Mexico OGFJ 2014 Part 1

OilIntFR_OGFJ_1405 1 4/23/14 5:21 PM

May 2014 Oil & Gas Financial JOurnal | www.OGFJ.cOm | enerGybOardrOOm.cOm 69

Ahead of the Toluca Summit - which marked the 20th anniversary of the North American Free Trade Agreement (NAFTA) and saw the reunion of US President Barack Obama, Mexican President Enrique Pea Nieto and Canadian Prime Min-ister Stephen Harper - Petrleos Mexicanos (Pemex) CEO Emilio Lozoya asserted that, North America will become the worlds cheapest source of energy if Canada, Mexico and the US pool their resources to reduce costs and generate industrial growth across the continent. He continued to say that the trio should work together on matters such as regulation and infrastructure to make the most efficient use of the continents growing energy production, currently reshaping global markets.

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Mexicospicing Up the north AmericAn energy revolUtion

70 enerGybOardrOOm.cOm | www.OGFJ.cOm | Oil & Gas Financial JOurnal May 2014

Prime Minister Stephen Harper, left, Mexican President Enrique Pena Nieto, and U.S. President Barack Obama, arrive at the North American Leaders Summit Meeting in Toluca, Mexico Feb. 19. (Photograph by: Jacquelyn Martin, The Associated Press, Postmedia News)

Indeed, the energy potential of the North American region has

changed dramatically in recent years. In the United States, the rise of

shale oil and gas has shifted the debate from one centered on energy

security to energy independence and even abundance. In Canada,

new technologies are unlocking the vast resources of Albertas oil

sands, while rising temperatures are opening up potential new finds

under the Arctic ice. In the latest turn of events, the regional energy

landscape took another sharp turn when, in December 2013, Mexi-

cos Congress approved the energy reform, effectively ending the

decades-long state monopoly on crude production.

For many years, Mexico and Canada have been the United States

top oil suppliers. Pemex is the third largest oil exporter to the USA,

after Canada and Saudi Arabia, but ahead of Venezuela and Nigeria.

Concurrently, Mexico and Canada are buying US natural gas whilst

Canada and the US share the largest integrated energy market in the

world with energy trade between the two exceeding US $100 billion

in 2011.

Over the past few years, a new energy dynamic has emerged be-

tween the United States and Mexico. Unable to match domestic con-

sumption with production, Mexico has grown increasingly reliant on

imported natural gas. Coinciding with the shale boom in the United

States, which catapulted US natural gas production by 22 percent in

just 15 years (from 18,856 billion cubic feet (Bcf) to 22,916 Bcf), the

US is a key exporter of natural gas to its neighbors. Enabled by ex-

panding infrastructure and driven by new power generation and in-

dustrial use, demand growth for natural gas in Mexico is robust and

on the rise: according to a report from Barclays Capital, US natural

gas exports to Mexico will more than double in three years, from an

average of 2 Bcf/d in 2013 to 4.5 Bcf/d in 2016.

With eight major pipelines scheduled to start operations within

Mexico from 2013 to 2017, with a total daily capacity of 5.6 Bcf, the

country will be increasingly reliant on external sources for natural gas

until it starts tapping its own shale gas reserves. Until then, the US is

likely to remain Mexicos main provider of natural gas.

On another front, within days of Mexicos energy reform approval

in December of last year, US Congress finally passed the long-awaited

Transboundary Hydrocarbon Agreement (THA) with Mexico signaling

their interest in collaborating, particularly in the Gulf of Mexico

(GoM). The accord allows, and effectively encourages, US companies

to partner with Mexicos Petroleos Mexicanos (Pemex) to jointly de-

velop transboundary reservoirs across some 1.5 million acres. This has

implications for the Perdido foldbelt area: a significant petroleum

province with discoveries and production made at Great White, Baha,

Trident and Tobago fields on the US side of the boundary. Pemex has

also announced the existence of significant resources in the Mexican

part of the Perdido foldbelt with interesting potentials for high qual-

ity extra-light crude oil.

At current production levels, the US, Canada

and Mexico together already represent 18.2 per-

cent of world crude output. By comparison, OPEC

member countries produce approximately 40 per-

cent of the worlds crude oil. Guillermo Pineda, en-

ergy industry leader at the multinational profes-

sional services firm PwC, believes that the North

American trio is now closer to mimicking or even

rivaling production levels observed in the oil rich

Middle East. Technological advancements, along

with the right regulatory environments, will truly al-

low the North American region to undergo an en-

ergy revolution and Mexico is an integral compo-

nent of that, says Pineda.

Although no formal discussions have taken

place yet, Guillermo Garca, director general of ex-

ploration and exploitation of hydrocarbons at Mex-

icos Secretariat of Energy (SENER, Mexicos ener-

gy ministry), acknowledges that: we will have to

work closely with our North American partners to

coordinate a regional energy strategy. [] We are

optimistic that the region as a whole will not only

develop strong levels of energy self-sufficiency, but

will actually become one of the major energy ex-

porting hubs of the world.

During Februarys Toluca summit, Canadian

Prime Minister Harper noted that a larger cooperation in the energy

sector would make North America the largest provider of fuel in the

world. In recognition of the opportunities that lie ahead, the so-

called three amigos concluded the summit by agreeing to organize

a meeting of North American energy ministers this year in an effort to

advance the talks on cooperation in energy.

Mexico has the opportunity to be the party that extracts the larg-

est benefit from the North American energy revolution, believes

Ernesto Marcos, founder and senior partner at Marcos y Asociados,

Guillermo Pineda M., energy leader, PwC

Guillermo Garcia Alcocer, director general exploitation and exploration of hydrocarbons, SENER

Dr. Ernesto Marcos, founding partner, Marcos y Asociados

AindaFR_OGFJ_1405 1 4/23/14 5:27 PM


In 2013, CP Latina acquired two Keppel Fels premium 400ft jackup

rigs, and secured two 7 year drilling contracts with PEMEX, Mexicos

national oil company, for deployment in offshore Mexico.

In 2014, CP Latina will continue to leverage upon the strong Mexican

energy market fundamentals and its inner strengths to grow towards

creating a leading Mexican integrated oil & gas services platform.

We reiterate our support and commitment towards Mexico and

PEMEX in this stage of modernization and growth, and are excited

about future opportunities for expansion, specifically in the area of

Exploration and Production.

Constructora y Perforadora Latina

Paseo de La Reforma 540 Col. Lomas de Chapultepec

11000 Mexico D.F.

www.cplatina.com

ABOUT US

Constructora y Perforadora

LATINA (CP LATINA) is a

Mexican private drilling

company focused on the

energy sector, with more than

40 years of experience in the

exploration, development,

operation and maintenance

of oil, gas, and geothermal

projects in Mexico and

Central America.

GruLatFR_OGFJ_1405 1 4/23/14 5:14 PM

Despite an increase in investment in exploration andproduction, Mexican oil production has declined from3.4 million barrels per day in 2004 to 2.5 million in 2012

3.0

3.4 20.7

2.5

103

11.7

31

4.7

1313

1997

1999

2001

2003

2005

2007

2009

2011

Investment inexploration and extraction

(Billion of dollars)

Oil production(Million of barrels per day)

Price of Mexican crudeexport mix (dollars per barrel)

2012

History of E&P Investments, Oil Production (mbpd), and Mexican Crude Price

sources: average price of the mexican crude export mix, Pmi comercio internacional

1997 2012. Production: Pemex institutional database, 1997 2012. investment:

Pemex annual statistics, 1997-2012.

the only financial and business development consultant specializing in

the Mexican energy industry, and former CFO at Pemex. The coun-

try shares the abundance of resources, both conventional and non-

conventional, and has an industrial base which means the country is

the largest exporter of manufactured products in Latin America; more

than all the Latin American countries combined. There is no previous

case in history of a country opening its energy sector as Mexico has,

whilst having such a large industrial capacity. The opportunities to

attract foreign direct investment at this moment are substantial. For

Mexico and the international energy sector, this is a decisive

moment.

EnErgy rEforms 101Mexicans today have two major challenges with respect to oil and gas

industry. First is securing a steady flow of affordable power to enable

greater industrial and national developments. Average electricity pric-

es in Mexico are 25 percent higher than those in the US, placing a

high burden on consumers and the government, as well as the coun-

trys manufacturing base. Second is Pemexs inability to tap into indi-

vidual companies experience, technology and the risk, leading to

production decline despite increased investments in E&P: having

pumped an average of 2.523 million barrels a day in 2013, Mexico and

Pemex have faced nine consecutive years of production declines.

Natural gas shortages have compelled Mexico to purchase lique-

fied natural gas at rates nearly five times higher than the US pipelined

alternative. Combined with reduced government subsidies, this has

led to considerable price hikes for electricity. In a country with a manu-

facturing base that accounts for 35 percent of its GDP, keeping energy

prices (an important input for many manufacturers) low is crucial.


In 2013, CP Latina acquired two Keppel Fels premium 400ft jackup

rigs, and secured two 7 year drilling contracts with PEMEX, Mexicos

national oil company, for deployment in offshore Mexico.

In 2014, CP Latina will continue to leverage upon the strong Mexican

energy market fundamentals and its inner strengths to grow towards

creating a leading Mexican integrated oil & gas services platform.

We reiterate our support and commitment towards Mexico and

PEMEX in this stage of modernization and growth, and are excited

about future opportunities for expansion, specifically in the area of

Exploration and Production.

Constructora y Perforadora Latina

Paseo de La Reforma 540 Col. Lomas de Chapultepec

11000 Mexico D.F.

www.cplatina.com

ABOUT US

Constructora y Perforadora

LATINA (CP LATINA) is a

Mexican private drilling

company focused on the

energy sector, with more than

40 years of experience in the

exploration, development,

operation and maintenance

of oil, gas, and geothermal

projects in Mexico and

Central America.

GruLatFR_OGFJ_1405 1 4/23/14 5:14 PM

The local perspecTive

Given the broad implications of the reforms and the potential opportunities they are expected to generate for inves-tors, two entrepreneurs and business leaders share their views on the importance of an industry-wide collective effort for a successful reform, and the breadth of opportunities to be had.

A collective effort for A successful reform Eric Bustamante, chief executive officer at OIS Corpo-ration, a group of companies dedicated to generating added value to its customer through products, ser-vices and solutions within the energy sector, offers his view on the potential opportunities that lie ahead in light of the energy reform, and how its success hinges on an industry-wide effort.

I would very much like to see our country be-come an integral player in the global energy land-scape, states Bustamante. Although the energy reform making headlines today is a significant step in the right direction towards making that a reality, the active contribution of all the organizations constituting our energy sector is essential. We all have to commit our talent, resources and efforts to each and every project we pursue and continuously push the boundaries of our capabilities. In this respect, every Mexican firm has the responsibility to realize the vision of our country and sector. We are all in this together and we will only succeed by working together.

Plenty for AllIncreased competition can always be viewed as a chal-lenge but we do not like to look at it in that way, asserts Jose Olarte, director general of Grupo Legotec, a Mexi-can firm specialized in the maintenance and restoration of drilling rig components.

If executed as intended, not only will the energy re-forms bring in increased investment and a broader cli-ent pool, it will also attract increased competition. While this would be a cause for concern, Olarte believes that increased competition will encourage us to improve our competitiveness through the enhanced quality and specifications of our products and services, enhancing our growth prospects. After all, a lack of competition can be dangerous as it often leads to complacency. However, the opening up of the market will change all that as local companies strive to match the standards of the international industry.

Olarte goes on to add that, the opportunities present in the market are far too many for any one company to satisfy alone and as such, we welcome our international counterparts. The cake is going to be very big and we cannot eat it all, there will to be plenty to go around for everyone.

Jos Gabriel Olarte, director general, Grupo Legotec

Eric Bustamante de la Parra, CEO, Oil International Services


PAEFR_OGFJ_1405 1 4/23/14 5:18 PM

enerGy reForM whaT do we Know so Far

Despite their historic significance, Mexicos energy future was not definitively settled by the constitu-tional amendments alone. Instead, much of the details concerning processes and content has been delegated to Congress, where it will be debated under much less public scrutiny in the form of secondary legislation. As always, the devil will be in the detail and the potential for backsliding will be high. As Monica Santoyo, at-torney at Santamarina y Steta, a firm dedicated to the practice of law across various industries, bluntly puts it, the constitution informs us of our desired destination, but it is the secondary laws that govern how we get there, or if we get there at all!

Some of the building blocks of the forthcoming energy framework are now beginning to fall into place, but many critical questions remain unan-swered. Heres what we know so far.

orgAnizAtionAl shAke-uPThree government ministries will have a hand in molding the new energy landscape. The Energy Ministry (Secretara de Energa or SENER) remains the dominant force within the sector retaining overall responsibility for the setting of energy policy, while assuming additional responsibility for select-ing the areas that will be opened up to E&P activities under each bidding round. SENER has been further tasked with adjudicating which assets and contracts Pemex will be allowed to keep out of its existing inventory dur-ing the much-awaited Round Zero phase. Meanwhile, the Ministry of the Environment (Agencia Nacional de Seguridad Industrial y Medio Ambiente

or SEMARNAT) is to acquire a new directorate mandated with overseeing in-dustrial safety and environmental protection across the energy sector. Finally, the Finance Ministry (Secretara de Haciena y Crdito Pblico or SHCP) has been charged with defining the fiscal terms applicable to the various energy contract types and with designing the parameters of a brand new sovereign wealth fund, modeled on the Norwegian system, to be financed exclusively from oil revenues.

indePendent regulAtorsSignificantly, both the Hydrocarbon Regulator (Comisin Nacional de Hidro-carburos or CNH) and Energy Regulatory Commission (Comisin Reguladora de Energia CRE) have been granted autonomy and had their functions boosted. The CNH will oversee regulation of upstream activities, which will entail the technical management of the bidding process and supervision of compliance with production requirements laid out in the licenses. Meanwhile, the CRE will regulate midstream and downstream activities by awarding and monitoring permits for the storage, transport and sale of petrochemicals.

oPerAtors unleAshedPemex and the Federal Electricity Commission (Comisin Federal de Electricidad or CFE) must transition from monopoly status to productive enterprises. Neither has been privatized, so each will continue to be publi-cally owned, but both will be exposed to competitive market forces and obliged to create economic value in the same way as classic private sec-tor actors. Two new entities the National Natural Gas Control Center (CENAGAS) and National Electricity Control Center (CENACE) will own and operate the national pipeline system and electricity grid, respectively.

Mnica Santoyo Galvn, attorney, Santamarina y Steta


GastFR_OGFJ_1405 1 4/23/14 5:33 PM

ENERGY REFORM continued

Increased transparency and mechanisms to reduce corruption within Pemex will be introduced; Pemexs executive board will be split between government appointees and independent consultants and the power of the labor union in Pemex will be reduced.

ownershiPIt is now up to the main Mexican political parties to determine whether or not private operators coming to Mexico will have ownership over the hydrocarbons they produce, with major energy companies around the world lobbying for this right to be introduced in the secondary legislation.

seismic dAtAE&P companies will also require access to Mexicos seismic data or a way to gain their own data before they can consolidate their investment decisions. So far there has been little indication of how or what data will be released. It has been mooted that the newly empowered CNH could allow seismic companies to shoot and sell data immediately prior to the proposed 2015 bidding rounds, but whether these terms would be deemed acceptable to the majority of po-tential new entrants is, as yet, unknown.

soft lAndingCongress will also be called upon to strike a delicate balance between cushion-ing Pemexs exposure to the rigors of the free(r) market, and ensuring a level enough playing field that will attract outside and indigenous investment. Spec-ulation is rife that the three of Pemexs four operating subsidies that are chroni-cally lossmaking will be bundled into a single bad entity with the profitable exploration unit being spun off. Associated issues such as the extent of local content requirements that may or may not be applied have still to be resolved.

Pemex will submit to the Ministryof Energy, applications for exploration areas and production elds that it is able to operate through entitlements. (90 days)

The Energy Ministry,with technical assistancefrom the National Hydro-carbons Commission(CNH) shall review Pemexsrequest and issue thecorresponding resolution.(180 days)

Pemex will maintainexploration entitlementsin those areas where it has made commercial or discover-ies exploration investments. (3-5 year period)

Pemex will maintainextradition entitlementsin producing elds.

Pemex may proposeto the Ministry ofEnergy for its approval,migration of allocatedentitlementsinto new contracts.

The Ministry shall determinethe technical and contractualguidelines of bidding roundswhile the Ministry of Financewill establish scal terms, andthe CNH shall conduct thebidding round to select thecontractor.

Source: Secretara de Energa. Direccin General de Exploracin y Explotacin de Hidrocarburos.

456

1 2 3

WHATS NEXT FOR PEMEX?Round zero for Pemex

Although the countrys historic and ongoing energy reforms are

intended to reverse this trend, it was not the decline in production that

served as the tipping point that gave way to the energy reforms. Guill-

ermo Garca, director general at SENER, explains that even though

the oil production we lost over the course of a decade equated to the

entire production of a country like Colombia, the rising price of oil

overcompensated for the decline in volumes and so failed to really

impact the national psyche. While declines in production were steep,

the increases in prices were even steeper, so the effects were barely


noticeable. Volatile gas prices, on the other hand,

and concerns about energy security have made a

big impression on both the politicians and people

and this has ultimately provided the incentive for

the radical changes we are witnessing today.

Marco Bernal, chairman of the energy commit-

tee at the Mexican Chamber of Deputies, points

out that energy security is a high priority as it is

essential for us to have the certainty that Mexico

will be an important producer of energy over the

next 25 years. Another sensitive topic is the need to

reduce the prices of gas as soon as possible; this

could be something that will boost the economy

over the next six years. The petroleum sector is and

will remain relevant for us, but the gas industry is of

pressing concern at the moment.

At the height of its production, between 2000

and 2004, Pemex was delivering 3.4 million barrels

a day (mbpd). From 2005, production started de-

clining until it reached an average daily amount of

2.5 million barrels in 2013. The energy industry

overhaul is expected to increase Pemexs annual

output to as much as 4 million barrels a day by

2025.

Mexicos energy reforms therefore seek to ad-

dress these challenges in a number of ways. Al-

though wide in scope, the reforms broadly seek to

increase investment and employment, as well as

strengthening Pemex by granting it greater free-

dom in its decisions toward partnerships, modern-

ization and better results. Moreover, the energy

reforms will help to strengthen the stewardship of

the state as the owner of oil and gas resources and

as regulator of the industry, and ultimately to gen-

erate greater economic and social wealth through

lower energy prices and increased investment.

Following the passage of the reforms at the constitutional level,

Pemex will have preference in the assignment of areas for explora-

tion or production in a so-called Round Zero. The company will also

make the transition from being a government entity to a state pro-

ductive company over a two year time period. Luis Vielma, CEO at

CBM Exploration and Production Engineering, a specialist consul-

tancy focused on the upstream sector, clarifies. Pemex will explicitly

define the projects it aims to retain in the future, and those it will

seek partnerships in, based on the execution capacity they have. In

doing so, he believes that Pemex is now being challenged, for the

first time, to carefully select those resources it can effectively and ef-

ficiently exploit. It is required to do so by law, adds Vielma.

Transformed into a competitive entity, the NOC will have the abil-

ity to make financial, procurement, and internal organizational deci-

sions. The government is effectively centralizing Pemex [], they are

providing Pemex with the tools to tackle the issues it has with its ex-

ecution capacity, explains Vielma.

Taking Pemexs experience and execution capacity into consider-

ation, industry experts are in general agreement as to which areas the

state giant will propose to retain, and those which it will relinquish to

private investors. Owing to its decades-long monopoly, Pemex has

amassed a wealth of experience in certain E&P areas. For instance,

Vielma points out that Pemex is perhaps one of the most experi-

enced oil companies in the world in terms of exploiting reservoirs in

shallow water (from the shoreline up to a depth of 700 meters). This

view is shared with Ernesto Iniesta, subsea systems commercial direc-

tor for LatAm at FMC Technologies, a leading global provider of tech-

nology solutions for the energy industry. The drilling of [shallow wa-

ter] wells is more efficient than years ago, and as a result, Pemex has

been able to improve the drilling time, utilizing more efficient pro-

grams, sophisticated rigs and advanced equipment, said Ernesto Ini-

esta. The advanced equipment provided by FMC Technologies has

contributed substantially to reducing rig time in the well completion

phase also.

So strong are Pemexs capabilities in shallow water that even the

Norwegians came to Mexico to study Pemexs techniques and meth-

ods, declares Guillermo Garca.

As such, Luis Vielma concludes it is safe to assume that Pemex

will look to maintain its grasp on the shallow water areas that still hold

vast amounts of reserves, as well as in the mature areas that exhibit

recovery factors that would permit the life extension of the reservoir.

In terms of the areas in which Pemex lacks experience, Jose

Rinkenbach, managing partner at Ainda Consultores and strategic

partners with CBM Exploration and Production Engineering, who to-

gether have advised Pemex and the local authorities on a variety of

notable technical and organizational matters, suggests that Pemex

should be more cautious in how it proceeds with the development of

shale resources given the relative nascence of the industry worldwide.

This is clearly demonstrated by Shells recent exit from the attractive

Eagle Ford Formation in the US because it could not turn an attractive

profit there, despite being the leading IOC in the world.

In late March 2014, Pemex finalized and presented Mexicos up-

stream regulator, the CNH, with a list of the areas it wants to keep as

part of the round zero. Although the NOC did not provide further

details about how much acreage it wanted to retain, it did say the list

comprised areas where it was currently producing oil and gas, or had

undertaken exploration work. According to a Pemex presentation to

investors, the firm is seeking to keep 83 percent of its proven and

probable (2P) reserves in the country, as well as 71 percent of proven,

probable and possible (3P) reserves.

Ernesto Iniesta, subsea systems commercial. LatAm at FMC Technologies

Jos Rinkenbach, director, Ainda Consultores

Luis Vielma Lobo, CEO CBM Ingenieria Exploracion y Produccion

Marco Bernal, chairman, Energy Committee, Mexican Chamber of Deputies

NavixFR_OGFJ_1405 1 4/24/14 11:29 AM


Pemexs Round Zero request suggests that the firm is leaving

significant room for private investors in unconventional as well as

deepwater oil and gas projects which the firm lacks the resources

and expertise to develop on its own. I believe that deepwater,

shale gas and shale oil and other complex wells that rely on cutting

edge technologies and significant investments for development, are

the areas in which we will see the greatest collaborative activities,

says Jos Serrano, president of Colegio de Ingenieros Petroleros de

Mxico (College of Petroleum Engineers, CIPM). It has been dem-

onstrated over the past decade that Pemex has not been able to

face the entire range of challenges characterizing the sector and so

the Mexican petroleum industry will need to pursue technological

and financial partnerships not only to tap into the unexplored re-

sources and revitalize its production, but also to gain experience in

these technically challenging fields.

Having supported Pemexs production development plans across

a number of areas order to improve its prospects, especially in off-

shore GoM, FMCs Ernesto Iniesta elaborates that by engaging in

partnerships in deepwaters areas where it lacks experience, Pemex

could, in turn, become knowledgeable enough to be a participant,

or major operator, of subsea projects.

Enhancing rEcovEry ratEs Although Mexico has more than 500 reservoirs,

only about 100 of these account for about 80

percent of total current production. As these are

concentrated in mature fields with low recovery

factors, enhancing recovery rates will be central

to the companys ambitions to boost production

levels, particularly over the short to mid-term.

Highlighting the extent of the issue, Sergio

Rivas, president of the Nordic Chamber in Mexi-

co, points out that at the moment, Norway

achieves a 60 percent recovery rate compared to

a mere 23 percent in Mexico.

However, Harry Bockmeulen, CEO at Petro-

fac, the first foreign company to operate state oil

fields in Mexico for more than 70 years, argues

that this isnt necessarily an indication of Pemexs

poor performance per se. As an organization

trying to maximize the use of their limited re-

sources, says Bockmeulen, this illustrates that the NOC simply

had more attractive projects to pursue. Had it not been for the vast

wealth of hydrocarbons in Mexico, which until recently were easily

accessible, Pemex would have been an entirely different entity, and

recovery factors would have been higher. It is technological and fi-

nancial resources that will help to drive recovery factors up in Mexi-

co. As such, it is the mature and other technically challenging fields

that are likely to constitute the portfolio of assets Mexico will offer

to foreign operators. It is this focus on enhancing recovery factors

that will drive production growth in Mexico over the mid-term, since

output from new exploration and production will take about a de-

cade or so to materialize.

Indeed, enhancing recovery factors can have a

profound impact on reserve and production lev-

els. Jos Rinkenbach, managing partner at Ainda

Consultores illustrates the fact through one of the

projects they took on with Pemex addressing the

famous Chicontepec formation. With an initially

dismal recovery factor of just 5.5 percent, Rinken-

bach explains that by looking at fields that are

comparable in characteristics to Chicontepec, we

were able to determine that Chicontepecs recov-

ery factor could be enhanced by a factor of four. To this end, we

suggested the formation of a number of individual, yet collabora-

tive, operational field labs that would work together to maximize

the field resource potential while viewing their third party service

providers as allies rather than contractors. This translated into

changing Pemexs mindset in that it would first focus on its business

model, then its technology requirements, followed by the support

functions and finally the organizational requirements. After estab-

lishing the five field labs, Pemex was able to realize a highly signifi-

cant increase in Chicontepecs production levels in the thousands of

bpd while also reducing the companys drilling activities. As of mid-

2013, those labs represented a third of Chicontepecs entire

production.

managing transitions For many, 2014 will be more about strategic anal-

yses of the reforms and understanding the new

changes and legal frameworks they introduce, be-

lieves Nicolas Borda, partner and energy specialist

at Greenberg Traurig, a leading international law

firm with a strong presence in Mexico.

In other words, this era of understanding

means that activities across the value chain have

slowed. John Lawrence, founder and managing director of

DTK-Group, a global products and services provider for the optimi-

zation of petroleum exploration and production, illustrates that,

Due to the introduction of the extensive energy reforms currently

taking place in Mexico, new exploration activities are on hold for the

time being. Of course, we are working on a number of assignments

now, but the overall level of activity is comparatively less than be-

fore as the industry is transformed and certain responsibilities are

being reassigned from Pemex to the SENER and the CNH. We are

therefore not expecting much growth in Mexico this year.

Harry Bockmeulen, CEO, Petrofac

Jos R. Serrano Lozano, president, Colegio de Ingenieros Petroleros de Mexico

Sergio Rivas, president, Nordic Chamber in Mexico & Intsok Oil and Gas Advisor

Nicolas Borda, partner, Greenberg Traurig

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easinG The burden

Following the anticipated implementation of the energy reforms this year, international in-vestors will be looking to penetrate the domestic market and capitalize on the available opportuni-ties. Streamlining the market entry process can be highly advantageous for companies, helping them save precious resources, focus on their core activi-ties and in some cases gain a first movers advan-tage. Ulises Muiz, vice president North America of Mexican based Grupo PAE, a smart solutions pro-vider in the area of human resources with 20 years experience and a presence across nine countries, explains how they can help.

how do you expect the reforms to impact Mexicos energy sector from an hr perspective?

After reviewing the main points of the energy reform, my opinion is that there are a large number of big companies that are interested in invest-ing in Mexico. Simultaneously however, many of them that already have operations in our country and were anticipating the highly publicized energy reforms which will open a range of new investment opportunities for them. My observation is that all these players will face a tremendous amount of challenges at the implementation of the new legislations and procedures. That will be the time when they will turn their attention to-wards companies such as Grupo PAE that can lessen that burden.

in terms of the clients you Grupo pae works with, what opportunities have you identified for expanding your client base in Mexico?

With the major amendments in the tax laws ahead, we are focused on finding and implementing a solution allowing our foreign clients that wish to invest in Mexico to do so in an efficient and safe manner. We intend to help them streamline the cost of doing business in Mexico by, for instance, developing the most efficient tax structures which simulta-neously minimize the risks they incur. In this regard, I would say that in 2014, we will see an increased level of activity in the market, although the players will be more or less the same.

Present in Europe and the Americas, Mexico has, and will continue

to be, a central component of DTK-Groups operations. Although the

company has experienced strong growth over the recent years, par-

ticularly in its core analysis and mudlogging services business lines,

the company is now looking to leverage its experiences and pursue

international expansion. As our business in Mexico matured, the

new strong growth we have forecasted for the company will largely

stem from international markets, explains John Lawrence. We have

also established a new laboratory in Abu Dhabi, U.A.E. that is set to

be operational before the end of April, 2014. We have also set out to

build a new lab in Houston, Texas.

In light of the depth of the reforms and the complexity of the pro-

cesses involved, Guillermo Garca says it will likely take until late 2015

or early 2016 for new contracts to be awarded to private players.

However, because Pemex can now engage in private sector partner-

ships in the areas it choses, we dont have to wait until 2016 for the

private sector to come in and start work on Mexican fields. Interna-

tional companies will be keen to embrace the

chance to work with Pemex.

Partly in anticipation of this slowdown in activi-

ty, companies like Constructora y Perforadora La-

tina (Latina) have taken another approach. With

over 60 years experience in the energy sector, the

Mexican firm first began operations in geothermal

drilling and later extended its services to include

onshore oil and gas drilling. Eager to maintain that

momentum, the company dove into offshore ac-

tivities by making a string of offshore rig acquisi-

tions in 2013.

In light of the reforms, Latina worked diligently

throughout the year to secure and lock in contracts

for its newly-acquired offshore rigs, says Santiago

del Valle, chairman of Latina. After all, what hap-

pens following the reforms is anyones guess and we wanted to limit

our exposure to that risk.

Del Valles colleague and Latinas CFO, Enrique Romo, adds that,

our ability to secure these contracts during these relatively turbulent

times represents a key strength of our organization. We are rather

proud of that. In fact, CP Latina is the only company that was able to

lock in not one, but two, seven-year contracts with Pemex for the

charter of offshore drilling rigs. This is rather unusual as by compari-

son, the average tenure of a similar contract around the world is far

less than that, lasting between six and twelve months at a time. This

clearly demonstrates Latinas operational and managerial capabili-

ties, especially once you take into consideration the stringent techni-

cal and operational requirements that Pemex expects of its

contractors.

financing growthIt must be said, proclaims Manuel Rodriguez, CEO of GBM Infrae-

structura, Mexicos largest infrastructure and energy fund, that a

majority of the hype surrounding the reforms has been dispropor-

tionately placed on the upstream segment, and with undeservedly

little attention being paid to the midstream, downstream and electric

power sector. The respective implications to the latter sectors are

also huge.

The huge opportunities unlocked by the reforms across the board

will require equally large financing in an industry characterized by

capital-intensive projects. However, as Didier Mena, CEO of Navix, a

recognized player specialized in the financing of energy projects in

Mexico, points out, Unfortunately, the financial sector is far from

ready for that. The banking sector has thus far expressed a general

lack of dedication and focus to the energy sector.

Ulises Muiz Patio, vice president, North America Grupo PAE Empresarial

Enrique Romo, CFO, Constructora y Perforadora LATINA

John D. Lawrence, CEO, DTK-Group


DTK Group

Av. Universidad No. 288Col. El Recreo

86020 Villahermosa, [email protected]

Reliable Formation

Evaluation Services

Innovative and

Proven Technology

LABORATORY SERVICES

Conventional core analysis Digital rock analysis

Micro imaging e-Core technology

WELLSITE SERVICES -

MUDLOGGING

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a real caTalysT For social wealTh

Not only is the oil industry of strategic importance to Mexico, it has been central to the countrys economic development and formative in Mexicos distinct sense of nationalism. When then-President Lzaro Crdenas national-ized the energy sector, seizing fields from US and British companies in 1938, he constitutionally guaranteed Mexican people legal property of the blackgold.

Addressing the critics of the energy reforms who believe that opening the sector to private investment will limit the benefits Mexicans derive from the resource, Didier Mena, CEO of Navix, a Mexican finance company with a strong focus on the oil and gas industry, offers a different view. Together with its controlling shareholder, Axis Capital, the two firms are the single largest independent managers of Mexican pension funds, with a combined US $768 million under management.

Having carefully invested capital raised through local pension funds, Navix has supported the growth of successful Mexican services providers to the oil industry. One such example is Oro Ne-gro, a company focused on becoming a leading player in the industry by offering technologically advanced integrated services and customized solutions.

There is no better way in which Mexicans can benefit from the industrys growth than by making them shareholders of the companies active in the sector, says Mena.We want to replicate the sort of success we achieved with Oro Negro in which the pension funds, through Axis, are the single largest investors with a 46.5 percent holding.

Not only are the opportunities to redistribute the value created in the sector to the Mexican pension holders, but there is much room for growth. Some fifty percent of the assets under man-agement of the pension funds are government securities. However, only 4 percent of local pension funds assets are invested in the instruments that expose them to such opportunities. Not only does this leave much room for growth opportunities for the pension funds, it also represents a significant source of financing for our industry, concludes Mena.

Although Mexican banks are rather liquid and robust in terms of their

capital ratios, they are also rather risk averse and reluctant to enter the

energy sector, explains Mena. As a result of the 1994/5 banking crisis in

Mexico, most of the sector was taken over by international banks and the

government did its part by issuing government securities to clean their

balance sheets. Today, the balance sheets of the banking system are heavily

weighted with investment in securities, representing close to 30 percent of

the banks balance sheets. Instead of branching out into unfamiliar territo-

ries, local banks understandably chose to pursue their more traditional lines of business; pro-

viding mortgages, credit card loans, personal lines of credit, and so on. The local banking

sector has therefore never developed the expertise unique to the financing of energy proj-

ects, leading to a significant gap in the market.

As a result of the domestic financial industrys relative inexperience with the energy sector,

some Mexican companies were left with little choice but to look elsewhere for their financing

needs. In financing its recent offshore rig acquisitions, Latina for instance had to turn to Nor-

wegian investors. Through its indirect subsidiary, the company successfully raised USD 175

million of five-year senior secured callable bonds to fund the completion and take delivery of

its first new build jack-up drilling rig.

When asked about their local project financing endeavors, Juan Reynoso, founder and

CEO of Blue Marine Technology Group, a leading oil and gas services company dedicated to

providing infrastructure, technology and specialized equipment solutions, says: without a

doubt, that was a challenging experience.

Despite the bitter taste left by those experiences, Reynoso explains that, because capital

for energy projects is typically raised through public and private investments, Mexicos public

financing market needs to enhance and align its process and structure to the requirements of

Didier Mena, CEO, Navix

Manuel Rodriguez Arregui, CEO, GBM Infraestructura


Onshore Drilling. Courtesy of Pemex

the market. It needs to enhance its transparency,

establish clear rules and provide investors with se-

curity, for instance. We have seen these issues im-

proving recently and we can expect to see energy

companies financing larger projects through the

local market.

At the same time, instead of just waiting for the

financial industry to catch up, Reynoso and Blue

Marine have taken matters into their own hands

and established the Blue Energy Fund, which allows individuals to

invest in a diverse pool of assets. Our fund targets investors that

understand the potential of the energy reforms and the market as a

whole, but do not necessarily have in-depth knowledge of the indus-

try. This creates strong synergies between our organization and inves-

tors, allowing us to raise the funds we need to acquire assets and al-

low investors to participate in the industrys growth. We have already

identified many potential investors, domestic and foreign, that are

successful in their own domains but do not necessarily possess exper-

tise in our field, he explains.

a lEss than pErfEct history of rEformsIn 2008, then-President Felipe Caldern sought to reform the coun-

trys energy sector, the first attempt to do so since the sectors nation-

alization in 1938. Seeking to reverse the countrys fortunes, Calderns

government passed the reforms which aimed to achieve the same

goals as the current energy reforms, but to the disappointment of

most stakeholders, the implementation of the 2008 reforms was large-

ly unsuccessful due to political reasons, according to Jose Rinken-

bach at Ainda Consultores, who was involved in the design of the bills

key elements.

Despite Mexicos questionable history with reforms, industry lead-

ers have expressed great optimism, and in some cases even disbelief,

with regards to the extent and depth of the governments renewed

attempt to reform the sector. Aindas strategic partner, Luis Vielma of

CBM Exploration and Production Engineering says: if someone were

to tell me that the congress would approve the deep and multidimen-

sional energy reforms that they did with such swiftness and few altera-

tions on December 16th, I would have struggled to believe them.

Similarly, having witnessed the generally disappointing 2008 ener-

gy reforms, Ernesto Iniesta of FMC Technologies explains how reas-

suring it is to see that the policy makers have learned from their past

experiences and are now far better informed about the industry, its

challenges and the different approaches to address these challenges.

They are well supported by industry experts in making their decisions

and I expect that the final outcome will mirror international standards

and best practices in many ways. The success of the reforms will large-

ly depend on how well aligned these latest efforts are with investors

hopes and expectations.

Indeed, the reforms have already generated a great deal of opti-

mism, particularly at the local level. As Joaquin Castro, founder and

managing director at Ensayos No Destructivos, a company dedicated

providing solutions and equipment for nondestructive testing (NDT),

puts it, if the reforms are successful in their goals, the increased

levels of production and activity will undoubtedly have a trickle-down

effect across the industry value chain. Increased production needs to

be complemented with a proportional increase in exploration and

production assets, infrastructure of all sorts including pipelines, as

well as more refining capacity, among others. The potential opportu-

nities unlocked by these are so great that not only will this have a

positive impact on our company and niche, but on all players active in

the industry, if not more.

Having drawn the global industrys attention with the reforms at

the constitutional level, domestic and foreign investors alike are now

eagerly anticipating the final hurdle that arguably lies between the

boom or bust of the Mexican energy industry. Harry Bockmeulen of

Petrofac summarizes the point. As a private company with an estab-

lished presence in the country, the secondary legislations are critical

in outlining what can and cannot be done in the industry. Although

the general consensus agrees that the secondary laws will promote

international participation and investment, we would be hard-pressed

to make any strategic decisions before we have had the opportunity

to study these closely.

Having played all its cards right so far, will Mexico finally break the

trend and implement a comprehensive set of energy reforms? Will

Mexico and Pemex continue to risk missing valuable foreign invest-

ment opportunities? Will Mexico be allowed to play its part in the

North American energy revolution? Only once the details of the sec-

ondary legislation are defined and made public will we be able to

answer these questions. Having missed the planned April 20 dead-

line, the ball is still in the legislators court.

Juan Reynoso Durand, CEO, Blue Marine Technologies

Mexico OGFJ 2014 Part 1

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Transcript of Mexico OGFJ 2014 Part 1