UAE SR 6/06 - Global Business Reports · new Pemex administrationinvolves...

A SHIFTING ENERGY PARADIGM

MEXICOA Special Report From

Oil and Gas Investorand Global Business Reports

Since 1938, Mexico’s state-ownedoil giant Petroleros Mexicanos(Pemex) has retained close to

complete control over the country’s size-able crude reserves. National ownershipof Mexico’s oil reserves is considered asacrosanct polit ical and historicalachievement, and Mexicans viewPemex as a powerful symbol of thecountry’s economic and political inde-pendence despite being in the shadow ofthe world’s greatest superpower. Overthe past few years, however, sharpdrops in production at the largeCantarell Field have prompted the gov-ernment to try to thwart the declinethrough a recently legislated energy re-form. This report looks at the energysector as it attempts to redesign its hy-drocarbon paradigm and face up tosome significant challenges.

While outsiders may associatetequila, rather than oil, with Mexico,hydrocarbons have been crucial tothe Mexican economy for manyyears. In 2008, oil revenues ac-counted for 40% of the country’s an-nual budget.

With proven oil reserves of close to 12 billion barrels,Mexico’s oil supply has garnered Pemex the status ofeleventh-largest petroleum company in the world. FollowingPresident Lazaro Cardenas del Rio’s decree of expropriationfavoring the nation in 1938, Pemex was given carte blancheover the entire industry. Since then, the company has en-joyed 71 years of virtual monopoly, survived the Mexicaneconomic crises of the 1980s and ’90s and consolidated itsposition as a national symbol.

In addition to crude, Pemex expanded its monopoly to in-clude the production of natural gas, petrochemicals, gasolineand diesel fuels. In 1995, the company averaged 2.7 millionbarrels of crude oil production per day, and eventuallypeaked at 3.8 million barrels daily in 2004 before falling to3.5 million per day in 2007. Oil production fell a further9.2% in 2008, and at year-end the government finally man-aged to legislate an energy reform aimed at reversing thistrend.

The drop in output has, in largepart, been blamed on CantarellField’s natural decline. But fingershave also been pointed at the ad-ministration and Pemex’s failure tomake any significant reinvestmentsin exploration and production sincethe 1980s. Despite the monumentalrevenues generated by Pemex (over$100 billion in 2008), it has had topay a large portion to the federalgovernment to cover more than two-fifths of the national budget. Thishas led many to describe the NOCas the government’s own personal“piggy bank.”

Revamping governanceIn this respect, the recent energy

reforms revolve around the issue ofcorporate governance. Realizing thatPemex had evolved from a produc-tive organization into a crutch forthe central government—and thatthe company’s financial policies,budgeting rules and human resourceswere being governed by an institu-tion that by nature was never de-

signed to promote profit-making—President Felipe Calderonand his National Action Party (PAN) released plans in April2008 to implement reforms that would revamp the industry.The aim: to give Pemex more power to self-govern and,hopefully, rope in some much-needed foreign investment.

The reform plans were met, however, with consternationin the Congress from the opposing Party of the DemocraticRevolution (PRD) and Institutional Revolutionary Party(PRI). Also, the majority of Mexican citizens voiced a strongobjection, viewing the reform as an attempt to privatizePemex and as violating a basic principal in the constitutionthat ensures Mexican oil will always remain firmly in thehands of Mexicans. After exhaustive talks and negotiations,a set of energy reforms was finally agreed upon in October2008. But to appease the almost unprecedented degree ofpublic disapproval, President Calderon and his supporterswere forced to water down the reforms and limit private-sec-tor participation.

Industry insiders’ reactions have been diverse, with someexperts voicing optimism about the reforms, while others ap-pear deeply concerned. The majority of Mexicans, however,seem merely to be surprised that the three main political par-ties managed to come to any form of agreement on such acontroversial issue. That this has been achieved is a testimo-nial to the need for change; it remains to be seen whetherthe agreed-upon reforms will be sufficient to alter the wayPemex operates and regenerate Mexico as a major player inthe energy sector.

MEXICO: INTRODUCTION

Redesigning An Oil ParadigmProduction declines prompt energy reforms.

This report was prepared by Global BusinessReports for Oil and Gas Investor. The authors are RorySheldon ([email protected]) and Ramona Tarta([email protected]). More information on thefirm can be found at www.gbreports.com.

June 2009 ▪ OilandGasInvestor.com M-71

Oil revenues accounted for 40% of Mexico’s annualbudget in 2008. The new energy reforms seek togive Pemex more power to self-govern and, it ishoped, rope in some much-needed foreigninvestment.

The new rules of the gameThe seven energy reform bills that

have been adopted will not alter theenergy business in Mexico to a great ex-tent. They conform to the status quothat the Mexican nation will maintaindirect dominion over the subsoil as wellas the exclusive right to exploit and de-velop oil and gas. All domesticpetroleum and hydrocarbon resourcesand basic petrochemicals will continueto be regarded as strategic activities re-served for the state. However, the billswill instigate a few small changes thatcould promote diversity in the sector.

Primarily, Pemex will undergo someinternal changes with the appointmentof four professional directors, who areexpected to help improve corporategovernance and strategic planningwithin the company. While the reformsgrant the Ministry of Energy (Sener)the power to establish the annual oilproduction platform, the new laws willloosen the restrictions under which thecompany has been operating in thepast. They give Pemex greater freedomand autonomy, and substantially in-crease its 2009 E&P budget by 27%, ac-cording to sources. Also, under the newlegal framework fewer restrictions willbe imposed on the contracts thatPemex is able to award to companiesfrom the private sector.

Historically, Pemex has never beenallowed to enter into product-sharingagreements, participation agreementsor to grant concessions with privatecompanies, as this would undermineArticle 27 of the constitution. Privateinvestment in the sector could only beundertaken through the restrictive pro-curement laws, which relate to acquisi-tion, leases and services for the publicsector as well as public works and ser-vices. Under the new scheme, compa-nies and investors will be able tooperate under performance-based in-centive contracts awarded by the newPemex board of administration, whichwill be advised by a new transparencyand auditing committee.

While a number of Mexican compa-nies will benefit from these new con-tracts, foreign companies will need todemonstrate a solid presence in thecountry before being considered worthyof winning a tender. Speculation is rifeas to whether the incentives behindthese new contracts will be beneficialenough to entice big players to enterthe deep-sea oil and gas sector, whichMexico desperately hopes to develop.

For many, one of the more interest-ing aspects of the reforms is a bill thatcreates the National Commission of

Hydrocarbons, which will in effect actas a regulatory commission over the up-stream sector. Unattached to Sener, theregulatory commission will be given au-thority over the regulation and supervi-sion of all exploration and productionin the country. Likely to be modeled onthe Energy Regulation Commission(CRE), which handles the more flexi-ble market for transportation and distri-bution of natural gas and LPG (and hasbeen considered a great success since itsformation in 1992), the new hydrocar-bon commission is charged with in-creasing efficiency and transparency inall business relating to exploration andproduction.

Perhaps the greatest disappointmentto arise out of the energy reforms is thelack of any major changes relating toMexico’s refineries. The country cur-rently imports 40% of the gasoline itconsumes, and it was hoped that pri-vate investment could bolster a drivefor new refineries. This was not thecase, however. Currently, the govern-ment has plans and investments inplace to construct a new refinery inTula, in the state of Hidalgo, but there

is wide-spread skepticism as to whetherthis will be sufficient to stop the coun-try from becoming a net importer ofgasoline.

The new laws initiated by the re-forms also focus on renewable energy,and give Sener the responsibility toconceive and operate a renewable en-ergy program. It envisions implement-ing a national strategy for thesustainable use of energy, through in-centives for companies working towardsproducing renewable energy schemesand instigating proven energy savings.

The most important achievement ofthe reforms has been to create a morelevel playing field for the political par-ties to discuss oil-related issues with ahigh degree of technical and politicalcomplexity, leaving aside emotions andideology. While the energy reforms willno doubt help develop Pemex’s corpo-rate governance and allow private com-panies more freedom to enter themarket, the reforms are viewed by manyas simply a first step in the right direc-tion, with more needed in the future. �

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Global Business Reports (GBR): The en-ergy reform was debated for well over 15 yearsbefore finally being legislated late last year.What are the principal obstacles that the gov-ernment faces in the immediate application ofthe reforms?Georgina Kessel (GK): We need time toexecute a number of operations instigatedby the reforms that were recently adopted.These will include a new system for perfor-mance contracts for the hydrocarbon sector,the entire part of a new legislation on re-newable energy, all the necessary parts oflegislation on energy efficiency, and ofcourse, all the changes with regard to the re-structuring of corporate governance for Pemex.I believe that the reform was very comprehensive and

that it will give the regulatory authorities a series of toolsthat will allow us to better regulate the sector far morebroadly and expansively.GBR: Can you detail how strategies and protocol will changein light of the recent energy reform to ensure Pemex becomes aprofitable institution and what exact role Sener will play?GK: From its inception, the Calderon administration hasunderstood how the uncertainties inherent in the hydro-carbon sector pose a substantial risk to the energy securityof Mexico’s future generations. What we see today in ourpetroleum industry is not a sudden and unexpected devel-opment. Rather, it is the unavoidable result that comesfrom decades of neglect; an inertia created by political ex-pediency and short-sightedness. Currently, over 90% ofour production is based in fields that have already passedpeak production levels and are in a state of decline, suchas Cantarell. Ku-Maloob-Zaap will soon follow.Pemex has a strategy in place for this situation, and it in-

cludes several measures to manage the decline of these twosites. These include increasing the production capacity ofexisting wells, the installation of gas-injection equipment,dehydration and desalination of crude oil, operational pro-cess automation and the application of rational technicalcriteria. Our production goals are aggressive.In addition to the measures listed above, Pemex will

also need to expand exploration to find new fields andbring them online as soon as possible to meet our goals. Ihave stated several times that Mexico must explore newfields in areas that present greater technical challenges interms of complexity of watershed and geology, such as thereserves at Chicontepec and the deepwater reserves in ournational waters in the Gulf of Mexico.The reform approved by Congress achieved a signifi-

cant structural change in the oil industry, as well as re-forming Pemex itself. This reform allows us to moveforward, making it possible to meet the goals that we have

set for ourselves, particularly in productionand the restoration of reserves. In the shortterm, these changes will enable us to haltour recent decline in oil production, and in-crease the reserve-restitution rate. We ex-pect that during 2009-2010, productionlevels will be between 2.7- and 2.8 millionbarrels per day. Then, beginning in 2011,production will gradually increase, reaching3 million barrels per day in 2015, and by theend of the current administration (2012),the reserve-restitution rate will reach 100%.GBR: What was the purpose of creating theNational Hydrocarbon Commission (NHC)?GK: The National Hydrocarbon Commis-

sion will have as its main objective the regulation and su-pervision of petroleum exploration and extraction, as wellas all products that accompany or result from these activi-ties. These include processing activities, transportationand storage.Responsibilities within the purview of NHC include

providing the technical details necessary for defining na-tional oil policy, as well as regional exploration and pro-duction programs; collaborating with the Ministry ofEnergy to determine a national policy for hydrocarbon re-serve restitution; establishing the necessary technicalguidelines to identify appropriate sites for exploration;conducting studies to assess, quantify, and verify nationaloil reserves; establishing official Mexican standards thatfall within the jurisdiction of the commission; and verify-ing compliance with those standards.GBR: Where do you see the best opportunities for foreigncompanies looking to invest in the Mexican oil and gas sector?GK: All oil production in Mexico is reserved solely forthe government as the representative of the Mexican peo-ple. For this reason Pemex is the only company that canlegally produce Mexican oil. However, the newly enactedcontract framework allows Pemex the freedom to establishproject or service contracts, which offer incentives relatedto the success of the project. These contracts are subjectto the following conditions: compensation is always andonly in cash, it is not possible for any government entityto cede ownership of Mexican hydrocarbons to any non-Mexican entity, contracts cannot include clauses to shareeither production or profits, and contracts cannot includeany clause that cedes or establishes a preferential right toacquire petroleum or its derivatives.The new framework gives Pemex more autonomy and

flexibility in operation and investment spending. Now thecompany has new terms of engagement that allow it toexplore and exploit hydrocarbons in a more agile and effi-cient way, ensuring a more timely response to market con-ditions. This will attract greater foreign investment. �

MEXICO: EXECUTIVE Q&A

An Interview With Mexico’sSecretary Of EnergyGeorgina Kessel, secretary of energy, discusses Mexico’s drive toward reviving its oil and gas industry fol-lowing the energy reform.

Georgina Kessel, secretary ofenergy, believes the newreforms will permit a broaderregulation of the sector.



ransforming a giant like Pemexwas never going to be an easytask, and no matter how inconse-

quential the energy reforms may appearto some observers, they represent a po-litical triumph. With a history stretch-ing back more than 71 years, sincePresident Lazaro Cardenas nationalizedthe industry in 1938, the national oilcompany’s (NOC) governing policieshave undergone few if any majorchanges. Essentially, the legislationgoverning the oil industry in Mexicowas drafted in the 1930s.“Pemex is an important engine of

the Mexican economy that has beenrun by very peculiar rules,” says RaulLivas Elizondo, chief operating officerof Pemex. “As a result, we have notbeen contributing efficiently to theeconomy. It is desirable for a companyto generate more revenue at a rationalcost, but Pemex has been governed by rules that only con-trol the cost, which creates very irrational behavior.”Because many Mexicans sold off their family riches to

help the government raise enough capital to buy out for-eign companies during expropriation, any form of energydebate regarding Pemex has been regarded as taboo.These debates have traditionally become heated, andwhen President Felipe Calderon first raised the issue ofenergy reform in April 2008, Andrés Manuel López Obre-dor, a former presidential candidate and member of theParty of the Democratic Revolution (PRD), rallied hissupporters and occupied both houses of Congress, chain-ing the front doors in an attempt to prevent approval ofany changes that could lead to even partial privatizationof the sector. To appease popular sentiment, therefore,Pemex’s leaders have traditionally painted an optimisticpicture of the company’s operations for the public whileappealing to government to initiate change.

While some experts have argued that short of privati-zation, little can be done to save Mexico’s oil and gas in-dustry, Livas disagrees. “We have a very clear mandatefrom the population and there is a very strong objectionfrom the majority of citizens in Mexico to privatizePemex. This is something we need to obey. It is the will ofthe people. If you were to look at the situation exclusivelyfrom a performance perspective, privatizing the companywould most likely be more effective, but violates the basicprincipal that is encapsulated within the constitution.”In view of increasingly pessimistic news from Pemex

managers, agreement was eventually reached between theprominent political parties in Congress, leading to the en-ergy reform legislated at the end of October 2008. But it

remains to be seen whether thechanges will, firstly, be enough to re-verse Mexico’s oil-production declineand, secondly, whether those in chargepossess the will and dedication neededto ensure the reforms’ success.

Immediate challengesDuring the recent celebrations of the

71st anniversary of the NOC in March2009, Pemex released figures showingcrude oil and natural gas reserves hadfallen for the tenth consecutive year.This was due to the decline ofCantarell Field—a supergiant said tocontain the third-largest known depositof crude. Oil production in 2008 stoodat 3.1 million barrels per day comparedto 3.5 million daily in 2007.Says Livas, “The situation in Pemex

is currently characterized by the evolu-tion of its main oil field, Cantarell,

which is presently undergoing a decline. The future chal-lenges are enormous, not least of all because extracting oilfrom Cantarell required far less investment than the newoil fields.”While the Energy Information Administration forecasts

that Mexico will produce 2.9 million barrels of oil per dayin 2009 and 2.7 million barrels daily in 2010, PresidentCalderon pointed out at the anniversary event that whileproduction had been declining, the country had experi-enced a reserve-replacement ratio of 71% in 2008, upfrom 50.3% in 2007. He went on to say that he fully ex-pected the reserve-replacement ratio to reach 100% ormore by 2012.“Our objective for this administration is to accomplish

full replenishment of reserves with 1P and 3P reserves andreach a sustainable phase in our production,” says Livas.“With the 3P figures, this replacement ratio has been ac-complished already. The figures released show that in2008 there was a 71% replacement ratio in 1P and 102%replacement ratio in 3P.” While these figures show poten-tial, the high replacement ratio can in part be explainedby lower output levels, rather than increases in reserves.Whatever the case, Livas admits that there is an imme-

diate need for a lot more activity on all levels, and that theneed to maintain the production platform requires massiveinvestment in E&P. While Pemex’s E&P budget is esti-mated at some $19 billion (all amounts in U.S. dollars) for2009, Livas explains that far more important in reversingMexico’s downward trend will be the application of theenergy reforms. “By removing the straightjacket underwhich Pemex is currently restrained, the NOC will be en-abled to move forward at a much faster pace.”

MEXICO: DEVELOPING A NEW PEMEX

The Path To ReformChanges to Pemex represent a political triumph as well as opportunity for foreign companies.

Raul Livas Elizondo, chief operatingofficer of Pemex, says the objective is toaccomplish full replacement of reserves.

T

Acclaimed energy analyst DavidShields has been living in Mexicosince 1980. He is the editor of localmagazine Energia a Debate, and haswritten two books on Pemex. He em-phasizes that what is important aboutthe energy reform is that as a piece oflegislation it gives the people in powermuch to accomplish. Committeesmust be created, regulators named,and a score of business and work plansdrawn up. “The reform in itself isnothing,” he says. “The next phase isnow and it is critical. Whether or notthey can get the committees, workplans, and contracts actually workingin an optimal way so as to create busi-ness and attract investment remainsto be seen.”Currently the reforms’ success de-

pends upon successful implementationof attractive contracts, establishmentof a functional National HydrocarbonCommission, and the outcome of thedifferent types of autonomy awardedto Pemex. Says Shields: “The big chal-lenges are here and they need to betackled now.”His comments are backed up by

Luiz Ferezin, Accenture’s project man-ager for Mexico. “We have not seenNOCs going from 0 to 100 in a matterof seconds, and this will not be thecase with Mexico. However, we seethis reform going in the right direc-tion, and as soon as the committeesthat were created start to act—andthey are still learning how to work—and as this starts to move, we willprobably see additional change thatwill make the processes more efficient.This is a very positive move, but thereform itself is no doubt an evolution-ary process.”

Creating a new administrationThe most important aspect of the

energy reform revolves around creat-ing a new set of rules for Pemex andrestructuring the administration of theNOC. “The key aspect to understandabout the reforms, which can be diffi-cult to comprehend at times, is that attheir heart is the issue of corporategovernance,” says Livas. As with theevolution of NOCs elsewhere, there isa general desire to shift these corpora-tions away from the restrictions im-posed upon them by centralgovernment and towards a more lib-eral and profitable playing field. “Gov-ernments were not designed to controlthe production of goods and servicesin a competitive market; they were es-tablished to provide services that thepopulation needs based on taxation,”


says Livas. Thus, the reforms wereaimed at giving Pemex the power togovern its own human resources, fi-nancial policies and budgeting rules.To realize this, the energy reforms

established a new board of directorsfor the company that will include fourindependent advisors. The impor-tance of these new members is to em-power the board’s decision-makingwhile creating a set of modern ac-countability rules. While these fourindependents were intended to be se-lected in December 2008, they werenot chosen until this March. Thisdoes not show a lack of dedication onthe government’s part to pushthrough the reforms, but rather, re-flects the time and effort required to

ensure the right people were selected,according to Livas.The new board members include

Rogelio Gasca Neri, who formallyheaded the Comision Federal de Elect-ricidad (CFE, the Federal ElectricityCommission); José Fortunato ÁlvarezEnríquez, a member of the governingNational Action Party (PAN), whohas worked in a number of state-runfinancial institutions; Héctor Mor-eira, also a member of PAN and for-mer researcher at the Tecnologico deMonterrey University; and FluvioCésar Ruíz Alarcón, a former advisorto Andrés Manuel López Obredor,who battled President FelipeCalderon in the 2006 presidentialelection.

A number of industry experts havepraised these selections. Leading en-ergy attorney and former head of theinternational legal department forPemex Rogelio Lopez-Velarde, of lawfirm LVHS, describes the four inde-pendent directors as very capable in-dividuals. “These new directors knowthe nitty-gritty of the governmentand Hacienda (Ministry of Finance),and by the same token, they are alsomindful of the lenders’ issues and fi-nancing.”When asked whether the political

backgrounds of the four new directorswould remove transparency and au-thenticity with regard to their beingindependent overseers, Livas pointsout that while they do have some var-ied political backgrounds, this can beseen as a means of representing thediffering views of the Mexican peo-ple, all of whom have a right to sayhow the NOC should be governedand run. “The names of the four pro-fessional members of the board satisfya broad set of interests, and I think itis going to be helpful in terms of hav-ing easier conversations and develop-ing a greater trust-building capacitybetween Pemex and Congress.”The new advisors will not only rep-

resent Pemex on the board of direc-tors, but will also control andsupervise some of the more importantcommittees created by the energy re-forms, such as strategy and invest-ments, auditing and performanceevaluation, transparency and render-ing of accounts, works and services,and leasing, among others.

A new financial instrumentAnother significant aspect of the

new Pemex administration involvescitizen bonds, which were, for themost part, fully approved in the re-form proposal.While the exact measures of these

bonds remain to be worked out by theMinistry of Finance, the design of thisnew mechanism should be made pub-lic by year-end. These are a financialinstrument that is linked to Pemex’seconomic results, says Livas. “Oncethe instrument is out in the market, itwill serve as a proxy to determinehow well Pemex is performing eco-nomically.” Essentially, the holders ofthese bonds or instruments will havean interest in analyzing the com-pany’s results as well as possible devia-tions from expected results. “We willestablish a market discipline onPemex which will be very helpful toattain the long-term objectives of the


Analyzing the new legal frameworkMexico has finally decided to change its oil andgas industry. On the one hand, for the first timethe oil and gas monopoly—Pemex, the nationaloil company—will have a regulator. This willresult in better industry standards, as the regula-tor, the National Hydrocarbon Commission, in-tervenes in restitution of reserves, recoverylevels and technology.On the other hand, Pemex’s new framework

will allow it to operate more like a public com-pany and less as a governmental department.Corporate governance rules with professionaldirectors taking the lead in issuing contractrules and evaluating the company’s performanceshould materially help Pemex shift towards en-hancing economic value and increasing produc-tivity levels. Also, the placement of “citizen bonds” in the securitiesmarket—with yields linked to Pemex performance—should bring account-ability to the NOC’s business. The market will oversee its performance,strengths and weaknesses, business plans and prospects—something the or-ganization has been lacking for decades.In its effort to materially increase productivity, restitution of reserves and

production levels, Pemex must not only go to the deepwater frontier, butalso must work on difficult onshore areas such as Chicontepec. Oilfield ser-vice companies and private investors (both domestic and foreign) will playa major role. A cornerstone of the reform is Pemex’s ability to issue its ownrules for entering into service contracts, which should allow the companyto approach more internationally standard service contracts. Oil and gascontracts (for upstream, midstream and downstream) will be carved outfrom the government procurement laws and given a new contractingframework expected to result in more commercially oriented agreements.Pemex is also authorized to build incentives into the contracts, with verybroad modalities, including per-barrel fees and payments based on findings,among others.Finally, Pemex will be given considerable latitude and autonomy from

the financial and budgetary standpoint. It, rather than the Ministry of Fi-nance (Hacienda), will decide what projects to undertake and invest in. Itwill also negotiate and assume its own financing with foreign and domesticlenders with no intervention from the ministry. These enhancements, plusan increase in available resources based on improved ability to reinvest partof its revenues, should boost the number of projects available for companiesworking in the field.

—Rogelio Lopez-Velarde

Energy-focused attorneyRogelio Lopez-Velarde saysPemex will have a regulatorfor the first time.

organization,” says Livas.Lopez-Velarde is optimistic about

the corporate restructuring. “Themost important aspect of the reform isthat the Pemex mandate will be tocreate economic value for the com-pany.” This change in mindset is infact a historical shift for Mexico, asPemex has never been given the flex-ibility or encouraged to focus onprofit. The citizen bonds will act asproxies forcing Pemex managers tofocus on results.

Redefining E&PPemex enjoyed a strong exploration

program during the 1960s and ’70s,when large deposits were discovered inthe provinces of Chiapas and Tabasco.Gigantic discoveries in the Sound ofCampeche, including Cantarell Field,followed in the late ’70s. But the dis-covery of Cantarell spelled disaster forthe future of exploration. Investmentsfrom the E&P budget were divertedtowards development of the huge de-posit, leaving other exploration effortsbadly neglected.Carlos Morales Gil, the director

general of Pemex Exploration andProduction (PEP), who has workedfor the NOC for more than 30 years,is openly critical of the decision tonot reactivate new exploration initia-tives sooner. “That is something thatshould never have happened,” hesays. “I believe that at the momentwhen the decision was made to speedup production in Cantarell, explo-ration activities should have been re-activated as well.”Active exploration resumed four

years ago, near the end of Vicente

Fox’s presidency. However, as Moralespoints out, “Exploration is not anovernight activity; you have to workfor several years to rebuild capacities,the peoples’ strengths, the acquisitionof information, especially after somany years of being inactive in thatfield.” The goal of the area under hiscommand is to fully replace the re-serves that are extracted every year,which he hopes to accomplish by2011 or 2012. The E&P budget for2008 was more than $17 billion; for2009, the figure looks set to exceed$19 billion. Most of this investmentwill be spread among onshore E&P(primarily in the Chicontepec Basin),deepwater E&P, and shallow-wateractivity to increase the production ofassets in Cantarell and Ku-Maloob-Zaap fields.

Morales highlights the need for in-vestment in shallow waters, saying,“We have very good quality reservesand the rock is not too complex.” Ku-Maloob-Zaap overtook Cantarell onJanuary 6 of this year for the firsttime, producing 822,000 barrels ofcrude compared to Cantarell’s811,000 barrels produced on the sameday. In response, investment is beingdirected to Ku-Maloob-Zaap’s re-cently discovered satellites: Ayatsiland the Pit Block. Also being funded

is light marine crude exploited in theshallow waters off the state of Tabascoand onshore, to keep the levels oflight oil at some 1 million barrelsdaily.

Focus on ChicontepecThe Chicontepec Basin is currently

Pemex’s major area of focus, and it ishoped that this area will supplementCantarell’s declining oil productionin the short- and medium-term. Itwas recently announced that thebasin contains an estimated 139 bil-lion barrels of reserves; however, withcurrent technology and a 7% recov-ery rate, Pemex will only be able toexploit an estimated 18 billion barrelsof crude from Chicontepec over thenext 30 years. This has not deterredits E&P aspirations for the region,and the NOC plans to sink morethan 16,000 wells there over the nextfew years.Chicontepec is a notoriously diffi-

cult field to exploit owing to thearea’s rough geological aspects andthe fact that the rock is extremelyhard to drill through. Drilling in thebasin, which covers an area of 3,800square kilometers, is further compli-cated by the dense population, whichincludes numerous indigenous com-munities. With previous developmentin the area having been shut down inthe early 1980s, production is nowunder way. In light of the decline atCantarell and the fact that the size ofthe Chicontepec reservoir has beencompared with reservoirs in SaudiArabia, the field’s development is ofutmost importance. However, thecompany does not currently possess


The ChicontepecBasin is currentlyPemex’s major area offocus…

the technology to sufficiently exploitthe field’s reserves.To remedy this, Pemex is working

closely with the Instituto Mexicanosdel Petroleo (IMP) along with a num-ber of large international service com-panies to fully exploit every new formof technology available. Héber CincoLey, director general of the IMP, ex-plains: “At this point they are obtain-ing about 7% of their recovery factor,and we have to find a way to helpthem increase this recovery factor anddouble it, at the very least.”The IMP has received substantial

funds from the central government toaid this effort. “Since the very begin-ning, the IMP has never received anymoney from the government; we onlyreceive payment for our services di-rectly from Pemex,” says Cinco Ley.“However, as a result of the energy re-form, we will be receiving some re-search funds from the governmentand this year we are going to receivearound $30 million from them.”Recently, Schlumberger and

Weatherford won contracts to de-velop wells in the area. Schlumbergerbested Weatherford, Halliburton andBaker Hughes with its $690 milliontender for the ATG 3 package, whichincludes developing 500 wells.Weatherford then outbid Mexicancompany Industrial Perforadora deCampeche for the ATG 4 package,which also includes the rights to de-velop 500 wells in the area, for $648million. This was the third contractwon by Weatherford there. Last yearit picked up two contracts valued to-gether at $870 million to drill up to600 wells. However, Pemex has beenforced to fine Weatherford for missingdrilling deadlines on both of thesecontracts, and a number of competi-tors have accused it of underestimat-ing the costs and difficulties ofdrilling in the area of ATG 4, claim-ing that they will eventually have tosignificantly cut the profit margins forthe drillers working for Pemex.

Deepwater investmentWhile the Chicontepec Basin pro-

vides numerous challenges, Pemexhopes it will provide enough crudeuntil it can undertake deepwaterE&P.Regarding Pemex’s deepwater ef-

forts, Morales indicates that the newreserves are going to require Pemex tokeep investment coming. It is un-likely that the NOC will find reser-voirs comparable to Cantarell, butinstead will discover smaller reser-

voirs requiring a lot of activity and acontinuous investment flow. “Wemust never forget that we are in theGulf of Mexico, which we share withthe U.S. In this light we expect tobenefit from the wide experience inthe U.S. part of the Gulf so as tospeed up our own processes,” he says.

Apart from the fact that produc-tion within these deepwater reserves,by the most optimistic estimates, willtake at least seven years to develop, itremains unclear whether the perfor-mance-based contracts due to be re-leased by Pemex towards the end ofthe year will provide benefit enoughto rope in the large foreign NOCsand IOCs that possess the technologyto extract these reserves.

Says Luis Miguel Labardini, a part-ner at Marcos y Asociados, a MexicoCity-based finance boutique, “The in-centives based in the new contractswill have to take into account thateach of the operators has an opportu-nity cost to the capital cost invested,and this opportunity cost will have tobe met one way or another, eventhough the constitutional constraintdoes not allow the Mexican govern-ment or Pemex to directly link com-pensation to production, or to oilfinding, or to the value or volume ofproduction.”Pemex and the Mexican govern-

ment will likely need to draft the con-tracts to take into account anoperator’s expected return on its capi-tal investment, and these contractswill have to be flexible. Labardini isupbeat: “There will be interestingtimes, and my expectation is thatPemex, the Mexican government andthe operators will move very rapidlyinto finding the right terms of en-

gagement.”A final area of interest is marginal

or mature fields. It is estimated thatin southern Mexico, of the more than7,000 wells that have been drilled,fewer than 2,000 are being used toproduce. Mexican company Comesa,often described as a little cousin toPemex, is very involved in thesefields. Comesa director general andpresident Adán E. Oviedo Pérez,along with a number of energy ana-lysts working in Mexico, believes thatthe development of these previouslyabandoned mature and marginalfields may provide Pemex with thefastest way to recover from produc-tion declines in Cantarell Field.

Incentivizing contractsWithout a doubt, the reform of

most interest to potential investorsand companies is the development ofsoon-to-be-released new contracts,which will determine the criteria forcompanies to work alongside Pemex.Livas of Pemex asserts that the NOCis “working on a set of contracts thatwill have proper incentives for theperformance of the execution of theworks that are related to the contractitself.” Pemex hopes to set up the ap-propriate balance between risk andreward, and success is crucial. “Pemexwill need to complement itself withthe capacities and capabilities ofother companies in order to properlyexecute all of the tasks that lieahead.”The contracts themselves will of

course be limited by Pemex’s inabil-ity to share production or grant con-cessions, and so will be oriented totechnology-contribution and service-rendering models. While this wouldseem to exclude the interests of largerplayers, it would have been unrealis-tic for the majors to expect the en-ergy reform to grant a carte blancheentry into the sector. They will haveto decide whether the contracts,once released, provide enough incen-tive to enter the market.Nevertheless, Lopez-Velarde of

LVHS says the contracts “will repre-sent a cultural revolution in the waywe operate business. We are talkingabout an industry that has been work-ing for 70 years, and now it will needto reward companies based on perfor-mance. It will not be an easy change,and it will take years.”Pemex has always been subject to

constitutionally mandated govern-ment procurement laws, which applyto all ministries in the country. Dur-


Heber Cinco Ley is director general of theInstituto Mexicano del Petroleo.

ing the reform process, however,Congress decided that instead of cre-ating a specific statute to regulatePemex contracts—which would havecaused political infighting betweenthe leading parties—it would be morebeneficial to simply amend a provi-sion stating that the government pro-curement laws do not apply toPemex’s core substantive productivecontracts. While these include nearlyall contracts relating to the NOC’sactivities and operations, a new set oflaws and rules, drawn up by thePemex board of directors, will have tobe established to govern these con-tracts, says Lopez-Velarde.This process will be extremely ben-

eficial for the industry for two majorreasons. First, the board of directors isgoing to issue clauses that are directlyadvantageous for Pemex and the in-dustry’s growth, which was not thecase in the past. Second, if any errorsare made in the guidelines of the newcontracting rules, the board can sim-ply make a resolution amending theguideline. If the regulations were es-tablished by law, any changes wouldbe subject to action by Congress,which would be a lengthier process.Making the reinvention of the con-

tracts subject to the board of direc-tors’ approval rather than Congressreflects a sea change in the NOC’s

operations. Previously, “all of Pemex’scontracts have not had the best inter-ests of the company in mind,” saysLopez-Velarde. Because the new inde-pendent advisors on the board of di-rectors will also chair the acquisitionsand procurement committee, it islikely that the new contracts and reg-ulations will be attractive to IOCsand service contractors.These incentive-based performance

contracts, as they are being called,will be cash based and completely un-related to any of Mexico’s crude re-sources. It is hoped that they will beawarded under the terms of additionalcompensation for increased perfor-mance, and Pemex will ultimately be-come more productive.

Managing riskThe risk and liability aspects of the

contracts remain a major concern forcompanies wishing to work forPemex. The new system may addressthese concerns. Even though it is theonly buyer among many sellers, risk-management issues have preventedPemex from selecting the best ser-vices at the best prices. While thecurrent regulation aims to reward thelowest bidder, Pemex’s costs are re-portedly 30% higher than the globalindustry standard. “The way tochange this is to lower the risk profile

of the contract, because when youmake the contract too one-sided, youend up participating with a high con-tingency risk fee, which at the end ofthe day is being paid for by Pemexand tax resources,” says Lopez-Ve-larde. It is expected that the new con-tracts will provide interested partieswith more attractive risk-relatedclauses to lower expenses over thelong term.It is likely that the new contracts

will be released by second-half 2009,allowing Pemex to start formal nego-tiations through bidding processes.While no definitive date has been setfor the release, Livas reckons thatPemex will have the first drafts of thecontracts ready by June. “We will beready with the documents and de-pending on how the market is behav-ing, it will be seen whether we canachieve our first contract this year,which is our objective.”At the end of the day, companies—

especially foreign ones—should un-derstand that while the Pemexcontracting landscape is changing,profiting from agreements with theNOC will be not be easy. The legalframework and regulations will remainextremely complex, and outsiders whodo not understand the multilayeredoperations and modus operandi of thePemex institution will continue to


A large industrial zone supporting the energy sector is at Cangrejera.

find it easier and more lucrative topartner with a local Mexican com-pany rather than go it alone. Labar-dini advises anyone interested inworking in Mexico “to understandand be willing to commit and lockinto a long-term strategy instead of ashort-term opportunistic strategy.”“The foreign companies that decide

to really get involved from the groundup are the companies that are goingto make it,” agrees Shields.

Developments in natural gasMexico estimates it will produce an

average of 6.45 billion cubic feet perday of natural gas in 2009. Shell oper-ates a liquefied petroleum gas (LPG)plant in the Gulf of Mexico close toAltimira, and Sempra operates oneon the Pacific. The main areas of nat-ural gas production are in the north-ern region of the country at BurgosField, where Pemex recently an-nounced plans for a $276-million in-vestment in the gas-processingfacilities as part of an overall $613-million planned investment over the2002-2009 period.Developments in deepwater E&P

are another area of interest, with gas

production expectedto expand significantlythere.While Mexico re-

mains a net importerof natural gas, Pemexcurrently provides95% of all natural gassupplied in Mexico,with the remaining5% coming from theU.S. Since 1994, thesector has been regu-lated and controlledby the Comisión Reg-uladora de Energía(CRE, the EnergyRegulatory Commis-sion).Private participation within the

sector became far more accessibleafter the 1992 reform to the electric-ity act, allowing private investment.Francisco X. Salazar Diez de Sollano,CRE president, believes two mainproblems challenge the natural gassector. The first involves market dis-tortions. “As long as the governmentdoes not decide to liberalize the priceof LPG and give us the power to linkit to the market, the growth of the

natural gas industrywill be limited. Al-though natural gas isstill more competitivethan LPG, it is not ascompetitive as itshould be due to theimplicit subsidy onLPG,” he says. Unlessthey are very largeusers, there is not suf-ficient incentive forconsumers to switchfrom LPG to naturalgas.The second chal-

lenge is linked torights-of-way and

local permits to expand infrastructure.Salazar Diez de Sollano believes localgovernments should play a more ac-tive and encouraging role.Agustín Humann Adame, execu-

tive president of the Asociación Mex-icana de Natural Gas (MexicanAssociation of Natural Gas) explainsthat while the industry is growing inMexico, it has not been growing fastenough. “We do not have sufficientinfrastructure in place currently totransport the gas, and as a result, we


Francisco X. Salazar Diez deSollano, president of the ComisiónReguladora de Energía, says theprice of LPG should be linked tothe market to incentivize naturalgas use.

are looking for increased participationfrom the private sector with regard tothe introduction of more pipelines forthe transport of gas and the develop-ment of new zones for its distributionand commercialization.”However, the energy reform will

make Mexico an attractive locationto invest in natural gas in the future,says Humann. “Following this, we willhave a far better developed naturalgas industry that will attract even fur-ther investment.”

Refinery expansionsOn April 15, Jesus Reyes Heroles,

Pemex general manager, announcedthat a new refinery will be built inTula, in the state of Hidalgo. The planreportedly involves a $10-billion in-vestment for construction of a refinerycapable of processing 300,000 barrels aday, boosting Pemex’s refining capac-ity by 19%. Reyes Heoles also an-nounced plans to invest $3.76 billionto revamp the Salamanca refinery.There is a definite need for a new

refinery, given that the country im-ports a little more than 40% of thegasoline it consumes while exportingcrude to countries as far afield asIndia. Mexico currently has six opera-tional refineries. The past lack of in-terest in investing in a new refinery tocounter growing gasoline product im-ports has stemmed from Pemex’s de-termination that the refineries’ rates

of return are relatively low. It has notinvested in a new refinery in morethan 20 years.“While we have modernized the

existing refinery cluster in the coun-try—and in doing so allowed someexpansion of the installed capacity ofrefined gasoline—demand for gaso-line is growing more rapidly than wecan offer it,” says Roberto Newell ofthe Institute of Mexican Competi-tiveness. He estimates that to supplyinternal demand growth, Mexico willprobably need to build at least twomore refineries in the next five years,“although a number like five or sixmakes much better sense.”Given the decline in crude produc-

tion, some sceptics have askedwhether there will be sufficient crudeto merit development of a new refin-ery. “We will have no problem supply-ing the crude to the new refinery,even if we build two more refineries,”counters Senator Francisco LabastidaOchoa. He expects production inChicontepec to eventually reach600,000 to 800,000 barrels per dayand also sees great potential offshore.

Environment and sustainabilityA new Pemex also means a new ap-

proach to the environment and sus-tainability. Carlos de RegulesRuiz-Funes, Pemex manager of envi-ronmental protection, outlines hisstrategy: “The main aspect defining

Pemex’s environmental strategy isthat it is a business strategy; thoughtout as an instrument to allow thebusiness strategy to become a reality,and I feel that this makes it an all-around robust strategy.”The Pemex environmental depart-

ment budget will grow to $10 billionfrom 2007 to 2012. Its investmentshave and will be dedicated to increas-ing fuel quality by reducing sulphurcontent in gasoline and diesels, in-creasing sulphur recovery in Pemexrefineries, benefiting from cogenera-tion plants, reducing gas flaring, andemphasizing land remediation andwater treatment.An interesting initiative that

Pemex hopes to adopt will involve afocus on working only with environ-mentally conscious service providers.De Regules explains that Pemex isworking on a pilot project to incorpo-rate the carbon footprint of his orga-nization’s suppliers. The aim is tocreate a culture among suppliers thatwill enhance the way they competefor contracts while benefiting the en-vironment. “It will not become animposition from our side, but rathercreate a competitive issue amongthese suppliers. I would encourageanyone interested in working withPemex to cut their emissions in orderto have a successful future relation-ship with us,” he says.

While the energy reform appeared

Tabasco is the site of the new Pemex gas processing complex.


Senator Francisco Labastida Ochoa says therewill be no problem supplying the crude to thenew refinery at Tula.

to focus on Pemex and the overall op-erations of the oil and gas industry, italso addresses renewable energies, al-ternative-energy sources and energy-efficiency savings. Sener’s GabrielBudebo expects the measures to ex-pand the renewable-energy sector.“Wind and solar energy projects

will receive an initial fund of 3 billionpesos, which is designed to supportrelevant investments recognizingthat they have positive externalities(reduced emissions that could gener-ate social benefits, etc.) without gen-erating widespread subsidies that donot make sense; but rather quantify-ing the benefits, not capturedthrough the market price, but cap-tured through the analysis of thebenefit of reducing emissions andother factors,” he says. This putsMexico on the path to not only de-veloping its fossil fuels, but also to

producing renewable energies overthe medium and long term. The re-sult? A much cleaner balance sheetand more environmentally friendlyenergy generation for Mexico.

Surviving the crisisThankfully for Mexico, Agustín

Guillermo Carstens, the secretary of fi-nance, had the foresight to hedgeMexican oil prices at $70 a barrel forthe duration of 2009. At the sametime, the federal government is settingin motion the largest public invest-ment in recent years to generate eco-nomic activity throughout the countryand create jobs through infrastructureprojects. However, because Pemexgenerates 40% of the government bud-get, 2010 will be a difficult year for theMexican economy, and should oilprices fall even further next year, thecompany will have to work exceed-

ingly hard to overcome the challengesit already faces.Pemex chief operating officer Livas

expects a better year for oil prices in2010. “The global economy will con-tinue suffering under pressure, at thesame time the natural decline of notonly our oil but many of the matureoil fields in the world is putting a lotof pressure on increased investments,and therefore supply will adjust andprices will go up,” he says.Mexico has survived two major

economic crises before, and as CarlosMorales of PEP says, “As long as theprices are at a level at which our pro-jects still have a good return, we willcontinue going in the same direction.We do not expect there to be furtherdrops in global oil prices, and I canguarantee that all projects we havetoday are profitable and have positivereturns.” �


The new hydrocarbon commission embodiesthe most important change brought about bythe reforms, according to Mario GabrielBudebo, sub-secretary of hydrocarbons for theMinistry of Energy (Sener). While the com-mission’s role will essentially be to regulatethe upstream sector, “the regulatory commis-sion will give information to Sener far morequickly and clearly regarding such things asdetermining the petroleum platform and therestitution of the reserves, while at the sametime dividing and defining the politics gov-erning oil and gas, the regulation of oil and itsexecution and operation,” says Budebo.Previously, the role of the regulatory com-

mission was undertaken by different bodieswithin Pemex, and many of the current woesthe industry is facing are blamed on the ab-sence of a firm regulatory committee. The new commis-sion will permit greater scope in the medium- andlonger-term planning of energy policy. Ultimately, its es-tablishment will separate the roles of operator and regu-lator within the areas Pemex operates. It is modeled on asimilar regulatory system that has proved successful inBrazil and Norway.

While in many respects Pemex has always been over-regulated with regard to expense and budgeting, it hasmaintained close to complete control over its core busi-ness, especially exploration and production. Now, theNHC will serve as not only the technical arm evaluatingprojects presented to Pemex, ensuring maximum recov-ery of hydrocarbons, but also as a regulatory body overPemex’s upstream operations.

It is likely that the NHC will be primarily attachedto Sener, because the operations of the NOC and Senerare currently so intertwined. Furthermore, Sener willprobably want to establish close contact with the NHC

to ensure that it has the ability to regu-late. “The commission will rely upon thetechnical capability of the Sener, and itscommissioners will be nominated forfive-year periods in order to give conti-nuity to the application of the norms,”says Budebo.The appointment of the five new com-

missioners, as yet unnamed, has provokeddebate. While many believe that theyshould be individuals who know andhave worked within PEP, others thinkthis would complicate transparency, leav-ing the industry once more regulated bythe same people who are accountable forsome of its current problems.Energy analyst Shields believes that

PEP has been run and managed in thepast by a tight-knit group of oil engineers who are notopen to new ideas. “I think the challenge of the hydro-carbon commission is to get some other experts in therewho are able to question what is going on in PEP andgive an external independent opinion. There is a riskthat the NHC could become another level of bureau-cracy.”While calls have been made to separate the NHC

from both Pemex and Sener, it remains to be seen howthe government will proceed. Senator FranciscoLabastida says that unless the NHC is given the profes-sionalism and independence it requires, it will not beable to help Pemex make important decisions. Ulti-mately, the NHC’s objective is to “ensure the heritage ofthe Mexican oil and gas industry,” he says. He goes on toexplain that the government’s objective “is not to in-crease production, but to expand the country’s energy se-curity and ensure that we have this energy security forthe next 10 years at the very least.”

Mario Gabriel Budebo issub-secretary ofhydrocarbons for theMinistry of Energy.

The National Hydrocarbon Commission


emex’s domination of Mexico’s oil andgas sector is so complete that an armyof service companies, contractors and

suppliers is required to support its quest. Be-coming a preferred partner is no easy task,however. As the energy reform is set in mo-tion, companies are positioning themselveswithin their specific niches to win work.Building a successful relationship withPemex requires an understanding of the waythe oil company operates and how its peoplethink, and dedication to both the oil andgas business and Mexico’s future.

Double V Holding, a company born ofthe consolidation of a number of differentcompanies under the leadership of Jorge O.Vazquez, specializes in engineering, procure-ment and construction (EPC) projects. As head of ahugely profitable company, Vazquez explains how the suc-cess of his venture depends to a great extent on establish-ing a close relationship with Pemex. “We have had towork very closely with Pemex in order to be successful,and we have a daily relationship with the company.”He observes that Pemex employees are placed under a

lot of stress, and are often wary of signing contracts withprivate companies for fear of being prosecuted by thegovernment or perhaps losing their jobs should anythinggo wrong. This is an often-mentioned point among com-panies throughout the sector, and while many hope thiswill change following the reforms, Vazquez believes thatfrequently the companies are themselves to blame.Pemex “needs more creativity from its suppliers to helpmake things easier and faster,” he says. To succeed, com-

panies must be very precise and efficient.Within the Mexican oil and gas sector,“you will have to pay for every mistake youmake,” he says.Juan Reynoso Durand, director general of

Blue Marine Technology, which services theoffshore industry, admits to not possessingany professional experience in the sectorprior to starting the company. He says he“learned about opportunities in the oil busi-ness through some friends who are oil engi-neers.” It is perhaps this open-mindedapproach that has helped his company gen-erate revenues of $150 million to $160 mil-lion (all dollar amounts are US unlessotherwise specified) in 2008 after a mere 10years in the sector.

Reynoso reckons that one of the company’s greatestchallenges, as well as one of its greatest successes, hasbeen to push Pemex to change the contract model for theoffshore market. “Instead of having just one-year con-tracts as was the practice,” explains Reynoso, “we askedfor five-year contracts that made it easier to get financingand to give Pemex better prices. This has been a commoneffort among Blue Marine and the other players in themarket that has resulted in success.” Given the right ap-proach and a good deal of patience, the behemoth that isPemex can, in fact, be flexible.Blue Marine Technology supplies Pemex with its only

operational floating production, storage, and offloadingvessel (FPSO), the Yùum K’ak’náab, which has a 2-mil-lion-barrel storage capacity, and a 600,000-barrel capacityfor mixing different types of oils. It is one of the three

MEXICO: THE ROAD TO PARTICIPATION

Becoming Pemex’sPreferred PartnerPartnership requires an understanding of the NOC’s mind-set and a dedication to Mexico’s future.

The success of his companystems from his closerelationship with Pemex, saysJorge O. Vasquez, head ofDouble V Holding.

P

biggest FPSOs in the world. In the future, says Reynoso,“we believe that anything that can maximize the produc-tion of Pemex is going to be demanded.”But an insightful and creative approach to the market is

not the only prerequisite for success with Pemex. CarlosPerea López is the technical sub-director of Rotenco,Mexico’s first mudlogging company, which has workedwith Pemex for more than 60 years and helped the NOCstrike the Tortuguero #1, the country’s first well followingthe expropriation. While his company has an extensiveand long-standing history with Pemex, Perea says that tocontinue this successful partnership he must “provide bet-ter quotations, more efficient services, and more modernequipment.”

Better business with better technologyIn the quest to develop a fruitful relationship with

Pemex, many companies are mindful that supplying newand innovative technology is key. Modec is one such com-pany, focused on increasing its market share with Pemexby developing technology for tension-leg platforms(TLPs) as well as the semisubmersibles it supplies offshore.Founded in 1968 as a shipyard engineering firm, the

company evolved into designing and constructing vesselsand later, supplying jack-up drilling rigs, one of which hasbeen operating for Pemex for more than 28 years. Thecompany also supplies Pemex with an FSO calledTa’kuntah, which Enrique F. Westrup Neira, the director ofModec, boasts has been operational for more than 10 yearswithout needing to go to the dry dock. And, during thisperiod it has offloaded more than 1 billion barrels of oil.Westrup expects the reforms to open many opportuni-

ties. He is planning to use new technologies to tap addi-tional work for the giant. “We are undertaking a researchand development program at the moment called ‘Gas toLiquids’ that could be very important for Pemex in the fu-ture. This project is about two years off, and will eventu-ally be a gas-to-liquid converter that we will be able toinstall on floating vessels.”An insider’s knowledge is always useful. Mexican-

owned and -operated SCAP was founded 15 years ago byJoel Arratia Núñez, who has more than 35 years experi-ence as a Pemex employee. SCAP engages in construc-tion, automation and safety control, informationtechnologies and chemical products. It exports services tosuch distant markets as Saudi Arabia, Malaysia, Korea andthe U.S., which is uncommon for a Mexican company.Providing Pemex with excellent technology throughstrategic alliances with specialized companies from abroadhas been a major source of success for the company.

Recently, Pemex hired SCAP to install the first off-shore dehydration, desalting and gas separation plant toprocess crude offshore before it is transported to land.“This was a $23-million turnkey project that included en-gineering, construction and maintenance of the plant,”says Eduardo Arratia Vingardi, vice president. The projectinvolved importing new technologies through alliancesSCAP has forged with foreign companies that specializein the treatment of crude oil. SCAP also has a key partnerin ICS Triplex, which was recently acquired by RockwellAutomation. Through this alliance, SCAP is able to sup-ply state-of-the-art automation and safety controls forPemex, expanding its relationship with the NOC.Even state-owned companies such as Comesa cannot

take relationships with Pemex for granted. Comesa is

eager to explore the potential of marginal and maturefields and to provide Pemex with new technologies to im-prove recoveries at Chicontepec Field. Adán E. OviedoPérez, Comesa director general and president, notes thatthe company is building on its relationship with Pemex. Itneeds to provide better technologies and services than itscompetitors in such areas as onshore production, marineseismic acquisitions, processing, reservoir studies and su-pervising offshore facilities, to name just a few.

“We have a number of new and innovative technolo-gies that we are currently testing, especially in Chiconte-

Joel Arratia Núñez, right, founded Mexican company SCAP 15 years ago.He is shown here with Eduardo Arratia Vingardi, vice president of theconstruction, automation, information technologies and chemicalproducts company.

June 2009 ▪ OilandGasInvestor.com P-89

pec, which is a very difficult area toproduce results,” says Oviedo.Not only Mexican companies are

providing new technologies to theNOC. General Electric, which hasbeen operating in Mexico for morethan 100 years, has increased its mar-ket share with Pemex through the ac-quisition of companies that allow itto offer better technology at betterprices. Rafael Díaz-Granados, presi-dent and chief executive officer ofGE Mexico, says that Mexico as atechnology base is becoming increas-ingly sophisticated. Giovanni Aloi-Timeus, a former race-car driver andmatador, and now director general ofGE Energy Mexico, describes an in-novative new technology that GE isable to provide through its acquisi-tion of Sundex, which makes softwarefor directional-drilling processes. This

technology “is hugely helpful forPemex in deepsea drilling, but also inChicontepec Field, where the geologyof the area is incredibly complex andhard to drill,” says Aloi-Timeus.Paint giant Comex is another tech-

nology provider to Pemex. “We havebeen investing about 3% to 4% of therevenues of the company in researchand development each year,” says Al-fonso Felix, vice president of the in-dustrial division. Comex currentlyhas a facility called the Centro de In-vestigación en Polímeros (CIP).“This is a top-notch facility that givesus horizontal support to go and sell tocustomers like Pemex in a very com-petitive way with the right perfor-mance and at the right prices. If webuy all the raw materials from third-party suppliers we will not be compet-itive enough to supply a huge marketlike that of Pemex.”

Challenges remain, however, forcompanies wishing to work withPemex, according to Steffen Huberand Eduardo Rodríguez, managing di-rector and marketing manager, re-spectively, for Endress + Hauser. Thecompany provides meters for instru-mentation including calibration andultrasonic meters, flow-measurementdevices, and its most specialized prod-uct, the Coriolis meter, the largest ofwhich is used for ship casting andplatforms. Huber says that while thecompany often supplies innovativeand new products directly and indi-rectly to Pemex through EPC con-tractors, the Pemex oil engineers areoften distrustful of and adverse tonew technology. “It can literally takeyears to convince the engineers andkey players in Pemex that they cansave money and increase efficiency byinstalling newer technology,” he says.

Safety and certificationPemex has had a poor safety record

in the past, including collisions withits platforms and explosions at fields.Today, however, the company is in-vesting in a comprehensive effort toimprove safety. Horacio Fajer Car-dona is president of Kidde Mexico, afire and safety security company ac-quired by UTC Fire & Security Co.in 2005. Today, 65% of Kidde’s Mexi-can operations are dedicated, indi-rectly or directly, to Pemex. Toimprove the safety and security ofPemex under the limitations imposedby the procurement laws, the com-pany developed a frame contract.“The frame contract is a way for

Pemex to access spare parts so as to

Adán E. Oviedo Pérez, Comesa director generaland president, notes that the company istesting innovative technologies inChicontepec Field.


Mexico’s technology base is becomingincreasing sophisticated, says Rafael Díaz-Granados, president and CEO of GE Mexico.

react more quickly to any failure inthe fire systems,” says Fajer. Throughthis contract, which basically in-volves a four-way interaction betweenUnited Technologies (UTC) in theU.S., Kidde Mexico, Pemex and ITS(a Pemex-owned company operatingin the U.S.), it now takes 30 days todraft a bid, award the bid, and buyand replace equipment, compared tothe previous five-month delay.“We then broke the orders into two

types; materials and labor,” says Fajer.“As a result, for any service that re-quires only labor (programing, check-ing, inspecting, training, etc.) we cannow reduce this time by a further 15days.”The next strategic improvement

that Kidde hopes to achieve is tohave inventories on hand to makesafety and security systems instantlyavailable and allow an almost imme-diate response to Pemex’s needs. Thecompany has also been providingtechnical training to the Pemex crew,and even servicing safety equipmentsupplied by other companies.Kidde is also helping to create in-

dustry standards by serving on com-mittees and chambers, to encouragethe various players in the sector to act

as one. “Our mission is to contributein the building of a culture wheresafety for people and assets becomesreal,” says Fajer. Ultimately, Pemex’sfocus on improving safety standardsand creating a zero-accident culture isopening up opportunity for compa-

nies such as Kidde.Nabors, the international drilling

company, has 10 offshore rigs in theCantarell area and five land rigs in theVillahermosa area, and counts Mexicoas its second-largest international op-eration after Saudi Arabia. Lorenzo

Pemex owns the Cadereyta refinery in Nuevo Leon. Refinery expansion is under way in Mexico.


Aldeco Ramírez, general manager forNabors in Mexico, says, “We have avision; to be the preferred serviceprovider in the drilling industry.”

Besides offering excellent perfor-mance supported by quality systemsand products, Nabors’ dedication toand focus on safety has not gone un-noticed by the NOC. With over 700employees working in Mexico,Lorenzo Aldeco says, “Nabors rewardsour people who distinguish them-selves in proposing and implementingnew ways of doing things in a saferand more productive manner. Wework alongside our customer Pemexand help them accomplish their goalswhile at the same time improving thesafety of their operations with us. In

other companies, you find that theoverseeing of safety and environmentare tasks to be performed at lowerlevels of the organization, but in ourcase it is directly at the top of thecompany’s priorities.”

By shifting the company’s interna-tionally established culture of safetyto Pemex, Nabors will no doubt suc-ceed in creating a safer industry whileenhancing its position with theNOC.

Appropriate certification is neces-sary to win work, according to JorgeLarrea Molina, director general ofAndamios Atlas, the oldest and best-known scaffolding company in thesector. Its long-standing reputation iskey to the company’s achievements,

and besides continuing to look fornew technology to supply Pemex withthe best possible solutions, the com-pany is highly certified. “We complywith all the OSHA requirements, thehealth and safety requirements, andare the only ISO9000 scaffolding-reg-istered company in Mexico; and inthis light our customers and clients(including Pemex) can be sure thatour company is one of the best thereis to work with,” says Larrea.

Developing local expertiseA much-hoped-for consequence of

the energy reform is the emergence ofa stronger local market with an in-creased skill base to support Pemex.Through expanded investment in in-


Planning to participate in the push to enlargethe local market is Francisco Julio CesarNuñez, director general of Flowcontrol.

At the Instituto Mexicano del Petroleo’s spectroscopy lab, applied studies are being carried outto support various scientific and technical needs in the sector.

stitutions such as the IMP (Instituto Mexicano dePetroleo), among others, the government hopes to pro-mote the growth of a larger local service and support base,providing Pemex with cheaper, high-quality services andproducts while creating jobs for locals.Mexican company Flowcontrol aims to profit from this

effort by manufacturing products that Pemex has, untilnow, been importing. The company was established in1997 under the direction of Julio Cesar Núñez to servicethe nuclear energy market. Flowcontrol decided to moveinto the petroleum market three years ago by providing in-tegrated solutions for fluids handling—mainly throughvalves, filters and accessories. With two plants in LagunaVerda Veracruz, the company is actively looking into thepossibility of manufacturing products it has previously im-ported from China, Taiwan, India and Italy. Núñez be-lieves that following the energy reform, opportunities forMexican companies to begin manufacturing are ripe.The company has been suffering from high import duty

taxes (sometimes as high as 125%) for products brought infrom such countries as China, which has not signed atrade agreement with Mexico. Importing products fromIndia is also complicated and time-consuming. Flowcon-trol plans more manufacturing in Mexico to counter theseproblems. “We are planning on manufacturing half-inchto four-inch valves,” says Núñez. “We have alreadybrought some machinery into Mexico and we will beginmanufacturing in the second quarter of 2009.”

Flowcontrol will then produce several more types ofvalves, increase its products for the nuclear industry, andfinally, it hopes to expand its market to the U.S.The company has been working for Pemex for more

than three years. Supplying the NOC with cheaper valvesof better quality will likely strengthen its relationship withthe oil giant. Núñez stresses that the establishment ofplants in Mexico to manufacture its own products will notonly help develop the sector there, but will “help Flow-control win contracts with Pemex in the future.”Spanish company Gas Natural, which has more than

150 years of operational experience in the energy sector, isspearheading a number of projects aimed to increase theMexican skill base. The Spaniards believe they can bene-fit from the growth this can foster in the sector.Gas Natural is the world’s fourth-largest gas transporter

by volume, and one of the biggest operators of combined-cycle generating plants in the world. Ángel Larraga Pala-cios, the country manager for Gas Natural in Mexico,explains how after Spain, Mexico is now the company’ssecond-most important market. Mexico has approximately1.2 million clients, as well as 15,000 kilometers of gasducts across the country.“While we grow, it is very important for Gas Natural to

ensure that the local companies that support us and pro-vide some basic services grow with us,” says Larraga. GasNatural is investing in a number of projects aimed atbringing smaller Mexican companies working in the en-ergy sector under its corporate umbrella. Through thesealliances, Gas Natural helps smaller companies to developskills. “Obviously, gaining skilled employees is very impor-tant for the company and we are continually working to-wards training locals who will be able to manage and leaddivisions within our company in the future,” he says.

Highly regarded work ethicPemex appreciates foreign companies that demonstrate

a dedication to the country by hiring and training localM-94 OilandGasInvestor.com ▪ June 2009

staff. Michael LeBlanc, direc-tor general of Intertek Mex-ico, says, “Mexican workershave integrity, dedication anda strong work ethic. Mexicocan provide an excellent skillbase.” Intertek is one of thelargest independent testing,inspection and certificationcompanies in the world andhas recently opened six newfacilities in Mexico with an-other three laboratories cur-rently under construction.“As many foreign-based com-panies continue to changecourse and move their pro-duction facilities to Mexico,independent testing, inspec-tion and certification in Mex-ico has never been more importantthan it is now,” says LeBlanc.Intertek derives about 40% of its

revenue from Pemex. The companyrecently helped sponsor an AmericanChamber of Commerce event inMexico City focused on increasingcompetitiveness between the U.S.and Mexico. President FelipeCalderon spoke at the event. LeBlanchopes that through its participation

in the conference it can show otherforeign companies the benefits ofworking with Mexican employees.“With strong leaders, regardless of

nationality and considering respectfor cultural and human elements,Mexico has a diverse, multinationalcorporate management structure,”says LeBlanc. “We have the largestinfrastructure of any of our competi-tors and we back it up with quality,but to provide this level of service

consistently, employee medical insur-ance, savings funds and general em-ployee benefits are critical.”Pemex no doubt recognizes the

company’s devotion to increasing theMexican skill base.Octopus is another company eager

to boast of the efficiency of Mexicanlabor. Octopus has four main lines ofproducts: pig launchers and receivers,separation equipment, pipeline spoolsand skid-mounted modular plants.


Delivery points for natural gas, especially for large municipalities, are often termed “city gates” and playan important role in pricing gas. (Photo courtesy of Gas Natural Mexico)

José Pablo Mendoza, who leads Octo-pus, explains that while most of thecompany’s clients are Pemex contrac-tors, its largest competitors are Hous-ton-based companies. Mendozadescribes an instance where he methis competition head on: “Atlas Engi-neering had doubts about relying on aMexican client to do their fabrica-tion; and so we invited them here tosee our operations. They sent theirinspector. who came on a Monday,visited us on Tuesday, returned onWednesday, gave his report on Thurs-day, and we received the contract onFriday.”

Mendoza believes that the only wayto win over companies that have beenrelying on Houston for many years isby continuously and consistently pro-viding quality services and products.“While our competition is in Houston,I will wager that most of our work isbetter than theirs is,” he says.

Helping Pemex help theenvironmentThe potential for Pemex to reduce

emissions is huge. Rigid managementand lack of investment capital haveso far handicapped concerted effortsto do so. The energy reform includesa number of environmental clausesthat could bring about change.Gabriel Quadri, director general ofMexico and Central America forEcoSecurities, explains that of the12% of Mexico’s carbon emissions forwhich Pemex is responsible, halfcomes from refineries and petrochem-ical production, and the rest frommethane flaring.EcoSecurities has a number of in-

teresting projects in the pipeline, in-

cluding landfill-gas-capture systemsthat flare and destroy methane.Quadri details how EcoSecurities is“also in the process of developing thefirst biogas-to-energy project in Mex-ico with the idea of developing elec-tricity with biogas from landfills.” Hestrongly hopes that Pemex will ac-tively engage in environmental pro-jects as a result of the energy reform.ABC Labs, which began as a spe-

cialized clinical analysis lab in 1970,provides emissions and safety analysisof oil platforms. Juan Ignacio UstaranCervantes, director general, explainsthat with revenues of over $7 millionin 2008, the company experienced a15% to 20% growth rate. This growthis related to a new area of expertise

for the company—soil testing for theincreasingly environmental-focusedPemex. “In the near future,” says Us-taran, “there are going to be moreregulations applied at Pemex; notonly soil contamination, but air pol-lution as well (organics in air). Thenew regulation on soil contaminationwill provide a huge market for us, andwe hope in the future to have moreregulations in which wastes have tobe analyzed.”The company does face a challenge

in that some of the large foreign oilservice companies operating in Mex-ico send their samples to the U.S. fortesting, and sometimes even use mo-bile labs on boats offshore Mexico.“The tests have to be carried out by alab that is accredited in Mexico bythe government,” he says. “Right nowthe big analysis contracts, worth over$10 million, are going out of thecountry and this is against the law.We are fighting against this situationand with this crisis the government ispushing Pemex to support nationalcompanies which have the same qual-ity products or services and the samecompetitiveness.”A new attitude from Pemex regard-

ing the environment is good news forMother Nature, as well as for special-ized companies that can help to cleanup the oil company’s operations.Pemex will continue to be a de-

manding partner for both Mexicanand foreign companies to deal with,but as these companies’ businessesdemonstrate, the opportunities areplentiful. With the right mind-set,the right product and a good deal ofpatience, partnership with Pemex canbe well worth the effort. �


Intertek Mexico’s Michael LeBlanc, directorgeneral, praises Mexican employees for theirintegrity, dedication and strong work ethic.

Global Business Reports (GBR): Canyou detail Pemex’s past exploration and pro-duction strategies, and how these are likely tochange in light of the energy reform and thedecline in oil production in Cantarell Field?Carlos Morales Gil (CMG): Pemex hada very strong exploration program back inthe 1960s and 1970s. Pemex discovereddeposits in the Chiapas and Tabascoprovinces, followed by gigantic depositsin the Sound of Campeche includingCantarell during that period. When westarted to develop and produce Cantarell,we continued exploring for additional re-serves. Following this the explorationprogram began to slow down in the late1980s, and was eventually put on holdwith the decision taken in 1996 to in-crease the levels of production inCantarell and to speed up the recovery ofthose reserves. However, the exploration program was notreactivated. It is an open criticism that I always make be-cause it is a fact, and no one can argue against it.Today, once again, we have a very strong exploration

program and we have been actively acquiring seismic in-formation and magnetometric information, and we havebeen preparing our people so as to be able to cope withthe challenges that we now face. We are trying to replaceall the reserves that we extract every year. By 2011 or2012 we hope to be able to replace those reserves fully,and for 2008 the budget for exploration and productionwas about US$17 billion.GBR: With a proposed budget of close to US$19 billion forexploration and production in 2009, could you detail wherethis capital will be invested and what you believe are the mosturgent areas in need of development?CMG: We still need to invest in Cantarell Field so as toincrease the recovery factor. We have very good qualityreserves and the rock is not too complex. Another of ourpriorities is to continue development of Ku-Maloob-Zaapand its two recently discovered satellites; Ayatsil and thePit block. We also have to continue with the develop-ment of the crudo ligero marino (light marine crude). Weare also continuing to invest in the state of Tabasco on-shore so as to keep the levels of light oil at around onemillion barrels a day. Another activity is the developmentof Chicontepec, which has been lying almost untouchedfor 80 years without a development plan.It is now the time for Chicontepec. For Chicontepec

we decided to use a strategy that requires parallel activi-ties: intensity (to drill as many wells as we can), the in-corporation of new technologies (which will result ingreater productivity), and the reduction of production and

development costs. Several years ago theinvestments favored Cantarell, but todaywe have a balanced portfolio of invest-ments that are distributed among the var-ious oil and gas projects in Mexico.

GBR: What benefits will the new perfor-mance-based contracts include and how soonwill they be released?

CMG: The first external contracts areplanned to be granted at the end of 2009,which I think is a realistic date. The firstthing to be considered in these contractsis the value creation for Pemex and forMexico. We are aware of the need of abalanced contract that allows companiesto have an attractive return on their in-vestments and a good cash flow in orderfor them to have an additional contribu-tion to their financial condition. Ofcourse there are the limitations that we

have here in Mexico, such as the fact that we cannotshare production nor can we grant concessions; so wehave to work under the technology contribution and ser-vice rendering models. The particularity of this new waveof contracts is that we are going to be able to include theright incentives, such as access to equipment fabricators.

GBR: Given the rapidly changing landscape of the Mexicanenergy industry and the need for Pemex to develop its E&Pportfolio, what are your forecasts for the future growth of theindustry?

CMG: In three to four years time I foresee that the PEPbudget will be higher than it is now. I also expect Pemexto find new reserves in deep waters and I expect the com-pany to keep up its level of activities in shallow waters.The new reserves in deep water are going to require thatwe keep investment going. If we are successful, we expectto find not huge reservoirs like Cantarell, but smallerreservoirs that will require a lot of activity and a continu-ous flow of investment. I also look forward to PEP becom-ing a sustainable business in terms of improving processesand in terms of developing the reserves we find veryquickly. If we reduce the time gap between discovery andproduction we are going to be successful.Here in Mexico we have many challenges, but these

challenges do not stand alone. These challenges are infact opportunities and offer us ways in which we cangrow. Mexico offers a very good atmosphere for invest-ment and Pemex has a very good working character; it isa company that knows and recognizes the compromisesand the commitments made by individuals and compa-nies, and we are very willing to diversify the portfolio ofservice providers, suppliers and of everyone that wouldlike to work here. �

MEXICO: PEP’S FUTURE

Chicontepec’s Time ComesCarlos Morales Gil, director general of Pemex Exploration and Production (PEP) addresses the future ofE&P for the NOC.

PEP’s Carlos Morales Gil, directorgeneral, says the strategy forChicontepec is three-fold.


Mexico’s energy reform will open up many opportu-nities for both foreign and local companies towork alongside Pemex. For foreign companies,

however, navigating the industry’s legal framework is notan easy task. The most effective route is either setting upa permanent base in Mexico long before establishing a re-lationship with Pemex, or entering into a partnershipwith an established Mexican company that understandsthe game.Raúl Monteforte, chief development officer of Fermaca

Global, a company with more than 40 years experience ininfrastructure development and construction in Mexico’skey sectors, believes that for a foreign company to succeedin Mexico, it is imperative to find a local partner. “Giventhe institutional, legal, and contractual context, it be-comes clear that a local partner is crucial for foreign in-vestors in Mexico,” says Monteforte. “Environmental,regulatory and construction permitting, siting, local pro-curement and outsourcing, and negotiations with the gov-ernment entities can baffle and frustrate foreigninvestors.”Fermaca is involved in numerous gas-transportation ac-

tivities through its subsidiaries and foreign partners. Onesuch subsidiary, Brycsa, functions as its technical engi-neering and permitting arm. Fernando Calvillo Alvarez,Fermaca’s president and CEO, describes how Brycsa wasable to help its 50/50 joint-venture partner Oil Tanking

obtain an environmental permit to build a refined-prod-ucts terminal on the Mayan Riviera in the YucatanPeninsula. “We have more than 25 biologists in the com-pany, approved by the federal government (most used towork for the government) and we brought them to Brycsaa long time ago,” says Calvillo. While the permit took twoyears to process and cost $3 million to pass (all dollaramounts are US), without the help of Brycsa, “this projectwould never have been possible for a foreign company toachieve on its own.” Monteforte observes that the prob-lems companies face in Mexico are idiosyncratic, “andyou really need to know the rules, the institutions, thelaws, the people, and all of the stakeholders involved in aproject in a specific country, and for this you need deeplocal knowledge.”

Strengthening through a JVThe energy development now under way in Mexico of-

fers significant opportunities for joint ventures with Mexi-can companies. The processes within Pemex are complex,and every decision has to be reviewed by numerous peoplebefore it can become official. With the energy reform,many foreign and local companies are hoping that theseshaded levels of bureaucracy will diminish.But Eduardo Arratia Vingardi, of SCAP, believes the

process may instead become more complicated. “As a re-sult of the energy reforms, it is likely that this decision-

MEXICO: ENTERING THE MARKET

Local Partners Ease The WayUnless foreign companies have a long-time base in Mexico, working with a local partner is criticalfor success.

The Pemex gas-processing plant in Cactus, Chiapas, is just one in Pemex’s significant infrastructure.

making process will become evenmore complex as there will be aneven greater scrutiny over Pemex’sdecisions and actions. Pemex will ofcourse have greater freedom to makeits decisions, but from an internalpoint of view, these decisions will befar more closely watched in efforts tobecome transparent.” Thus, the needfor foreign companies wishing to in-vest in Mexico to associate with com-panies that know their way aroundPemex, its people and bureaucracymay only intensify.Arratia Vingardi is used to doing

business with foreign partners.“SCAP has proven itself as a viableand prominent player within its spe-cific market and is a company thatknows very well what it is doing,” hesays. “We always do research on thecompanies we enter into businesswith in order to ensure they are ethi-cally viable partners.”Rotenco also envisions entering

joint ventures with foreign companiesas competition in its sector heats up.In the past, Pemex has paid mudlog-ging companies significantly lowerprices than NOCs offer elsewhere inLatin America. Having a well-estab-lished set of operations in Mexico hashelped the company provide the low-est prices. “It will of course be greatfor us should Pemex increase theirprices, but will not be too beneficialin that it will attract a lot more for-eign competition,” says Carlos PereaLópez, technical sub-director.

“We are very open to forming al-liances with foreign companies whowish to enter the Mexican market.We have the infrastructure, the expe-

Service company ITS successfully enteredMexico without a local partner, according toJoe Chandler, vice president of North andSouth America operations.

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rience and we know how to workwith Pemex,” adds Alejandro Salas,directing grandson of the company’sfounder.

Going soloNevertheless, certain companies

have cracked the market alone. Onesuch is ITS, which offers pressure-control equipment for drilling inMexico but plans to expand into cas-ing-running services and tubularrentals. ITS has offices across LatinAmerica in Venezuela, Mexico,Colombia and recently, Peru. JoeChandler, vice-president of ITSNorth and South America, describeshow the company was registered inMexico. “We were committed and de-cided that even though we had no as-surances from Pemex, we knew fromthe other multinationals such asSchlumberger and Halliburton (whowe have a long history with) thatMexico was a good place to be. Weopened up without an alliance withany company and began offering ourequipment to the market.”After launching with a yard and of-

fice in Villahermosa, the company isalready expanding considerably. Lastyear it imported $5.5 million ofequipment into Mexico.While Chandler says, “We hope

Pemex will be our largest customer inMexico,” he also signals that thecompany’s success in Mexico, despiteentering the market alone, can be at-tributed in part to its international re-

lationships with companies such asSchlumberger and Halliburton. “Thisopened doors for us here in Mexico,and we appreciate that,” he says.“We have met some very influen-

tial people in Pemex and we need toestablish ourselves and demonstratecommitment to the market before wetry to get on the approved vendor listand work directly with them. Wehave not considered entering intojoint ventures, but our main goalsince the beginning is that we wantlocal people running our local opera-tions. Venezuela is run by a Venezue-lan, India is run by an Indian, and weare confident that soon we will havea Mexican running our Mexican op-erations.”Endress+Hauser also entered Mex-

ico without significant support fromlocal partners. Again, however, sub-stantial international experience andrecognition made the process easier.While the company is currently cele-brating its tenth anniversary of opera-tions in Mexico, it took the companyfive to six years to enter the Mexicanoil and gas market. Its endeavor un-derscores the importance of having awell-established base before attempt-ing to do business with the Mexicanoil giant. “Primarily, we had to gainthe knowledge, market share and rep-utation, and only then did we startplacing a lot more emphasis on theoil and gas market. It takes time to beable to negotiate and reach arrange-ments with Pemex, as people here inMexico are afraid of trying new

things, but you have to be persistentand you will eventually succeed,” saysSteffen Huber, managing director ofEndress+Hauser in Mexico.

Strategic adviceA number of law firms and finan-

cial boutiques focus on advisingclients on how best to approach anddeal with Pemex. Marcos y Asocia-dos, a financial boutique, has at onepoint or another advised almost everysingle player in the Mexican oil andgas market. Luis Miguel Labardini,partner, once worked for Pemex,where his first assignment was to ne-gotiate a $5-billion Eximbank line ofcredit to finance the development ofKu-Maloob-Zaap Field.Marcos y Asociados started in 1995

as a financial boutique for infrastruc-ture and energy projects in general.“There was a moment when a foreigncompany asked us to finance theirproject,” says Labardini. “We ob-tained the commitment letters fromthe banks, but they did not get the

International experience paved the way forEndress+Hauser’s entry to Mexico, notesSteffen Huber, managing director for Mexico.

Tula, Hidalgo state, already the site ofrefinery infrastructure, will be the site of anew Pemex facility as well.

A number of law firmsand financial boutiquesadvise foreign companieson how to work withPemex and fund projects.

M-100

contracts. We then decided that for-eign companies needed advice onbusiness developments in Mexico.”Ever since, it has been advising bothMexican and foreign companies onthe best ways to work the market and,of course, to win the contracts Pemexwill release following the energy re-form. While Marcos y Asociados hasso far only advised oilfield servicecompanies, it is contemplating expan-sion. “If the contracts that are goingto be released before the end of theyear are attractive to operators, it willbe interesting to see if it would bepossible to work for the major IOCsin Mexico,” says Labardini.Another firm, Manatt Jones, pro-

vides strategic advice and helps itsclients identify business opportunitiesacross the board in Mexico. The com-pany was originally formed by ChuckManatt and Jim Jones, both Ameri-can lawyers who had served as ambas-sadors. Juan Casillas, managingdirector, describes his company as anentity that promotes investment inMexico but also consults on how toparticipate in the bidding processes.While Manatt Jones is not solely fo-cused on the oil sector, much of itsbusiness is now being directed thereas a result of the energy reform andincreased interest from foreign in-vestors. Says Casillas: “In terms ofidentifying opportunities, it is thecorrect time now for the oil and gassector, especially for the midsizedcompanies in the States or elsewherewho would want to come here.” �

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M-101

he dominance of Pemex, the im-perative the Mexican govern-ment is now placing on the

national oil company (NOC) to per-form, and a difficult economic climatehave created challenges for companieswishing to operate within the serviceand supply sector. In response, manyare considering pioneering solutionsto the problems they face when ser-vicing the Mexican oil giant.Gabriel Alvarez Gómez, who leads

Conip Contratistas S.A. de C.V,which offers a full range of engineer-ing and construction services, believesthat one of the greatest challengesfacing construction companies work-ing in Mexico’s oil and gas sector isfinding sufficient project financing.Conip helps Pemex with refinery pro-cesses. The company has been widelysuccessful in this operation, andthrough its 17-year representation ofABB Lummus, sold catalytic technologies used in theCadereyta and Madero refineries, as well as equipmentused in the Minatitlan and Madero refineries.

Then the company found a niche in its start-up andtesting capacity for Pemex. Due to the economic crisis, anumber of Conip’s clients are not prepared to pay ad-vances for projects, slowing the growth of both the com-pany and the industry. To counter these problems, Conipis partnering with strong foreign clients such as Shell and

ABB Lumus, and through this part-nership an entire project is currentlyin progress to purify the gasoline pro-duced at the Tula and Salamanca re-fineries.Fernando Calvillo Alvarez, presi-

dent and CEO of Fermaca, concurswith this approach. “Project financ-ing is not readily available today,” hesays. “Take for example a US$300-million project. If you go to the bankin order to raise $300 million, youneed to go to 10 or 20 banks. Beforethe current economic crisis, visitingonly one or two banks would havebeen enough to get the funds.” Inlight of the financial crisis, compa-nies will focus on core projects. How-ever, Cavillo points to opportunitydespite the downturn. “A time of cri-sis is also a time of opportunity, andsomeone needs to save the Mexicanmarket—and we have the structures

put into place to help this happen. New infrastructureprojects need to be built and we are here to help.”

Relationship buildingAlejandro Flores Trespalacios, director general of Ro-

tork, a company that specializes in valves and actuators,suggests that Pemex create an “approved vendor list.”While most large petroleum companies have an approvedvendor list, Pemex hazs never had one. “Not having an

MEXICO: SERVICE AND SUPPLY

Overcoming The ChallengesPemex reforms and massive investment in infrastructure open the door to opportunity for those withinnovative solutions.

Pemex would benefit from creating anapproved vendor list, says Alejandro FloresTrespalacios, director general of Rotork.


T

approved vendor list creates confusion, and if Pemex hasa US$100-million project to undertake, things can getconfusing without knowing who the best vendors in themarket are.” There is talk of Pemex putting together acritical equipment list, which would significantly benefitvendors such as Rotork.Bluewater, a global company specializing in the design,

development, lease and operation of tanker-based produc-tion and storage systems, is interested in entering theMexican market but describes another major barrier:Pemex is unwilling to break its established relationshipswith companies offering inferior products and services.Allard van Hoeken, the Bluewater business developmentmanager for Mexico, Latin America and the Caribbean,explains that the products being supplied to Pemex bycompetitors are 20 to 30 years old and need continual re-pair. In fact, these systems need so much repair and main-tenance that the companies providing them have anongoing relationship with Pemex.“We are still facing this wall of existing relationships

that is very difficult to break. We will do this by keeping atechnological focus, and by being committed to offeringthe best quality available. We are also flexible and adaptthe technology around our client,” says van Hoeken.

Counter measures to limit the effects of the global cri-sis in Mexico include massive spending on infrastructure.Combined with the opportunities that Pemex reformshave opened up, the door is open for companies to enterthe Mexican market. �

Fernando Calvillo Alvarez, president and CEO of Fermaca, says newinfrastructure projects are needed, despite the financial crisis.


In light of the current financial crisis,companies will focus on core projects.

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