministry

of Energy.

Even though the Mexican oil and gas sector is becoming more flexible and open, most

companies still depend directly on PEMEX’s choices and its ultimate fate. To say that there is no

flourishing Mexican oil and gas industry without PEMEX is as true as to say that there is a flourish-

ing Mexican oil and gas industry in spite of PEMEX.

PEMEX predominant role is felt at all levels. And it takes stamina to thrive in Mexico’s overly

concentrated market with merely one order giver. Rolando Maggi, CEO of FCM, the exclusive

representative of Kimray Inc.’s control equipment products and also holder of other partner-

ships with foreign companies, “One of the biggest challenges faced in the Mexican oil and

gas industry is the purchasing system, where the law forbids direct purchasing from PEMEX for

new products. Hence even if one has the best product it needs to go through a public bidding

process. Saying that, you end up doing two sales: to PEMEX and to all the bidders. As you can

imagine, the process tends to be very slow”, explained the young CEO.

Most of the changes and reforms highlighted were driven more by PEMEX’s changing needs

than Mexico’s. While the two are not mutually exclusive, but they are certainly not the same.

PEMEX’s role as a company is disguised and is still considered by many as a de facto public regu-

lator due to its monopolistic market control.

CarProm_OGFJ_1202 1 1/23/12 2:03 PM


were responsible for the lion’s share of Mexico's conventional thermal

generation mix feedstock. However, even before the 2008 energy

reform, natural gas consumption for electricity generation had risen dra-

matically and natural gas is now the dominant feedstock in the Mexican

Energy mix.

Unsurpisingly, PEMEX dominates Mexico’s natural gas value chain.

PEMEX itself is the single largest consumer of natural gas, representing

around 40 percent of domestic demand. It also operates over 5,700

miles of natural gas pipelines in Mexico and has twelve natural gas

processing centers, with liquids extraction capacity of 5.9 Bcf per day in

2010. Mexico’s natural gas pipeline network includes ten active import

connections with the United States. In 2010, Mexico imported 342 Bcf

of natural gas from the United States, while it exported 30 Bcf to the

United States.

Natural gas’ midstream and downstream sectors were liberalized by

previous reforms in the 1990s and early 2000s. Thanks to these, vast

opportunities were opened to companies such as GDF Suez. The com-

Nevertheless the creation of CNH was an acknowledgement by

Mexican legislators that, even though state-owned, PEMEX could not

regulate its own activities while safeguarding the long-term interest

of Mexico’s energy security. Clearly, Cantarell’s fast and, according

to some, irresponsible depletion left its scars. Zepeda Molina puts it

bluntly; “No oil company in the world is capable of developing the

resources that we have here in Mexico by itself. PEMEX needs new

partnerships. Hence, the full implementation of the new IBCs is crucial

and central for the challenges that we are facing now.”

PEMEX is expected to apply the new IBC to mature northern fields,

such as the onshore Chicontepec basin and the deepwaters of the Gulf

of Mexico (GOM). Chicontepec's output, PEMEX hopes, could rise to

around 70,000 b/d with the right kind of investment.

On that note, Juan Manuel Delgado, general director, Schlum-

berger Oilfield Services Mexico and Central America comments, “A

lot of people compare Chicontepec to Cantarell, which is misleading.

Chicontepec is one of those unique fields where even with all the tools

available today it is not easy to understand and follow the continuity

and multiple compartments of its reservoirs. Exploitation of Chicon-

tepec does not have a magic solution and it is not, by any means,

straightforward. There is no one simple field development plan that

will lead to immediate success like in the majority of other fields. With

fields in the southern part of the country, it is hard to reach the oil, but

once you have achieved this, it is relatively easy to extract. Chicontepec

is the opposite.”

It's no wonder that so much emphasis is given to Chicontepec’s

exploration. PEMEX to date has spent more than U$ 5 billion in devel-

oping the Chicontepec field, which has resulted in less than 60,000

bbl/d even though the field contains around 17.7 billion boe of possible

reserves.

The 2008 energy reform package also contained specific features

related to renewable energy, energy efficiency and other important

environment-related issues. In one of their most sensible acts, Mexican

legislators acknowledged the country’s need to depend less on oil, now

an expensive and scarce resource, while also taking measures to comply

with Mexico’s international environmental obligations embodied in trea-

ties such as the Kyoto Protocol.

According to Mexico’s Energy Secretariat (Sener), fuel oil and diesel

CarEcot_OGFJ_1202 1 1/20/12 11:43 AM


CarProy_OGFJ_1202 1 1/26/12 5:25 PM

64 energy.focusreports.net February 2012 Oil & Gas Financial Journal • www.ogfj.com

pany country manager, Germain Manchon explains: “GDF Suez is the

number one private sector natural gas transmission company in Mexico,

with over 900 km of pipelines constructed, and we are the second most

important natural gas distribution company in Mexico, serving 400,000

customers through our 6 distribution companies. The company also has

some participation in the power sector with over 300 MW of cogenera-

tion-installed capacity.”

Based on the new Federal Electricity Commission (CFE) require-

ments, Mexico has a huge need for energy infrastructure in the next

10 years. “GDF Suez is a world leader in terms of the management of

pipes and infrastructure, so I believe we have much to offer. Gas distri-

bution of course is also important because Mexico needs to incentivize

a higher market penetration”, highlights Manchon, who also notes that

the company is increasingly thinking about how they can introduce

Life without Pemex

In a context where most suppliers

depend on PEMEX contracts, the past

5 years have been stressful. “The past

five years have been difficult and we barely

survived because it was taking PEMEX

so long to issue new contracts,” explains

Abelardo Rivera Lechuga, general man-

ager of Proyectos Peninsulares. It must be

acknowledged that the historic partnership

Proyectos Peninsulares has with Rockwell

Automation to install and maintain their Allen

Bradley technology in Mexico was a lifesaver,

“like rain in the desert”. Tired of waiting

for the renewal of PEMEX contracts, Rivera

Lechuga took a drastic decision that could

look suicidal in the Mexican context: “we do

not participate in public biddings anymore.

For automation projects

we go with Rockwell, but

apart from that we do

not participate in PEMEX

biddings anymore”, he

explains.

He prefers to “fight

the stereotypes about

Mexicans being lazy,

untrustworthy and having

poor work ethic” and

offer the company’s thirty-year experience in

electric and mechanical services to new-

comers and notably to drilling companies

coming from as far away as China to drill in

Mexico, rather than dealing

with the frustration gener-

ated by the perception that

some of PEMEX biddings

might be designed for a

company specifically, or

that “you need an internal

contact in Pemex to win a

contract”. “In general and

in the current Mexican con-

text I think there are more

opportunities to work for private companies

than for PEMEX” concludes Rivera Lechuga.

Ing. Abelardo Rivera Lechuga, general director of Proyectos peninsulares


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environmental services in their offers,

as a response to Mexico’s growing

environmental concerns.

…..Then PerformPetrofac won international head-

lines by securing the first ever IBC

in Mexico for the Santuario and

Magallanes fields. As explained by

Harry Bockmeulen, general manager of Petrofac Mexico, “The basis of

the contract is a fee per barrel paid by PEMEX and reimbursement of

some capital costs. PEMEX asked companies to bid a fee per barrel to

produce over and above a certain minimum production that exists in

the fields. They will give us a fee for all incremental production above

that. Petrofac will invest and PEMEX will repay up to 75% of that

amount.” The IBC was strategic not only for its profit prospects, but by

the precedent it opened for Petrofac. “It is not a one-off opportunity.

PEMEX announced multiple similar opportunities in the future and

this seemed like a good place for

us to start in Latin America”, says

Bockmeulen.

According to him, contractually

Petrofac will spend approximately

U$ 200 million in the first two years

in both blocks, which is a function of

PEMEX’s contract bidding conditions

and the minimum expenditure levels

that were part of the bidding pro-

cess. The minimum development spend on the fields over the 25-year

contracts is approximately U$500 million. “The contracts are very well

designed to incentivize the contractor to maximize production and we

will look for every opportunity to do so”, Bockmeulen concludes.

In a market that many regard as impenetrable and even xenophobic,

the key to winning such a strategic bid was to have established offices

in the country and to have build up a local network prior to that. As

Bockmeulen puts it, “Doing so establishes a credibility that you are

CarCC_OGFJ_1202 1 1/20/12 10:04 AM

Ing. Harry Bockmeulen, general director México, Petrofac

Ing. Juan Manuel Delgado, general director of Schlumberger Oilfield Services Mexico and Central America


seriously interested in coming here and it gives you an opportunity to

establish relationships with people who you hope to work with in the

future. I know that PEMEX is contemplating a second round of contracts

sometime soon. Petrofac is focusing very much on delivering the first

two fields but we will study what PEMEX has to offer in rounds two,

three, and four.”

Schlumberger, the other winner of the first IBCs bidding round,

had the contract assigned after the original winner failed to meet the

requirements for the Carrizo field in southern Mexico. According to Del-

gado, “2011 has been a good year to explore and consolidate different

prospects in the industry around the so-called ‘mature fields contracts’.

They will add more activity and bring more players into the picture,

helping PEMEX increase its oil production. Although they might not yet

have had as great an impact as PEMEX initially hoped for, they are a

good way to start the Mexican model of private company participation

in the oil and gas production industry. It is clear, however, that PEMEX

is the only company taking equity on

the assets, and any changes to this

would be left to the government to

decide. We, as a service industry,

have to comply with the rules of the

game set by PEMEX and the govern-

ment.” Prior to this, Schlumberger

had won the highest number of

contracts in Mexico amongst oilfield

service providers over the past 12

years.

The new IBCs are also expanding the options to existing local EPC

players. Nuvoil, a company traditionally focused on the management

and treatment of natural gas from well to sale points, is interested in

the opportunities they could create in oil assets through partnership

with other companies,. Mariano Hernández, Nuvoil’s director, explains

how, “Nuvoil is aligning itself with a third company involved in the

exploration of oil. Our aim is to participate in the IBCs expected for

2012. Nuvoil wants to have more strategic alliances while continuing

to strengthen cooperation with the most technologically-advanced

companies present in the Mexican market”. Nuvoil already enjoys a

strategic partnership with Calgary-based TESCO Corporation.

Instead of fearing the new competition brought by the flock of for-

eign companies considering Mexico’s friendlier regulatory environment,

Hernandez believes that competition will force local players to invest

in productivity. “There is a certain sense of excessive comfort enjoyed

Ing. Mariano Hernández, director of Nuvoil

PEMEX's Maritime Terminal Pajaritos in Coatzacaolcos Vercruz. Courtesy of Pemex.

Don’t Forget the People

Jorge Chiprés, managing direc-

tor of Ecoterra, a young start-

up made up of experienced

environment-related analysts, stresses

that even though Mexico’s environmen-

tal standards are not as high as in some

developed markets, they are getting there,

“Today, Mexican service providers are

adapting to supply the industry’s changing

environmental needs. At the same time, the

government is making an effort to clarify its

rules and solve old environmental issues.

The industry and the government are going

hand in hand towards the higher develop-

ment of Mexican environmental services”.

On the other hand, Chiprés stresses

that efforts still need to be made on social

assessment, and which are at the heart

of their current success: “How many

environmental assessment projects have

we seen fail because they didn’t take

into consideration the social component?

For Ecoterra, the social and economic

impacts of industrial projects are as

important as the purely environmental

impacts; this is our edge over other play-

ers in our niche”, he explains.


CarPro_OGFJ_1202 1 1/23/12 5:41 PM


CarPro_OGFJ_1202 1 1/23/12 5:41 PM


by local firms, thanks to the lack of local com-

petition, they are not investing much in their

competitiveness and end up losing opportuni-

ties in countries like Colombia, Bolivia or Peru;

this is not the case of Nuvoil.” Hopefully new

measures such as the IBCs will bring more

competition to Mexico’s still “overly comfort-

able” market.

Oscar Vázquez Sentíes, CEO of Grupo Dia-

vaz, makes the following assessment of IBCs,

“The previous type of contracts were limited

in that companies like Grupo Diavaz were only

providing what our customer asked for, and

were not including new ideas or new technolo-

gies and also the services were not oriented

to produce more, they were oriented just to

provide more services. With the IBCs, Grupo

Diavaz is now able to include all our capabili-

ties and we believe these new contracts will

mean higher productivity as they will create

a win-win situation between our customers

and the services that we provide, they induce

the contractor to produce more using better

technologies.”

Grupo Diavaz currently provides services

to PEMEX and other companies in marine

operations, gas distribution and exploration

and production. The company assists PEMEX

to produce gas in Burgos Basin in the North

Region, where it also helps PEMEX to pro-

duce oil, whereas in the Marine Region they

operate underwater pipelines.

One of the key strengths of Diavaz over

the years has been its ability to create and

strengthen firm partnerships with interna-

tional players, bringing new technologies to

the Mexican oil and gas industry. The latest

such partnership is with Fugro for deepwater

development and exploration. “Grupo Diavaz has been work-

ing with Fugro in the offshore market for over twenty years.

Thanks to this, we now provide services to deepwater fields.

Geotechnical and geophysical studies are the very first step

to develop them, now Grupo Diavaz is working on it”, says

Vázquez.

Protexa, a local EPC with activities in onshore and offshore

oil piping laying and oil drilling, besides maritime construc-

tions, also expects considerable benefits from the new IBCs.

“The new IBCs and other measures brought by the 2008 energy reform opened many busi-

ness opportunities that weren’t feasible before, such as alliances between PEMEX and other

companies to increase production, which will ultimately bring many multinational companies that

are still not based in Mexico. The newcomers will naturally search for synergies with local players

who can offer them local experience and market knowledge, making Protexa a unique partner of

choice”, says Fernando Lobo, head of Protexa.

This Mexican family-owned company is focusing on providing value to PEMEX’s requirements.

The company has built about 25% of the pipelines or submarine lines in Mexico and installed

CarDelt_OGFJ_1202 1 1/20/12 11:39 AM

Ing. Oscar Vázquez Sentíes, CEO of Grupo Diavaz


approximately 90% of the fixed offshore platforms in the country.

“As is well known, PEMEX plans to replenish its reserves by more

than 100% in the coming years, which represents a lot of work and

opportunities. To maintain a production of 2.5 million bbl/d means to

significantly increase drilling activities, among other things, and this

can give much impetus to Protexa’s offshore business”, anticipates

Lobo. His growth strategy is to promote new technologies and to enter

Mexico’s promising deepwater explorations. However, Protexa also

intends to continue promoting the maintenance of PEMEX’ platforms

and marine facilities, as this represents Protexa’s main cash flow.

Becoming betterAfter nearly three decades of operations, Oil International Services (OIS)

has built a skilled team with a deep understanding of both the Mexican

and the international oil industry and has gained a broad experience in

onshore and offshore construction, manufacturing and maintenance of

marine drilling rigs.

According to the company’s operational director Adrian Busta-

mante, OIS growth has always been linked to its clients’ needs and has

also succeeded in meeting national and international requirements:

“Our structure and capabilities give us the flexibility to offer our services

directly to PEMEX or to any international company by using incentive

contract schemes.”

OIS provides products and services using leading edge technolo-

gies. Bustamante asserts: “At OIS we are always looking for new ways

to help the oil and gas industry to improve its performance and to

achieve the best possible outcome.” Among these services OIS offers

two key solutions: providing Dynamic Equipment with safety and envi-

ronmental protection systems in order to address environmental and

safety issues respectively.

During the past five years, the oil and gas industry in Mexico has

experienced a steady decline in production. Nevertheless Bustamante

asserts that OIS has fulfilled its commitment in terms of production

in various niches such as drilling modules overhauling and providing

enclosures for gas turbines in the Mexican Oil Industry commissioning

between Singapore and Mexico.

In addition Bustamante feels confident about the future as he asserts

that the company has “a long term vision to anticipate the customers'

future needs; that is why within the group we have an area of research

and development which allows us to have a clear image of the techno-

logical trends and to help us understand the applications and solutions

to be implemented in PEMEX’s PEP development program.”

OIS partnership strategies have played a key role in the company’s

growth: “We have been working with foreign companies that are

already established in Mexico or with others that intend to penetrate

It is a company with 6 years of experience in the Project manage-

ment of the Energetic Sector, particularly in the Petroleum

Industry.

It takes part with companies as Mexican Oils, contributing in the

Planification, Organization, Direction and Project control in such

Strategic Areas as: Exploration, Explotation, Perforation,

Transport and Distribution of Hydrocarbons, Industrial

Security and Environmental Protection.

It designs and develops specialized software for the administra-

tion of integral projects, with base in the Reforms of PEMEX's

New Law, since:

CIAPP (System of Consultation of Information for the Administra-

tion of the Petroleum Processes). It is a technological platform,

which integrates and processes the information of the substantive

activities in the petroleum industry, allowing a better control during

his execution and an opportune capture of decisions.

SAFFC (Integral System of Administration of Contracts). It is a

technological tool which purpose is to facilitate a suitable adminis-

tration if the contracts of any nature.

It develops Basic and detailed

engieneering base on Electronic

threedimensional intelligent models

(METIS).

CarSAFFC_OGFJ_1202 1 1/23/12 1:28 PM

Lic. Eric Bustamante de la Parra, CEO, and Lic. Adrián Bustamante de la Parra, COO, OIS


the market. At OIS we are open to forming partnerships as long as they

are in a win-win format for all parties involved. We have also established

in Mexico City, Ciudad del Carmen and Houston to fulfill our clients’

needs and concentrate on strategic alliances.

As for the long-term goals, Bustamante insists that OIS vision and

mission will remain: “to become a model group in its niche.” He also

adds that the company is committed to continue searching new and fur-

ther solutions to actively contribute to improve the Mexican oil industry.

Deepwater Cliff DiversOne must not underestimate the knowledge accumulated in a century

by Mexico’s oil and gas industry. When offshore exploration was only

a speck in the distance for countries such as Norway or Brazil in the

1960s, Mexico was already working its way to discovering the world’s

second largest mega field in its shallow waters. But sadly, easy come,

easy go.

After decades of easy oil and lack of market competition, the tech-

nologies available for the expansion of Mexico’s hydrocarbon industry

have lagged behind its international counterparts and failed to meet its

increased hard-to-find oil needs. Adrian Lajous, PEMEX general director

from 1994 to 1999, is categorical about Mexico’s current challenges

to expand into new oil frontiers, “The main potential for discoveries is

where we have not explored in the past, which is in deep and ultra-

deepwater in the Gulf of Mexico. This is more a recognition of our

ignorance than any specific knowledge of what may be discovered or

where.”

Two recent deepwater discoveries have shaken the Mexican oil and

gas industry, “Three years ago, PEMEX discovered important deepwa-

ter natural gas reserves at the Lakach field and, more recently, it has

found gas reserves in the Piklis field, which together form part of the

same sub-basin in the Gulf’s deepwaters”, highlights Carlos Morales,

PEMEX E&P general manager. Coincidently or not, these findings came

out in 2008, at the same timeas the approval of the energy reform bill

by Mexican legislators.

Bejamin Torres-Barron, partner at Baker & McKenzie explains

the impact of the 2008 energy reform in the deepwater sector and

beyond. “I believe the greatest achievement of our energy reform is,

on one side, the DAC (Disposiciones Administrativas de Contratación)

or the ‘Administrative Procurement

Guidelines’, which include more flex-

ible mechanisms and add particular

features to facilitate contracting with

private parties. It is a rather modern

contractual structure that is designed

to encourage private parties and our

national industry to ‘dive’ into deep-

waters. Maybe later than sooner (not

as early as we would like), but finally

Mexico will be able to exploit the

challenging deepwaters in the Gulf of

Mexico, whereas before, PEMEX was

unable to do so.”

He goes on to emphasize that

“The energy reform is not only

related to oil matters. The reform

package also contained specific

features related to renewable energy

and energy efficiency. Some progress has been made on this front,

particularly in the electricity sector. In terms of renewables, the power

industry has been more effective as a result of the policies and the

guidelines that the Mexican Energy Regulatory Commission has issued

and implemented to encourage the use and exploitation of electricity

based on renewable sources.”

With all nuances of the 2008 reform, Torres-Barron acknowledges

that the real interest and revenue for international oil companies will

be in the Gulf of Mexico’s deepwaters. However, what is important for

most IOCs is the ability to book reserves. At the moment, if an IOC

goes into a field for E&P, Mexico’s legal framework does not allow it to

book these reserves. Torres reckons that “This prohibition to booking

reserves is not clear enough and is subject to different arguments and

interpretations with respect to its scope and mandatory effect”. Not

very comforting for an already overly risky industry.

Jose Aguilar, director general of C&C Technologies Mexico,

describes some symptomatic signs of the lack of favorable regulatory

conditions for deepwater projects, “While C&C Technologies’ main

activity is deepwater, there have been no substantial developments in

Ing. José Aguilar, director general of C&C Technologies Mexico

Mr. Adrían Lajous Ex CEO of Pemex and specialist in the Oil&Gas industry


Global Conquista?

With guaranteed rev-

enues from PEMEX

many Mexican private

companies are too often Mexico-centered

and few have invested to internationalize

their client base. Samuel Nicolayevsky and

Carlos Kahan, respectively president and

CEO of Xanik, pride themselves on being

one of them. “The excellence of our valves

has enabled us to considerably increase our

exports all over the world. Today we are

selling to the United States and Canada,

Venezuela, Colombia, Israel, South Africa,

Korea, Singapore, Kuwait, and Australia. In

Europe we sell to Belgium, the Netherlands,

Greece, Poland, Finland, Italy. Furthermore,

4 years ago we started to work in China;

our penetration in that market was mainly

in valves for alkylation process, and special

alloy and high pressure. Today our business

is 70 percent international and 30 percent

local, while a few years ago it was the other

way around”, they celebrate.

Xanik is UOP approved to supply valves

in all pipe classes for the HF alkylation

units. “This approval was a great milestone

for us since there were only three valves

companies approved in the world and we

were the fourth to get it. We are proud to

say that we are the only company in this

country that makes these types of valves”,

they say.

“It’s important to mention that even

though we have considerable exports,

one of our policy mantras at Xanik is that

whatever we can buy in Mexico, we buy it

here. Of course, there are certain types of

materials that are not produced in Mexico.

However, 80 percent of our acquisitions

are made in Mexico. Even when prices

are a little higher, we want to promote

Mexican workmanship and demonstrate

that Mexican products can have the best

quality standards”, they add.

CarLOC_OGFJ_1202 1 1/20/12 1:23 PM

Ing. Samuel Nicolayevsky, president, and Lic.Carlos Kahan, CEO, XANIK


CarXan_OGFJ_1202 1 1/23/12 1:26 PM


this market in Mexico nor do I fore-

see any in the next five years. We

are currently participating in Lakach

field, the only deepwater activity in

Mexico, by providing engineering

services for various land facilities.

Having also done work for Lakach

five years ago, we at C&C Technolo-

gies are proud of our long service to

the only deepwater production site

in Mexico.”

C&C Technologies is still working at Mexico’s offshore and shal-

low water areas and also provides geotechnical services. According

to Aguilar, what explains C&C Technologies’ success in the Mexican

market is their “Ability to offer a number of services in one package.

C&C can offer a customer both onshore and offshore solutions. I want

C&C Technologies to be one vendor that is able to provide a whole set

of products. I also want to offer a company with the highest technology

with a 100 percent Mexican workforce.”

While offshore work is normally C&C Technologies’ cash cow, in

Mexico they earn similar revenues from their onshore work. Aguilar

concludes by saying the “We at C&C Technologies are benefitting from

volume instead of bulk. We are applying offshore technology to all land

technology, which can be simple but, nevertheless, it has never been

done before”.

Milton Costa, general director of Petrobras Mexico, couldn’t be

more diplomatic in his comments about PEMEX, Mexico and its latest

energy reform, “The energy reform was something very important.

However, time is going to prove whether changes made are going to

achieve what authorities want. Mexico is a fantastic country with a huge

economy and a large population. It is a big challenge to supply the

amount of energy that its industry and 110 million inhabitants demand.

Regarding Petrobras as a model, it is true that the company is a very

appealing model to exemplify how a state oil company can be man-

aged and grow very fast in a successful way.”

When asked if one can compare Petrobras to PEMEX, here is his

answer, “The point is that conditions are different. In Brazil we were

always looking for oil because we were not self-sufficient, while Mexico

had considerable amounts of easy-to-extract oil and gas. So the

approaches were really very different. When we discovered oil in Brazil,

it was in deepwater, which meant a big technical challenge for Petro-

bras. Facing and solving this challenge has shaped our business culture

and made Petrobras what it is today. We have a larger experience

and we can share it with PEMEX.” Being an experienced employee of

Petrobras, a NOC itself, Costa is well aware of the greater advantages

of joining forces with local NOCs rather than trying to compete directly

with them.

Local knowledge, local contentWhile addressing the subject of deepwater development and Mexico’s

needs, Adrian Lajous, former PEMEX general manager draws attention

to the huge knowledge gap facing Mexico: “Naturally, never having

to explore these areas has left a serious lack of know-how in the areas

where we actually have the potential to find new reserves”.

The challenges are not just in E&P, as PEMEX’s ambitious invest-

ment plan also targets downstream sectors. In the words of PEMEX’s

Milton Costa, general director of Petrobras Mexico

Señor del Mar, in the Gulf of Mexico. Photo courtesy of Pemex

Sonda de Campeche


current general manager, “Today we

produce 1.4 billion barrels in both oil

and gas liquids. Our development

costs are about $15 per barrel and

the refining cost reaches from $1.5

up to $2.5 per barrel. The other part

of our strategy is to turn around

the situation in downstream. In past

years petrochemicals and refining

activities were in deficit”, says Juan Josè Sùarez Coppel, general direc-

tor of PEMEX. Since PEMEX is willing to increase its current production

levels from 2.5 million bbl/d to 3 million bbl/d by 2018 and improve its

local refining capacity, the U$ 22-24 billion annual investments planned

for the coming years will surely run short.

Technological research centers such as Ciateq have spotted the

opportunities brought by such aggressive investment plays and are try-

ing to fill Mexico’s technology gap as soon as possible. Since 2001, the

research institute has shifted its attention to the growing technological

needs of Mexico’s oil and gas industry. “At first, the institution worked

with gas processing technologies, but now we are focusing on fluid flow

measurement, directly applied to oil and gas flows, and exploratory

and producing wells’ productivity”, highlights Francisco Antón, Ciateq’s

general director. Ciateq has continu-

ally worked with PEMEX’s subsidiar-

ies and over the years PEMEX Gas

has become its main client, while the

research institution also completed

projects for PEMEX Refining and

PEMEX Exploration & Production.

In order to meet PEMEX’s needs

for large natural gas flow measure-

ment installations, Ciateq has entered into partnerships with institutes

in the United States and Canada, such as Southwest Research Institute

and Transcanada, which complement its capabilities and enable Ciateq

to execute large projects for PEMEX. Naturally, being a public research

center facilitates Ciateq’s access to the equally public-owned PEMEX,

making it an interesting channel for introducing new technologies and

processes into Mexico’s oil and gas industry.

Nevertheless, to develop Mexican know-how and technologies,

companies will need a large pool of skilled workers available. According

to Alejandro Martin, country manager of London Offshore Consultants

(LOC), this will become a major challenge. Martin states that, “Mexico

will need thousands of skilled people to do the work its oil and gas

industry requires. There are thousands and unfilled qualified jobs at

Crossing the Rio Grande

While relatively few Mexi-

can companies operate

in the USA, many have

seized the opportunities created by the

proximity of their northern neighbors.

In early 2000 PEMEX decided to acceler-

ate the integration of new technologies

developed abroad. Many newly created

companies seized the opportunity to

develop partnership with US based technol-

ogy suppliers. Jorge de la Torre, a former

PEMEX field engineer, decided to embark

on such an adventure and founded Delta

ARE. Thanks to a partnership with Capillary

Services Inc. Delta ARE was a pioneer in

bringing capillary tubing to Mexico.

However the US didn't only supplied

Delta ARE with a strong technological

partner, de la Torre recalls that facing

adversity with obtaining credits directly in

Mexico, they had to cross the Rio Grande

a second time, incorporate a US company

and successfully convince US financial

institutions to give them the credit to

successfully develop their Mexican

operations.

Nowadays the company has been

contracted to collect and process

magnetotelluric data in one of Mexico’s

first shale gas projects, located between

Nuevo Laredo and Piedras Negras. They

could surely seek advice north of the

border where shale gas is nothing new.

Francisco Antón Gabelich, general director, CIATEQ

Ing. Alejandro Martín Audelo Aun General Manager, London Offshore Consultants (LOC) Mexico


industry.” Paredes now expects to

increase its service portfolio and, by

doing so, help PEMEX to reach its

local content targets.

Safety FirstThe Deepwater Horizon disaster

of April 20th 2010 in the Gulf of

Mexico, resulting in 11 deaths and

the estimated spillage of between

4 and 5 million barrels of oil, has brought the paramount importance

of high safety standards within the industry into sharp focus. The

toughening of local security and environmental regulations has already

changed the fate of companies such as Kidde de Mexico (a subsidiary

of UTC Fire and Security). With an impressive safety record “Kidde has a

record of more than five years with zero accidents on the work we have

performed”, says Horacio Fájer, Kidde de Mexico’s president.

“What is better for us in the long run is that we have been able to

demonstrate that Kidde can sustain the systems beyond 98 percent

availability. To have all fire systems beyond 98 percent is key to our main

customer, PEMEX. That is because we have been able to train, educate,

and report even a “near miss” – which is almost an accident or some-

thing that could eventually become an accident”, highlights Fájer.

As with most other Mexican service providers, the role of PEMEX

is central to Kidde’s present and future, “An important portion of

our recent growth in the offshore and marine business is due to our

expanded relationship with PEMEX. Kidde de Mexico now maintains

fire systems in turbo-machinery, open areas and habitation units. The

company is also committed to better train and develop the skills in the

overall fire protection industry in Mexico, and is planning to offer train-

ing and certification to the PEMEX’s crew in Spanish” explains Fájer.

Strangely, only a few other companies offer training with 100% Spanish

materials, which can pose a significant problem in sites with a high

proportion of local crew.

In addition to this, Mexican companies are quick to react to these

highest needs for safety services and procedure. Promasa, for example

developed an innovative safety system, called the “arnés inteligente”

(smart harness). As general director Francisco Soriano explains, “The

the moment and we cannot rely

on bringing people from abroad

because other countries will have

their own needs to solve, besides

the fact that bringing foreign per-

sonnel would be very expensive. As

a country, Mexico needs to make a

bigger effort to increase and train

people at all levels, so that it can

further succeed and enhance its oil

& gas industry”.

Present in Mexico since 2004, LOC Mexico provides Marine War-

ranty Survey (MWS) services in the country. It also provides specialized

marine consultancy and surveying services to the maritime industry. “In

2004 the Ku-Maloob-Zaap development was in its early stages. It was

perfect timing for us to open the Mexican office as this allowed us to

offer MWS services to PEMEX. Our participation in the review of the

NRF-041, which is the standard established by PEMEX for the load-out,

transportation and installation of marine platforms, is a good example

of our participation with PEMEX in improving the industry practice in

the country”, recalls Martin.

The issue of developing local expertise and increasing the local

content in the Mexican oil and gas industry has been taken as a priority

for PEMEX and for the Mexican government. Measures in this direction

have boosted the demand for local start-ups such as SAFFC. With only

five years of experience in the oil and gas industry, this service provider

has specialized in the negotiation, management and supervision of stra-

tegic projects in areas such as exploration and exploitation, perforation,

transport, hydrocarbon distribution, industrial safety and environmental

protection.

With a crew of over 400 contributors working in Cantarell, Samaria

Luna, Macuspana and Chicontepec, SAFFC’s CEO Juan Carlos Paredes

asserts that “The only reason why we have been able to capitalize on

PEMEX’s “going local” policy were our strong investments in high-

quality standards, which culminated on the ISO 9001:2008 certifica-

tion. This certification has been a major step in order to guarantee the

enterprise’s commitment to work according to its quality management

system and to fulfill all international quality standards required by the

Horacio Fájer Cardona, president of Kidde Mexico

Ing. Francisco Soriano, general director of Promasa


CarOIS_OGFJ_1202 1 1/20/12 1:59 PM

idea was born after a conversation between

me and a PEMEX drilling manager. After he

told me that despite all the security measures

that they had, accidents were still happening,

I told him we needed a 24-hour supervisor.

We brainstormed how we could do this and it

occurred to us that instead of thinking about

only training people to warn others in case of

danger, we should come up with an electronic

device that could assist us in doing so 24/7.

Then we investigated the technologies that

were available and came up with a technology

that uses a type of wireless computer alarm

that gives a history and reports from the con-

trol area. This way, whenever a worker is in a

dangerous place at a dangerous time, he and

others are warned by the ‘arnés inteligente’.”

The company first started auditing air

systems in drill wells in 1999 and then saw the

opportunity to offer PEMEX’s subcontractors

risk studies and Rig Pass courses. “Regarding

industrial security and environment-related

courses, Promasa is accredited with more

than 30 different courses, being the company

with the second highest number of accredita-

tions behind the Houston-based International

Association of Drilling Contractors (IADC). Rig

Pass is a basic course necessary to enter any

PEMEX drilling installation”, says Soriano.

According to Soriano, a lot has changed

in Mexico on the environmental requirement

fields, “In the past, environmental audit ser-

vices were too costly and were unnecessarily

bureaucratic. Therefore, I saw a niche where

Promasa could offer efficient and competi-

tive services which ended up opening many

interesting opportunities for us”.

FOCUS REPORTS28 February 2012 FOCUS REPORTS

For exclusive interviews and directory of Mexican

companies, log on : www.energy.focusreports.net

FOCUS REPORTS 29February 2012 29FOCUS REPORTS16 www.ogfj.com • Oil & Gas Financial Journal September 2011

OIL & GAS FINANCIAL JOURNAL: In 2009, you were appointed head of PEMEX, a company surrounded by many pressures and influences (politics, fiscal, trade unions). Was this somewhat like a poisonous gift?

DR. JUAN JOSÉ SUÁREZ COPPEL: I previously spent six years – from 2000 to 2006 – working for PEMEX. I therefore knew what I was getting into when I had the privilege of being asked to work in this posi-tion. I have worked in both the private and public sectors

and even if this job can be frustrating, it is the most interesting and rewarding job I have ever had.

OGFJ: What have been your priorities over the course of the past two years?

SUÁREZ COPPEL: When I arrived at PEMEX, we had experienced several years of steep decline in oil production. As such, the main priority was to make sure we were making the right investments and making the right decisions to stop this trend. We also pursued our exploration efforts in order to reach our target of a 100% replacement ratio by 2012. The other part of our strategy was to turn around the situation in downstream. In past years petrochemicals and refining activities were in deficit. Hence we made the decision to return to profits. Our last point was to operate operational changes in order to become a more flexible, efficient, and agile organization.

AN INTERVIEW WITH DR. JUAN JOSÉ SUÁREZ COPPEL

EDITOR’S NOTE: The following interview with Dr. Juan José Suárez Coppel, director-general of Petroleos Mexicanos (PEMEX), was conducted in Mexico by the editorial staff of Focus Reports exclusively for Oil & Gas Financial Journal. Suárez Coppel, an economist, succeeded Jesus Reyes Her-oles as chief executive of the state-owned oil monopoly in September 2009. He previously served as CFO of PEMEX before leaving the company in 2006.

Suárez Coppel is building PEMEXdespite constitutional restrictions

PEMEX installation in Bay of CampechePhoto courtesy of PEMEX

FOCUS REPORTS30 February 2012September 2011 Oil & Gas Financial Journal • www.ogfj.com 17

OGFJ: What is the overall line and target for increasing E&P?

SUÁREZ COPPEL: PEMEX today produces 1.4 bil-lion barrels in both oil and gas liquids. Our development costs are about $15 per barrel and the refining cost is $1.5 to $2.5 per barrel. We need to invest between $15 to $18 per barrel to maintain these levels of production. Therefore, we need to invest $22 to 24 billion every year to maintain our level of production.

When it comes to crude, we produce close to 2.6 mil-lion barrels per day, and I believe that by the end of this year, we will be producing steadily 2.6 million. Our plan is to reach 2.7 million bpd by the end of 2012 and hit 3 million bpd by 2017-2018. This will of course require significant invest-ments, and we therefore need to invest in addition to these $22 to $24 billion planned. Besides we have a lot of opportunities to increase our gas output. In the past, a lack of invest-ment drove to the decline in non-associated gas pro-duction in the Veracruz and Burgos basins. But today we have discovered very significant gas fields in deep water. We expect produc-tion to start by 2015.

I believe we also have opportunities in our shale gas potential. We are optimistic about all these developments, and we will continue making efforts to increase gas production as Mexico needs this gas.

This is the basis of our development strategy. As every company involved in extraction we need to think about the future now. This is why we are choosing to invest heavily in E&P.

OGFJ: PEMEX introduced incentive contracts. What has been the reaction to these contracts and what novelty do they bring?

SUÁREZ COPPEL: Our constitution does not allow us to enter into joint ventures. PEMEX was working on penalty bases without incentives. And that now this has changed. In 2008, within the frame of the energy reforms, we got more flexibility in contracting. This flex-

ibility allows us to contract private operators for our oil and gas fields.

The incentive contracts have two main components: the first is a “cost recovery” factor while the second is a “pay per barrel” factor. These two elements have differ-ent effects on incentives and it is important to keep both, and play around with them.

Unfortunately, we still suffer from a lack of competi-tiveness regarding fiscal terms. Given that we have been trying to have these contracts as close to non-recourse as we possibly can, this often creates a situation in which the cash-flows make the recovering of these contracts very tough.

Having said that, deep-water will happen. We started investing consider-ably in deepwater explora-tion in 2004, and back then, we acknowledged this wasn’t going to happen overnight. But I am glad to say that we are now going to start developing our first deepwater field – Lakach – and we are confident production will begin in 2015. We are very excited about Mexico’s deepwater potential.

OGFJ: The investment plan announced by PEMEX mainly focuses on E&P. Are you neglect-ing the refining and petrochemical infrastruc-tures?

SUÁREZ COPPEL: Everything else might look dwarfed but this is a wrong perception. We are invest-ing what we need in refineries, putting very important investments in the next few years. We are building new processing capacities in Minatitlán refinery, and we are revamping Tula. In general, we are putting a lot of money into maintenance and bringing up to speed up our overall refining system. Furthermore, we are putting

“We started investing considerably in deepwater exploration in 2004, and back then we acknowl-edged this wasn’t going to happen overnight. But I am glad to say that we are now going to start developing our first deepwater field – Lakach – and we are confident production will begin in 2015.”— Juan José Suárez Coppel

FOCUS REPORTS 31February 2012 3118 www.ogfj.com • Oil & Gas Financial Journal September 2011

more money into petrochemicals, as there are a lot of opportunities. North America has the cheapest natural gas, and we absolutely need to take advantage of this situation.

OGFJ: Despite the turnaround in oil output decline last year, PEMEX once again generated losses. How do you explain this situation?

SUÁREZ COPPEL: This is more a result of both our fiscal and social obligations than of our operations. PEMEX is responsible for the payment of LPG subsidies – close to $7 billion per year. The prices that we receive for the products we sell in Mexico (gasoline, diesel, and other) are calculated with the logic of international prices plus logistics to protect Mexican consumers from our monopoly. That logistical adjustment has to be approved by our tax collector. This costs us another $5 billion to $6 billion every year.

In addition, one third of our payroll goes to pensioners – that is to say all the people that have worked with us throughout history, which amounts to 70,000 people, and which cost us another $3 billion to $4 billion annually. This represents more of a debt than an operating cost. These cost caps, which we cannot deduct from our taxes, make us pay about $6 billion more than what we would pay with a regional tax scheme.

If you add all these elements together, of course losses will be big. For instance, last year we lost about $4.5 billion. But if you add all this up, with the adjusted P&L, we actually made about $15 billion. We pay a lot of dividends to our shareholders – a good $18 billion of dividends on top of the taxes we pay.

Having said that, certainly there are a lot of opportu-nities to increase our profitability and that is what we see as one of our main responsibilities – getting profitability downstream and ensuring profitability and cost-reduction across the board.

From my viewpoint, too many people have a say in how PEMEX is run. When there are too many cooks in the kitchen, no one is responsible for how the broth tastes. The big difference from how we run PEMEX and how other NOCs and oil companies are run is that in the latter, you have one cook. You then have to make sure he has the ingredients that he claims he needs, and then

if the broth is not good enough, after a couple of trials, you get a new cook.

Most certainly we need to run PEMEX more as a business entity, as an enterprise, so we can get better results out of the company. Rather than focusing on how to get more taxes from the company, we should concen-trate on ensuring that PEMEX has the financial, techni-cal, and human resources to increase Mexico’s potential as an oil and gas producer and exporter.

We need to be able to run the company as a com-pany. We do not need a new company; we just need the flexibility to run this company as we should in order to create value for our shareholders.

OGFJ: How do you see the future of PEMEX, and what is the model for the company?

SUÁREZ COPPEL: On the one hand, you have Bra-zil’s Petrobras and Norway’s Statoil where the majority

of the shares and control over the votes are owned by the government, but they still act as private com-panies. Generally speaking, the way a company is run should not be affected by who the owner is. One would like the people run-ning the company to create value for shareholders independently of whether they are governments, sovereign wealth funds, or regular individuals. So yes, on the one hand, PEMEX should be like a Petrobras, a big company with the government as the majority shareholder, but a company

able to compete with others. Another example is Saudi Aramco, in which the

company and the resource are owned by the same entity. The company does its job by maximizing the value of the resource and you do not need special regulatory bodies. At PEMEX there are just too many regulators. There has to be a decision about whether we wish to come closer to the models of Saudi Arabia or Brazil. But that is a politi-cal decision. Meanwhile, our job is to run PEMEX as well as we possibly can.

The issue right now is that we have a huge oppor-tunity to increase the value that we can get from the industry by just running PEMEX properly. Regardless of politics, we need to strengthen, develop, and invest in our company.

OGFJ: Thank you very much for your time. OGFJ

PEMEX petrochemical complexPhoto courtesy of PEMEX

FOCUS REPORTS32 February 201220 www.ogfj.com • Oil & Gas Financial Journal September 2011

EDITOR’S NOTE: Carlos Morales Gil is head of exploration and production at PEMEX. This interview was conducted by Focus Reports exclusively for Oil & Gas Financial Journal.

AN INTERVIEW WITH PEMEX’S CARLOS MORALES GIL

OIL & GAS FINANCIAL JOURNAL: In May PEMEX announced a new deepwater natural gas discovery. How important is this discovery for the company? Could this be the beginning of a new era for PEMEX, signaling a shift from petroleum to natural gas and the true start of deepwater exploration and production for Mexico?

CARLOS MORALES GIL: This is a very important dis-covery for two main reasons. First, it confirms the existence of a gas province in the deep waters of the Gulf of Mexico with significant production potential. Two years ago we discovered Lakach, and now Piklis, which together form part of the same sub-basin in the Gulf’s deep waters.

Second, the discovery also means that PEMEX has entered into a challenging area of deepwater operations. At 1,900 meters (6,000 feet) this is the deepest well that we have drilled. It leads us to work in a way that we foresaw several years ago when first projecting deepwater activities. As we developed our capacities, we started shooting seismic, commenced drilling, and prepared our people to take on this challenge. We are now ready for development. Our first asset to be developed in deep waters is Lakach which, together with Piklis, has the potential to produce about 800 bcf, which equates to 80% of the country’s current gas imports. This is very significant.

Additionally, we are working to include new capacities in our drilling fleet. We will have three rigs in deep waters this year, which we contracted in 2007. We have an assessment of about 28 billion barrels of oil equivalent of prospective resources, and we are going to speed up the exploration process in deep waters to hopefully deliver expected results.

OGFJ: You recently returned from the United States, Canada, and Argentina where you launched new incen-tive contracts. Why did you choose these countries and what was your message to investors there?

CMG: Our E&P strategy is focused on reducing current production gaps – increasing production in order to replace the reserves that we are extracting. Part of this strategy includes the reactivation of mature fields. After discovering the Mesozoic basins in the south and the Gulf of Campeche in the early 1970s, we essentially abandoned mature fields without enough activity to extract the reserves that were

still in place. We have only extracted 17% of their volume, so there is still great potential in those fields. We have the potential to extract at least twice as much. Increasing the production capacity of mature fields is one of our objectives for the short term.

This means that we need to bring additional capacities to the country to complement the capacities that PEMEX currently has. Most of our human and financial resources are concentrated in our highly productive large fields in the south and the Gulf of Campeche. We need to look at additional capacity for those mature fields which is why we are trying to bring in people through new contracts. The bidding has been going on for a little over two months and so far we have had very good responses from the interested parties. We have 45 bases and 22 companies for sale, and overall we believe we have very strong offers on the table that are attractive to the industry.

OGFJ: Last year PEMEX announced a massive $267 billion plan to increase output. Can you explain to our readers how important this plan is for PEMEX and how the money will be divided? Will it be dedicated more to enhancing existing fields or new exploration efforts?

CMG: The key word that best describes our strategy is diversification. We are increasing our level of investment in exploration. About 14% of our $22 billion annual budget is dedicated to exploration activity.

A big part of the budget, of course, goes to develop-ment and production in the high productivity areas in the southwest and offshore shallow waters – 8% is dedicated to Chicontepec because we see it as a strategic resource. The remaining 78% to 80% goes to the big production areas – the development of onshore fields in the south and the new fields that we discovered in the last two years. Part of the budget also goes toward Burgos as part of PEMEX’s gas strategy. The multiple areas of investment indeed reflect our strategy to diversify.

OGFJ: Over the past 30 years, the Cantarell field alone has generated over half a trillion dollars in revenue since it began production in 1979. The Chicontepec field, which was deemed the possible successor of Cantarell, has proven to be far more challenging due to geologi-cal aspects. As a result, not only have production results been far below expectations, but more worryingly, production costs have now doubled and are on par with bitumen oil sands in Canada at $17/barrel. Obviously this is far from being enough to replace Cantarell or

PEMEX’s head of E&P has planfor increasing production capacity

FOCUS REPORTS 33February 2012 3322 www.ogfj.com • Oil & Gas Financial Journal September 2011

CMG: Our production goal this year is 2,570,000 barrels per day, which is similar to last year’s output. We face some internal challenges, all of which we expect to overcome. Next year we expect production to surpass 2.6 million bar-rels per day.

OGFJ: Regarding these internal challenges, there have been efforts in the past to make the company more efficient and transparent. As a state-owned company, PEMEX is often the target of much criticism. I under-stand that PEMEX has a very special position in Mexico, but do you think it is time for the company to become more independent?

CMG: No doubt about it. Greater independence is one of our aims. We should let PEMEX be a more independent company and give it a more flexible legal framework without so many restrictions so it can perform better. PEMEX is often a target for criticism by politicians and by the public, who want to achieve a better standard of living for the Mexi-

can people. PEMEX is huge company which makes a lot of money and develops large-scale projects. This is in sharp contrast to the poverty we have in some areas, which makes the com-pany a convenient target of criticism. I applaud the initiatives of the president (of Mexico) to make PEMEX more flexible and grant it more budgetary independence. In the end the recipe is to leave PEMEX out of the political arena.

OGFJ: Mexico could use the expertise of foreign companies for enhanced oil recovery (EOR) and in developing deepwater fields, yet there are certain governmental restric-tions. What is your message to those compa-

nies? Will you welcome them?

CMG: We have been working with service companies for a long time: consulting companies, universities – foreign as well as Mexican universities – and research institutes. The limitations that we have here in Mexico are related to prop-erty, which is not negotiable as it is in many other countries.

We need new technology to perform better and enhance reservoir recovery. For instance, we are working with a con-sortium of universities in the US and France to implement EOR projects in Mexico. Consulting companies are helping us define exploration strategies and the effectiveness of cur-rent prospects. We are now going a step beyond by having service contracts with operating companies in mature fields. But here in Mexico, just like everywhere else, the owner of the resource has to receive the rights and the royalties that the operating companies, including PEMEX, have to pay.

OGFJ: Thanks very much for your time. OGFJ

KMZ. Is there still hope that Chicontepec will play a central role future production?

CMG: I do indeed believe that Chicontepec will play a big strategic role in the future of the Mexican oil industry. Given the fact that there are about 100 billion barrels of oil equivalent down there in the ground, we cannot just let the field pass undeveloped like we did for the first 80 years since its discovery in 1926. We have the obligation to the country to develop the field. Everybody in the country, particularly those involved in developing policies, should be very inter-ested in Chicontepec. It is a strategic issue and a resource that we have not dedicated enough human and financial capacities to properly develop and extract. This is not the same as exploration. The difference between exploration and Chicontepec is that with exploration we are still searching for oil. In this case, we know where the oil is but we have to find better ways to extract it.

OGFJ: Chicontepec production for 2011 is forecast at 70,000 barrels per day. Can you confirm that figure and what do you hope to produce from Chicontepec in the coming years?

CMG: Our target forecast is to reach 70,000 bpd this December. Chicontepec currently represents 2% of our total oil output, and we

expect production to increase. Over the next two years, we expect Chicontepec to account for 4% of production, and 8% to 10% of production within five years.

Chicontepec is not like Cantarell, which is a mistake that people commonly make. It is bigger than Cantarell. But it is also tougher than Cantarell, so we have to bear in mind that it needs a different pace for execution, technological development, and reservoir management.

OGFJ: Since peaking in 2004, Mexico’s oil produc-tion has steadily declined. Production in 2009 was 25% lower than 2004 levels. By some assessments the life of estimated oil reserves is only nine more years. Neverthe-less April and May of this year have shown positive signs with one new oil discovery and an important deepwater gas find. What is the E&P outlook for 2011 and how hopeful you are that this will be another good year for PEMEX?

“The key word that best describes our strategy is diversification. We are increasing our level of investment in exploration. About 14% of our $22 billion annual budget is dedicated to exploration activity.” — Carlos Morales Gil


PAST REPORTS

Part 1 August 2011

Part 2 December 2011

Part 1 July 2011

Part 2 November 2011

http://issuu.com/focusreports/docs/oil_gas_australia_2011

http://issuu.com/focusreports/docs/oil_gas_india_2011

http://issuu.com/focusreports/docs/oil_gas_peru_2011

http://issuu.com/focusreports/docs/oil_gas_australia_2010

http://issuu.com/focusreports/docs/india_pt2_energy

http://issuu.com/focusreports/docs/oil_gas_singapore_2010

http://issuu.com/focusreports/docs/oil_gas_brazil_2010

http://issuu.com/focusreports/docs/o_g_russia_2010

http://issuu.com/focusreports/docs/oil_gas_malaysia_2010



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Mexico - EnergyBoardroom · 2017-09-07 · Mexico to further exploit its existing reserves in order to avoid a supply shock, making it dangerously dependent on mature reserves. When

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