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mexico
spicing Up the North American Energy Revolution

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

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May 2014 Oil & Gas Financial Journal | www.ogfj.com | energyboardroom.com

69

On another front, within days of Mexicos energy reform approval

in December of last year, US Congress finally passed the long-awaited
Transboundary Hydrocarbon Agreement (THA) with Mexico signaling
their interest in collaborating, particularly in the Gulf of Mexico
(GoM). The accord allows, and effectively encourages, US companies
to partner with Mexicos Petroleos Mexicanos (Pemex) to jointly develop transboundary reservoirs across some 1.5 million acres. This has
implications for the Perdido foldbelt area: a significant petroleum
province with discoveries and production made at Great White, Baha,
Trident and Tobago fields on the US side of the boundary. Pemex has
Prime Minister Stephen Harper, left, Mexican President Enrique Pena Nieto, and U.S.
President Barack Obama, arrive at the North American Leaders Summit Meeting in Toluca,
Mexico Feb. 19. (Photograph by: Jacquelyn Martin, The Associated Press, Postmedia News)

also announced the existence of significant resources in the Mexican

part of the Perdido foldbelt with interesting potentials for high quality extra-light crude oil.
At current production levels, the US, Canada

Indeed, the energy potential of the North American region has

and Mexico together already represent 18.2 per-

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

cent of world crude output. By comparison, OPEC

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

member countries produce approximately 40 per-

security to energy independence and even abundance. In Canada,

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

new technologies are unlocking the vast resources of Albertas oil

ergy industry leader at the multinational profes-

sands, while rising temperatures are opening up potential new finds

under the Arctic ice. In the latest turn of events, the regional energy
landscape took another sharp turn when, in December 2013, Mexicos Congress approved the energy reform, effectively ending the

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

decades-long state monopoly on crude production.

sional services firm PwC, believes that the North

American trio is now closer to mimicking or even
rivaling production levels observed in the oil rich
Middle East. Technological advancements, along
with the right regulatory environments, will truly al-

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

low the North American region to undergo an en-

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

ergy revolution and Mexico is an integral compo-

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

nent of that, says Pineda.

Concurrently, Mexico and Canada are buying US natural gas whilst

Although no formal discussions have taken

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

place yet, Guillermo Garca, director general of ex-

world with energy trade between the two exceeding US $100 billion
in 2011.

Guillermo Pineda
M., energy leader,
PwC

ploration and exploitation of hydrocarbons at Mexicos Secretariat of Energy (SENER, Mexicos ener-

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

gy ministry), acknowledges that: we will have to

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

work closely with our North American partners to

sumption with production, Mexico has grown increasingly reliant on

coordinate a regional energy strategy. [] We are

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

optimistic that the region as a whole will not only

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

develop strong levels of energy self-sufficiency, but

just 15 years (from 18,856 billion cubic feet (Bcf) to 22,916 Bcf), the
US is a key exporter of natural gas to its neighbors. Enabled by ex-

Dr. Ernesto Marcos,

founding partner,
Marcos y Asociados

will actually become one of the major energy exporting hubs of the world.

panding infrastructure and driven by new power generation and in-

During Februarys Toluca summit, Canadian

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

Prime Minister Harper noted that a larger cooperation in the energy

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

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

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

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

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

called three amigos concluded the summit by agreeing to organize

With eight major pipelines scheduled to start operations within

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

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

advance the talks on cooperation in energy.

country will be increasingly reliant on external sources for natural gas

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

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

est benefit from the North American energy revolution, believes

likely to remain Mexicos main provider of natural gas.

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

70

energyboardroom.com | www.ogfj.com | Oil & Gas Financial Journal May 2014

History of E&P Investments, Oil Production (mbpd),

and Mexican Crude Price

whilst having such a large industrial capacity. The opportunities to

Despite an increase in investment in exploration and

production, Mexican oil production has declined from
3.4 million barrels per day in 2004 to 2.5 million in 2012
Investment in
exploration and extraction
(Billion of dollars)
20.7
3.4
3.0

11.7
Oil production
(Million of barrels per day)

4.7

103

11

12

20

20

09
20

07
20

05
20

03
20

01
20

99
19

97

Price of Mexican crude

export mix (dollars per barrel)

31

13

19

2.5

attract foreign direct investment at this moment are substantial. For

Mexico and the international energy sector, this is a decisive
moment.

Energy reforms 101

Mexicans today have two major challenges with respect to oil and gas
industry. First is securing a steady flow of affordable power to enable
greater industrial and national developments. Average electricity prices in Mexico are 25 percent higher than those in the US, placing a
high burden on consumers and the government, as well as the countrys manufacturing base. Second is Pemexs inability to tap into indi-

Sources: Average price of the Mexican Crude Export Mix, PMI Comercio Internacional
1997 2012. Production: Pemex Institutional Database, 1997 2012. Investment:
Pemex Annual Statistics, 1997-2012.

vidual companies experience, technology and the risk, leading to

production decline despite increased investments in E&P: having
pumped an average of 2.523 million barrels a day in 2013, Mexico and

the only financial and business development consultant specializing in

Pemex have faced nine consecutive years of production declines.

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

Natural gas shortages have compelled Mexico to purchase lique-

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

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

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

alternative. Combined with reduced government subsidies, this has

the largest exporter of manufactured products in Latin America; more

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

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

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

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

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

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

rigs, and secured two 7 year drilling contracts with PEMEX, Mexicos
national oil company, for deployment in offshore Mexico.

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

energy market fundamentals and its inner strengths to grow towards
creating a leading Mexican integrated oil & gas services platform.
We reiterate our support and commitment towards Mexico and
PEMEX in this stage of modernization and growth, and are excited
about future opportunities for expansion, specifically in the area of
Exploration and Production.

72

Constructora y Perforadora Latina

Paseo de La Reforma 540 Col. Lomas de Chapultepec
11000 Mexico D.F.
energyboardroom.com | www.ogfj.com | Oil & Gas Financial Journal May 2014
www.cplatina.com

The local perspective

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

A collective effort for a successful reform

Eric Bustamante, chief executive officer at OIS Corporation, a group of companies dedicated to generating
added value to its customer through products, services and solutions within the energy sector, offers his
view on the potential opportunities that lie ahead in
light of the energy reform, and how its success hinges
on an industry-wide effort.
I would very much like to see our country beEric Bustamante
de la Parra, CEO,
come an integral player in the global energy landOil International
scape, states Bustamante. Although the energy
Services
reform making headlines today is a significant step in
the right direction towards making that a reality, the
active contribution of all the organizations constituting our energy sector
is essential. We all have to commit our talent, resources and efforts to each
and every project we pursue and continuously push the boundaries of our
capabilities. In this respect, every Mexican firm has the responsibility to
realize the vision of our country and sector. We are all in this together and
we will only succeed by working together.

Plenty for all

Increased competition can always be viewed as a challenge but we do not like to look at it in that way, asserts
Jose Olarte, director general of Grupo Legotec, a Mexican firm specialized in the maintenance and restoration of
drilling rig components.
If executed as intended, not only will the energy reforms bring in increased investment and a broader client pool, it will also attract increased competition. While
Jos Gabriel
this would be a cause for concern, Olarte believes that
Olarte, director
general, Grupo
increased competition will encourage us to improve
Legotec
our competitiveness through the enhanced quality and
specifications of our products and services, enhancing our
growth prospects. After all, a lack of competition can be dangerous as it often
leads to complacency. However, the opening up of the market will change all that
as local companies strive to match the standards of the international industry.
Olarte goes on to add that, the opportunities present in the market are far
too many for any one company to satisfy alone and as such, we welcome our
international counterparts. The cake is going to be very big and we cannot eat it
all, there will to be plenty to go around for everyone.

ABOUT US
Constructora y Perforadora
LATINA (CP LATINA) is a
Mexican private drilling
company focused on the
energy sector, with more than
40 years of experience in the
exploration, development,
operation and maintenance
of oil, gas, and geothermal
projects in Mexico and
Central America.

May 2014 Oil & Gas Financial Journal | www.ogfj.com | energyboardroom.com

73

ENERGY REFORM WHAT DO WE KNOW SO FAR

espite their historic significance, Mexicos energy

future was not definitively settled by the constitutional amendments alone. Instead, much of the details
concerning processes and content has been delegated
to Congress, where it will be debated under much less
public scrutiny in the form of secondary legislation. As
always, the devil will be in the detail and the potential
for backsliding will be high. As Monica Santoyo, atMnica Santoyo
torney at Santamarina y Steta, a firm dedicated to the
Galvn, attorney,
Santamarina y Steta
practice of law across various industries, bluntly puts it,
the constitution informs us of our desired destination,
but it is the secondary laws that govern how we get
there, or if we get there at all!
Some of the building blocks of the forthcoming energy framework are
now beginning to fall into place, but many critical questions remain unanswered. Heres what we know so far.
Organizational shake-up
Three government ministries will have a hand in molding the new energy
landscape. The Energy Ministry (Secretara de Energa or SENER) remains
the dominant force within the sector retaining overall responsibility for the
setting of energy policy, while assuming additional responsibility for selecting the areas that will be opened up to E&P activities under each bidding
round. SENER has been further tasked with adjudicating which assets and
contracts Pemex will be allowed to keep out of its existing inventory during the much-awaited Round Zero phase. Meanwhile, the Ministry of the
Environment (Agencia Nacional de Seguridad Industrial y Medio Ambiente

74

or SEMARNAT) is to acquire a new directorate mandated with overseeing industrial safety and environmental protection across the energy sector. Finally,
the Finance Ministry (Secretara de Haciena y Crdito Pblico or SHCP) has
been charged with defining the fiscal terms applicable to the various energy
contract types and with designing the parameters of a brand new sovereign
wealth fund, modeled on the Norwegian system, to be financed exclusively
from oil revenues.
Independent regulators
Significantly, both the Hydrocarbon Regulator (Comisin Nacional de Hidrocarburos or CNH) and Energy Regulatory Commission (Comisin Reguladora
de Energia CRE) have been granted autonomy and had their functions
boosted. The CNH will oversee regulation of upstream activities, which will
entail the technical management of the bidding process and supervision of
compliance with production requirements laid out in the licenses. Meanwhile,
the CRE will regulate midstream and downstream activities by awarding and
monitoring permits for the storage, transport and sale of petrochemicals.
Operators unleashed
Pemex and the Federal Electricity Commission (Comisin Federal de
Electricidad or CFE) must transition from monopoly status to productive
enterprises. Neither has been privatized, so each will continue to be publically owned, but both will be exposed to competitive market forces and
obliged to create economic value in the same way as classic private sector actors. Two new entities the National Natural Gas Control Center
(CENAGAS) and National Electricity Control Center (CENACE) will own
and operate the national pipeline system and electricity grid, respectively.

energyboardroom.com | www.ogfj.com | Oil & Gas Financial Journal May 2014

ENERGY REFORM continued

Increased transparency and mechanisms to reduce corruption within Pemex
will be introduced; Pemexs executive board will be split between government
appointees and independent consultants and the power of the labor union in
Pemex will be reduced.
Ownership
It is now up to the main Mexican political parties to determine whether or not
private operators coming to Mexico will have ownership over the hydrocarbons
they produce, with major energy companies around the world lobbying for this
right to be introduced in the secondary legislation.
Seismic Data
E&P companies will also require access to Mexicos seismic data or a way to
gain their own data before they can consolidate their investment decisions.
So far there has been little indication of how or what data will be released. It has
been mooted that the newly empowered CNH could allow seismic companies
to shoot and sell data immediately prior to the proposed 2015 bidding rounds,
but whether these terms would be deemed acceptable to the majority of potential new entrants is, as yet, unknown.
Soft landing
Congress will also be called upon to strike a delicate balance between cushioning Pemexs exposure to the rigors of the free(r) market, and ensuring a level
enough playing field that will attract outside and indigenous investment. Speculation is rife that the three of Pemexs four operating subsidies that are chronically lossmaking will be bundled into a single bad entity with the profitable
exploration unit being spun off. Associated issues such as the extent of local
content requirements that may or may not be applied have still to be resolved.

WHATS NEXT FOR PEMEX?

Round zero for Pemex
1
Pemex will submit to the Ministry
of Energy, applications for
exploration areas and production
fields that it is able to operate
through entitlements. (90 days)

6
The Ministry shall determine
the technical and contractual
guidelines of bidding rounds
while the Ministry of Finance
will establish fiscal terms, and
the CNH shall conduct the
bidding round to select the
contractor.

2
The Energy Ministry,
with technical assistance
from the National Hydrocarbons Commission
(CNH) shall review Pemexs
request and issue the
corresponding resolution.
(180 days)

5
Pemex may propose
to the Ministry of
Energy for its approval,
migration of allocated
entitlements
into new contracts.

3
Pemex will maintain
exploration entitlements
in those areas where it has
made commercial or discoveries exploration investments.
(3-5 year period)

4
Pemex will maintain
extradition entitlements
in producing fields.

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

Hidrocarburos.

Although the countrys historic and ongoing energy reforms are

intended to reverse this trend, it was not the decline in production that
served as the tipping point that gave way to the energy reforms. Guillermo Garca, director general at SENER, explains that even though
the oil production we lost over the course of a decade equated to the
entire production of a country like Colombia, the rising price of oil
overcompensated for the decline in volumes and so failed to really
impact the national psyche. While declines in production were steep,
the increases in prices were even steeper, so the effects were barely

May 2014 Oil & Gas Financial Journal | www.ogfj.com | energyboardroom.com

75

noticeable. Volatile gas prices, on the other hand,

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

and concerns about energy security have made a

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

big impression on both the politicians and people

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

and this has ultimately provided the incentive for

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

the radical changes we are witnessing today.

ecution capacity, explains Vielma.

Marco Bernal, chairman of the energy committee at the Mexican Chamber of Deputies, points
out that energy security is a high priority as it is

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

Taking Pemexs experience and execution capacity into consideration, industry experts are in general agreement as to which areas the
state giant will propose to retain, and those which it will relinquish to

essential for us to have the certainty that Mexico

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

will be an important producer of energy over the

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

next 25 years. Another sensitive topic is the need to

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

reduce the prices of gas as soon as possible; this

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

could be something that will boost the economy

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

over the next six years. The petroleum sector is and

will remain relevant for us, but the gas industry is of
pressing concern at the moment.
At the height of its production, between 2000

view is shared with Ernesto Iniesta, subsea systems commercial direcLuis Vielma
Lobo, CEO
CBM Ingenieria
Exploracion y
Produccion

tor for LatAm at FMC Technologies, a leading global provider of technology solutions for the energy industry. The drilling of [shallow water] wells is more efficient than years ago, and as a result, Pemex has

and 2004, Pemex was delivering 3.4 million barrels

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

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

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

clining until it reached an average daily amount of

esta. The advanced equipment provided by FMC Technologies has

2.5 million barrels in 2013. The energy industry

contributed substantially to reducing rig time in the well completion

overhaul is expected to increase Pemexs annual

phase also.

output to as much as 4 million barrels a day by

2025.
Mexicos energy reforms therefore seek to ad-

So strong are Pemexs capabilities in shallow water that even the

Jos Rinkenbach,
director, Ainda
Consultores

Norwegians came to Mexico to study Pemexs techniques and methods, declares Guillermo Garca.

dress these challenges in a number of ways. Al-

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

though wide in scope, the reforms broadly seek to

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

increase investment and employment, as well as

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

strengthening Pemex by granting it greater free-

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

dom in its decisions toward partnerships, modern-

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

ization and better results. Moreover, the energy

Rinkenbach, managing partner at Ainda Consultores and strategic

reforms will help to strengthen the stewardship of

the state as the owner of oil and gas resources and
as regulator of the industry, and ultimately to gen-

Ernesto Iniesta,
subsea systems
commercial.
LatAm at FMC
Technologies

partners with CBM Exploration and Production Engineering, who together have advised Pemex and the local authorities on a variety of
notable technical and organizational matters, suggests that Pemex

erate greater economic and social wealth through

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

lower energy prices and increased investment.

shale resources given the relative nascence of the industry worldwide.

Following the passage of the reforms at the constitutional level,

This is clearly demonstrated by Shells recent exit from the attractive

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

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

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

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

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

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

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

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

CBM Exploration and Production Engineering, a specialist consul-

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

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

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

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

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

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

undertaken exploration work. According to a Pemex presentation to

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

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

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

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

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

probable and possible (3P) reserves.

76

energyboardroom.com | www.ogfj.com | Oil & Gas Financial Journal May 2014

Pemexs Round Zero request suggests that the firm is leaving

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

significant room for private investors in unconventional as well as

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

deepwater oil and gas projects which the firm lacks the resources

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

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

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

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

cade or so to materialize.

edge technologies and significant investments for development, are

Indeed, enhancing recovery factors can have a

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

profound impact on reserve and production lev-

says Jos Serrano, president of Colegio de Ingenieros Petroleros de

els. Jos Rinkenbach, managing partner at Ainda

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

Consultores illustrates the fact through one of the

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

projects they took on with Pemex addressing the

face the entire range of challenges characterizing the sector and so

famous Chicontepec formation. With an initially

the Mexican petroleum industry will need to pursue technological

dismal recovery factor of just 5.5 percent, Rinken-

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

bach explains that by looking at fields that are

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

comparable in characteristics to Chicontepec, we

these technically challenging fields.

were able to determine that Chicontepecs recov-

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

Having supported Pemexs production development plans across

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

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

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

shore GoM, FMCs Ernesto Iniesta elaborates that by engaging in

tive, operational field labs that would work together to maximize

partnerships in deepwaters areas where it lacks experience, Pemex

the field resource potential while viewing their third party service

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

providers as allies rather than contractors. This translated into

or major operator, of subsea projects.

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

model, then its technology requirements, followed by the support

Enhancing recovery rates

functions and finally the organizational requirements. After estab-

Although Mexico has more than 500 reservoirs,

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

only about 100 of these account for about 80

cant increase in Chicontepecs production levels in the thousands of

percent of total current production. As these are

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

concentrated in mature fields with low recovery

2013, those labs represented a third of Chicontepecs entire

factors, enhancing recovery rates will be central

production.

to the companys ambitions to boost production

levels, particularly over the short to mid-term.
Highlighting the extent of the issue, Sergio

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

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

Rivas, president of the Nordic Chamber in Mexi-

yses of the reforms and understanding the new

co, points out that at the moment, Norway

changes and legal frameworks they introduce, be-

achieves a 60 percent recovery rate compared to

lieves Nicolas Borda, partner and energy specialist

a mere 23 percent in Mexico.

at Greenberg Traurig, a leading international law

However, Harry Bockmeulen, CEO at Petro-

firm with a strong presence in Mexico.

fac, the first foreign company to operate state oil

In other words, this era of understanding

fields in Mexico for more than 70 years, argues

that this isnt necessarily an indication of Pemexs
poor performance per se. As an organization

Nicolas Borda,
partner, Greenberg
Traurig

means that activities across the value chain have

Harry Bockmeulen,
CEO, Petrofac

slowed.

John Lawrence, founder and managing director of

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

trying to maximize the use of their limited re-

zation of petroleum exploration and production, illustrates that,

sources, says Bockmeulen, this illustrates that the NOC simply

Due to the introduction of the extensive energy reforms currently

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

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

wealth of hydrocarbons in Mexico, which until recently were easily

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

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

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

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

fore as the industry is transformed and certain responsibilities are

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

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

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

therefore not expecting much growth in Mexico this year.

78

energyboardroom.com | www.ogfj.com | Oil & Gas Financial Journal May 2014

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

Easing the burden

private sector to come in and start work on Mexican fields. International companies will be keen to embrace the

ollowing the anticipated implementation of

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

chance to work with Pemex.

Partly in anticipation of this slowdown in activity, companies like Constructora y Perforadora Latina (Latina) have taken another approach. With
Ulises Muiz
Patio, vice
president, North
America Grupo PAE
Empresarial

John D. Lawrence,
CEO, DTK-Group

over 60 years experience in the energy sector, the

Mexican firm first began operations in geothermal
drilling and later extended its services to include
onshore oil and gas drilling. Eager to maintain that
momentum, the company dove into offshore activities by making a string of offshore rig acquisi-

How do you expect the reforms to impact Mexicos energy sector

from an HR perspective?

tions in 2013.
In light of the reforms, Latina worked diligently

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

Enrique Romo,
CFO, Constructora
y Perforadora
LATINA

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

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

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

throughout the year to secure and lock in contracts

for its newly-acquired offshore rigs, says Santiago
del Valle, chairman of Latina. After all, what hap-

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

our exposure to that risk.
Del Valles colleague and Latinas CFO, Enrique Romo, adds that,
our ability to secure these contracts during these relatively turbulent
proud of that. In fact, CP Latina is the only company that was able to
lock in not one, but two, seven-year contracts with Pemex for the
charter of offshore drilling rigs. This is rather unusual as by comparison, the average tenure of a similar contract around the world is far
less than that, lasting between six and twelve months at a time. This
clearly demonstrates Latinas operational and managerial capabilities, especially once you take into consideration the stringent technical and operational requirements that Pemex expects of its
contractors.

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

Financing growth

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

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

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

structura, Mexicos largest infrastructure and energy fund, that a

ticularly in its core analysis and mudlogging services business lines,

majority of the hype surrounding the reforms has been dispropor-

the company is now looking to leverage its experiences and pursue

tionately placed on the upstream segment, and with undeservedly

international expansion. As our business in Mexico matured, the

little attention being paid to the midstream, downstream and electric

new strong growth we have forecasted for the company will largely

power sector. The respective implications to the latter sectors are

stem from international markets, explains John Lawrence. We have

also huge.

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

The huge opportunities unlocked by the reforms across the board

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

will require equally large financing in an industry characterized by

build a new lab in Houston, Texas.

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

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

recognized player specialized in the financing of energy projects in

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

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

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

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

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

lack of dedication and focus to the energy sector.

80

energyboardroom.com | www.ogfj.com | Oil & Gas Financial Journal May 2014

Although Mexican banks are rather liquid and robust in terms of their
capital ratios, they are also rather risk averse and reluctant to enter the
energy sector, explains Mena. As a result of the 1994/5 banking crisis in
Mexico, most of the sector was taken over by international banks and the
government did its part by issuing government securities to clean their
Manuel Rodriguez
Arregui, CEO, GBM
Infraestructura

balance sheets. Today, the balance sheets of the banking system are heavily
weighted with investment in securities, representing close to 30 percent of
the banks balance sheets. Instead of branching out into unfamiliar territo-

Reliable Formation
Evaluation Services
Innovative and
Proven Technology

ries, local banks understandably chose to pursue their more traditional lines of business; providing mortgages, credit card loans, personal lines of credit, and so on. The local banking
sector has therefore never developed the expertise unique to the financing of energy projects, leading to a significant gap in the market.
As a result of the domestic financial industrys relative inexperience with the energy sector,
some Mexican companies were left with little choice but to look elsewhere for their financing
needs. In financing its recent offshore rig acquisitions, Latina for instance had to turn to Norwegian investors. Through its indirect subsidiary, the company successfully raised USD 175

LABORATORY SERVICES
Conventional core analysis
Digital rock analysis
Micro imaging
e-Core technology

WELLSITE SERVICES MUDLOGGING

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

MATERIALS FOR
DRILLING FLUIDS

its first new build jack-up drilling rig.

When asked about their local project financing endeavors, Juan Reynoso, founder and
CEO of Blue Marine Technology Group, a leading oil and gas services company dedicated to
providing infrastructure, technology and specialized equipment solutions, says: without a
doubt, that was a challenging experience.
Despite the bitter taste left by those experiences, Reynoso explains that, because capital
for energy projects is typically raised through public and private investments, Mexicos public
financing market needs to enhance and align its process and structure to the requirements of

A real catalyst for social wealth

ot only is the oil industry of strategic importance to Mexico, it has been

central to the countrys economic development and formative in Mexicos
distinct sense of nationalism. When then-President Lzaro Crdenas nationalized the energy sector, seizing fields from US and British companies in 1938, he
constitutionally guaranteed Mexican people legal property of the blackgold.
Addressing the critics of the energy reforms who believe that opening
the sector to private investment will limit the benefits Mexicans derive from
the resource, Didier Mena, CEO of Navix, a Mexican finance company with a
Didier Mena, CEO,
strong focus on the oil and gas industry, offers a different view. Together with
Navix
its controlling shareholder, Axis Capital, the two firms are the single largest
independent managers of Mexican pension funds, with a combined US $768
million under management.
Having carefully invested capital raised through local pension funds, Navix has supported the
growth of successful Mexican services providers to the oil industry. One such example is Oro Negro, a company focused on becoming a leading player in the industry by offering technologically
advanced integrated services and customized solutions.
There is no better way in which Mexicans can benefit from the industrys growth than by making
them shareholders of the companies active in the sector, says Mena.We want to replicate the sort
of success we achieved with Oro Negro in which the pension funds, through Axis, are the single
largest investors with a 46.5 percent holding.
Not only are the opportunities to redistribute the value created in the sector to the Mexican
pension holders, but there is much room for growth. Some fifty percent of the assets under management of the pension funds are government securities. However, only 4 percent of local pension
funds assets are invested in the instruments that expose them to such opportunities. Not only does
this leave much room for growth opportunities for the pension funds, it also represents a significant
source of financing for our industry, concludes Mena.

DTK Group
Av. Universidad No. 288
Col. El Recreo
86020 Villahermosa, Tabasco
www.dtk-group.com
info@dtk-group.com
London Houston Villahermosa
Bogota Maracaibo Dammam
Abu Dhabi Trondheim

May 2014 Oil & Gas Financial Journal | www.ogfj.com | energyboardroom.com

81
DTKFR_OGFJ_1405 1

4/23/14 5:24 PM

the market. It needs to enhance its transparency,

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

establish clear rules and provide investors with se-

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

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

managing director at Ensayos No Destructivos, a company dedicated

proving recently and we can expect to see energy

providing solutions and equipment for nondestructive testing (NDT),

companies financing larger projects through the

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

local market.
At the same time, instead of just waiting for the
financial industry to catch up, Reynoso and Blue

Juan Reynoso
Durand, CEO,
Blue Marine
Technologies

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

effect across the industry value chain. Increased production needs to
be complemented with a proportional increase in exploration and

Marine have taken matters into their own hands

production assets, infrastructure of all sorts including pipelines, as

and established the Blue Energy Fund, which allows individuals to

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

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

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

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

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

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

the industry, if not more.

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

Having drawn the global industrys attention with the reforms at

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

the constitutional level, domestic and foreign investors alike are now

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

eagerly anticipating the final hurdle that arguably lies between the

identified many potential investors, domestic and foreign, that are

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

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

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

tise in our field, he explains.

lished presence in the country, the secondary legislations are critical

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

A less than perfect history of reforms

the general consensus agrees that the secondary laws will promote

In 2008, then-President Felipe Caldern sought to reform the coun-

international participation and investment, we would be hard-pressed

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

to make any strategic decisions before we have had the opportunity

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

to study these closely.

government passed the reforms which aimed to achieve the same

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

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

trend and implement a comprehensive set of energy reforms? Will

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

Mexico and Pemex continue to risk missing valuable foreign invest-

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

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

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

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

key elements.

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

Despite Mexicos questionable history with reforms, industry leaders have expressed great optimism, and in some cases even disbelief,

answer these questions. Having missed the planned April 20 deadline, the ball is still in the legislators court.

with regards to the extent and depth of the governments renewed

attempt to reform the sector. Aindas strategic partner, Luis Vielma of
CBM Exploration and Production Engineering says: if someone were
to tell me that the congress would approve the deep and multidimensional energy reforms that they did with such swiftness and few alterations on December 16th, I would have struggled to believe them.
Similarly, having witnessed the generally disappointing 2008 energy reforms, Ernesto Iniesta of FMC Technologies explains how reassuring it is to see that the policy makers have learned from their past
experiences and are now far better informed about the industry, its
challenges and the different approaches to address these challenges.
They are well supported by industry experts in making their decisions
and I expect that the final outcome will mirror international standards
and best practices in many ways. The success of the reforms will largely depend on how well aligned these latest efforts are with investors
hopes and expectations.
82

Onshore Drilling. Courtesy of Pemex

energyboardroom.com | www.ogfj.com | Oil & Gas Financial Journal May 2014