oil and gas mexico report 2014

2014

THE LOCAL PERSPECTIVE PAGE 11

ENERGY REFORM - WHAT DO WE KNOW SO FAR PAGE 12

FINANCING GROWTH PAGE 18

GOVERNMENT PERSPECTIVE - INTERVIEW WITH MARCO BERNAL, PRESIDENT OF ENERGY COMMISSION, CHAMBER OF DEPUTIES. PAGE 24

Spicing up the North American energy revolution

FULL INTERVIEW WITH GUILLERMO GARCIA ALCOCER, DIRECTOR GENERAL OF

EXPLORATION AND EXPLOITATION OF HYDROCARBONS, SENER PAGE 22

MEXICO

Acknowledgements:

EnergyBoardroom would like to thank all the people, institutions and companies involved

in producing this special report.

Special thanks to

Guillermo Garcia Alcocer of SENER and Sergio Rivas Farias of Intsok/ Nordic

Chamber of Commerce for their strong interest in this report.

3

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Report Publisher: Julie Avena Project Director: Mariuca Georgescu Editorial Coordinator: Roslan KhasawnehProject Assistant: Olga Palaga Editorial Researcher: Louis Haynes Graphic assistance: Nisha Albuquerque Photo credit title page: Ines Nandin

For exclusive interviews and more info, plus log onto www.energyboardroom.com or write to [email protected].

CopyrightAll rights reserved. No part of this publication maybe reproduced in any form or by any means, whether electronic, mechanical or otherwise including photocopying, recording or any information storage or retrieval system without prior written consent of Focus Reports.While every attempt is made to ensure the accuracy of the information contained in this report, neither Focus Reports nor the authors accept any liabilities for errors and omissions. Opinions expressed in this report are not necessarily those of the authors.

CONTENTS

7 SPICING UP THE NORTH AMERICAN ENERGY REVOLUTION

10 ENERGY REFORMS 101

11 THE LOCAL PERSPECTIVE

12 ENERGY REFORM – WHAT DO WE KNOW SO FAR

13 WHATS NEXT FOR PEMEX

16 ENHANCING RECOVERY RATES

16 MANAGING TRANSITIONS

18 EASING THE BURDEN

18 FINANCING GROWTH

19 A REAL CATALYST FOR SOCIAL WEALTH

20 A LESS THAN PERFECT HISTORY FOR REFORMS

22 INTERVIEW WITH

Guillermo I. García Alcocer, Director General - Exploration and Exploitation of Hydrocarbons, SENER

24 INTERVIEW WITH

Marco Bernal, President - Energy Commission, Chamber of Deputies 26 INTERVIEW WITH

José R. Serrano Lozano, President - Colegio de Ingenieros Petroleros de Mexico (CIPM)28 INTERVIEW WITH

Jorge Castilla, Partner - Deloitte Mexico30 INTERVIEW WITH

Luis Vielma Lobo, General Director - CBM Exploration & Production Engineering32 INTERVIEW WITH

Dr Ernesto Marcos, Founding Senior Partner - Marcos y Asociados34 INTERVIEW WITH

Jorge Jiménez, Partner - López Velarde, Heftye y Soria (LVHS)36 INTERVIEW WITH

Franco Colloridi, Oil & Gas Director for Mesoamerica- Siemens Energy38 INTERVIEW WITH

Eric Bustamante, CEO - Oil International Services (OIS)40 INTERVIEW WITH

Juan Reynoso Durand, Founder & Managing Director - Blue Marine Technology Group

INTERVIEWS

6

OilIntFR_OGFJ_1405 1 4/23/14 5:21 PM

A 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 Peña Nieto and Canadian Prime Min-

ister Stephen Harper - Petróleos Mexicanos (Pemex) CEO Emilio Lozoya asserted that, “North America will become the world’s 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 e�cient use of the continent’s growing energy production, currently reshaping global markets.

MEXICOSPICING UP THE NORTH AMERICAN ENERGY REVOLUTION

7

A 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 Peña Nieto and Canadian Prime Min-

ister Stephen Harper - Petróleos Mexicanos (Pemex) CEO Emilio Lozoya asserted that, “North America will become the world’s 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 e�cient use of the continent’s growing energy production, currently reshaping global markets.

MEXICOSPICING UP THE NORTH AMERICAN ENERGY REVOLUTION

8 Mexico Oil & Gas report May 2014

70 energyboardroom.com | www.ogfj.com | oil & gas financial journal May 2014

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

Indeed, the energy potential of the North American region has

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

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

security to energy independence and even abundance. In Canada,

new technologies are unlocking the vast resources of Alberta’s oil

sands, while rising temperatures are opening up potential new finds

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

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

co’s Congress approved the energy reform, effectively ending the

decades-long state monopoly on crude production.

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

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

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

Concurrently, Mexico and Canada are buying US natural gas whilst

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

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

in 2011.

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

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

sumption with production, Mexico has grown increasingly reliant on

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

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

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

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

panding infrastructure and driven by new power generation and in-

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

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

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

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

With eight major pipelines scheduled to start operations within

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

country will be increasingly reliant on external sources for natural gas

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

likely to remain Mexico’s main provider of natural gas.

On another front, within days of Mexico’s 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 Mexico’s Petroleos Mexicanos (Pemex) to jointly de-

velop transboundary reservoirs across some 1.5 million acres. This has

implications for the Perdido foldbelt area: a significant petroleum

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

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

also announced the existence of significant resources in the Mexican

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

ity extra-light crude oil.

At current production levels, the US, Canada

and Mexico together already represent 18.2 per-

cent of world crude output. By comparison, OPEC

member countries produce approximately 40 per-

cent of the world’s crude oil. Guillermo Pineda, en-

ergy industry leader at the multinational profes-

sional services firm PwC, believes that the North

American trio is now closer to mimicking or even

rivaling production levels observed in the oil rich

Middle East. “Technological advancements, along

with the right regulatory environments, will truly al-

low the North American region to undergo an en-

ergy revolution and Mexico is an integral compo-

nent of that,” says Pineda.

Although no formal discussions have taken

place yet, Guillermo García, director general of ex-

ploration and exploitation of hydrocarbons at Mex-

ico’s Secretariat of Energy (SENER, Mexico’s ener-

gy ministry), acknowledges that: “we will have to

work closely with our North American partners to

coordinate a regional energy strategy. […] We are

optimistic that the region as a whole will not only

develop strong levels of energy self-sufficiency, but

will actually become one of the major energy ex-

porting hubs of the world.”

During February’s Toluca summit, Canadian

Prime Minister Harper noted that a larger cooperation in the energy

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

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

called ‘three amigos’ concluded the summit by agreeing to organize

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

advance the talks on cooperation in energy.

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

est benefit from the North American energy revolution, “ believes

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

Guillermo Pineda M., energy leader, PwC

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

Dr. Ernesto Marcos, founding partner, Marcos y Asociados

AindaFR_OGFJ_1405 1 4/23/14 5:27 PM

9

AindaFR_OGFJ_1405 1 4/23/14 5:27 PM



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

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

national oil company, for deployment in offshore Mexico.

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

energy market fundamentals and its inner strengths to grow towards

creating a leading Mexican integrated oil & gas services platform.

We reiterate our support and commitment towards Mexico and

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

about future opportunities for expansion, specifically in the area of

Exploration and Production.

Constructora y Perforadora Latina

Paseo de La Reforma 540 Col. Lomas de Chapultepec

11000 Mexico D.F.

www.cplatina.com

ABOUT US

Constructora y Perforadora

LATINA (CP LATINA) is a

Mexican private drilling

company focused on the

energy sector, with more than

40 years of experience in the

exploration, development,

operation and maintenance

of oil, gas, and geothermal

projects in Mexico and

Central America.

GruLatFR_OGFJ_1405 1 4/23/14 5:14 PM

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

3.0

3.4 20.7

2.5

103

11.7

31

4.7

1313

1997

1999

2001

2003

2005

2007

2009

2011

Investment inexploration and extraction

(Billion of dollars)

Oil production(Million of barrels per day)

Price of Mexican crudeexport mix (dollars per barrel)

2012

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

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

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

Pemex annual statistics, 1997-2012.

the only financial and business development consultant specializing in

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

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

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

the largest exporter of manufactured products in Latin America; more

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

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

whilst having such a large industrial capacity. The opportunities to

attract foreign direct investment at this moment are substantial.” For

Mexico and the international energy sector, this is a decisive

moment.

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

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

greater industrial and national developments. Average electricity pric-

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

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

try’s manufacturing base. Second is Pemex’s inability to tap into indi-

vidual companies’ experience, technology and the risk, leading to

production decline despite increased investments in E&P: having

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

Pemex have faced nine consecutive years of production declines.

Natural gas shortages have compelled Mexico to purchase lique-

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

alternative. Combined with reduced government subsidies, this has

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

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

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

May 2014 oil & gas financial journal | www.ogfj.com | energyboardroom.com 73













11000 Mexico D.F.

www.cplatina.com

ABOUT US











Central America.

GruLatFR_OGFJ_1405 1 4/23/14 5:14 PM

The local perspecTive

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

for a successful reform, and the breadth of opportunities to be had.

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

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

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

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

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

José Gabriel Olarte, director general, Grupo Legotec

Eric Bustamante de la Parra, CEO, Oil International Services

11














11000 Mexico D.F.

www.cplatina.com

ABOUT US











Central America.

GruLatFR_OGFJ_1405 1 4/23/14 5:14 PM

The local perspecTive

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

for a successful reform, and the breadth of opportunities to be had.

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

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

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

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

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

José Gabriel Olarte, director general, Grupo Legotec

Eric Bustamante de la Parra, CEO, Oil International Services



PAEFR_OGFJ_1405 1 4/23/14 5:18 PM

eNerGy reForM – WhaT Do We KNoW so Far

Despite their historic significance, Mexico’s energy future was not definitively settled by the constitu-

tional amendments alone. Instead, much of the details concerning processes and content has been delegated to Congress, where it will be debated under much less public scrutiny in the form of secondary legislation. As always, the devil will be in the detail and the potential for backsliding will be high. As Monica Santoyo, at-torney at Santamarina y Steta, a firm dedicated to the practice of law across various industries, bluntly puts it, “the constitution informs us of our desired destination, but it is the secondary laws that govern how we get there, or if we get there at all!”

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

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

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

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

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

Mónica Santoyo Galván, attorney, Santamarina y Steta


GastFR_OGFJ_1405 1 4/23/14 5:33 PM

ENERGY REFORM continued

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

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

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

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

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

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

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

Pemex will maintainextradition entitlementsin producing �elds.

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

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

Source: Secretaría de Energía. Dirección General de Exploración y Explotación de Hidrocarburos.

456

1 2 3

WHAT’S NEXT FOR PEMEX?Round zero for Pemex

Although the country’s historic and ongoing energy reforms are

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

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

ermo García, 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

13


PAEFR_OGFJ_1405 1 4/23/14 5:18 PM

eNerGy reForM – WhaT Do We KNoW so Far

Despite their historic significance, Mexico’s energy future was not definitively settled by the constitu-

tional amendments alone. Instead, much of the details concerning processes and content has been delegated to Congress, where it will be debated under much less public scrutiny in the form of secondary legislation. As always, the devil will be in the detail and the potential for backsliding will be high. As Monica Santoyo, at-torney at Santamarina y Steta, a firm dedicated to the practice of law across various industries, bluntly puts it, “the constitution informs us of our desired destination, but it is the secondary laws that govern how we get there, or if we get there at all!”

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

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

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

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

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

Mónica Santoyo Galván, attorney, Santamarina y Steta


GastFR_OGFJ_1405 1 4/23/14 5:33 PM

ENERGY REFORM continued

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

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

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

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

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

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

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

Pemex will maintainextradition entitlementsin producing �elds.

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

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

Source: Secretaría de Energía. Dirección General de Exploración y Explotación de Hidrocarburos.

456

1 2 3

WHAT’S NEXT FOR PEMEX?Round zero for Pemex

Although the country’s historic and ongoing energy reforms are

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

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

ermo García, director general at SENER, explains that “even though

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

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

overcompensated for the decline in volumes and so failed to really

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

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



noticeable. Volatile gas prices, on the other hand,

and concerns about energy security have made a

big impression on both the politicians and people

and this has ultimately provided the incentive for

the radical changes we are witnessing today.”

Marco Bernal, chairman of the energy commit-

tee at the Mexican Chamber of Deputies, points

out that energy security is a high priority as “it is

essential for us to have the certainty that Mexico

will be an important producer of energy over the

next 25 years. Another sensitive topic is the need to

reduce the prices of gas as soon as possible; this

could be something that will boost the economy

over the next six years. The petroleum sector is and

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

pressing concern at the moment.”

At the height of its production, between 2000

and 2004, Pemex was delivering 3.4 million barrels

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

clining until it reached an average daily amount of

2.5 million barrels in 2013. The energy industry

overhaul is expected to increase Pemex’s annual

output to as much as 4 million barrels a day by

2025.

Mexico’s energy reforms therefore seek to ad-

dress these challenges in a number of ways. Al-

though wide in scope, the reforms broadly seek to

increase investment and employment, as well as

strengthening Pemex by granting it greater free-

dom in its decisions toward partnerships, modern-

ization and better results. Moreover, the energy

reforms will help to strengthen the stewardship of

the state as the owner of oil and gas resources and

as regulator of the industry, and ultimately to gen-

erate greater economic and social wealth through

lower energy prices and increased investment.

Following the passage of the reforms at the constitutional level,

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

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

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

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

CBM Exploration and Production Engineering, a specialist consul-

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

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

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

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

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

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

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

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

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

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

ecution capacity,” explains Vielma.

Taking Pemex’s experience and execution capacity into consider-

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

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

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

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

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

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

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

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

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

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

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

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

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

esta. The advanced equipment provided by FMC Technologies has

contributed substantially to reducing rig time in the well completion

phase also.”

So strong are Pemex’s capabilities in shallow water that “even the

Norwegians came to Mexico to study Pemex’s techniques and meth-

ods,” declares Guillermo García.

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

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

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

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

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

Rinkenbach, managing partner at Ainda Consultores and strategic

partners with CBM Exploration and Production Engineering, who to-

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

notable technical and organizational matters, suggests that “Pemex

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

shale resources given the relative nascence of the industry worldwide.

This is clearly demonstrated by Shell’s recent exit from the attractive

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

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

In late March 2014, Pemex finalized and presented Mexico’s up-

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

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

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

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

undertaken exploration work. According to a Pemex presentation to

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

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

probable and possible (3P) reserves.

Ernesto Iniesta, subsea systems commercial. LatAm at FMC Technologies

José Rinkenbach, director, Ainda Consultores

Luis Vielma Lobo, CEO CBM Ingenieria Exploracion y Produccion

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

NavixFR_OGFJ_1405 1 4/24/14 11:29 AM

15

NavixFR_OGFJ_1405 1 4/24/14 11:29 AM



Pemex’s Round Zero request suggests that the firm is leaving

significant room for private investors in unconventional as well as

deepwater oil and gas projects which the firm lacks the resources

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

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

edge technologies and significant investments for development, are

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

says José Serrano, president of Colegio de Ingenieros Petroleros de

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

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

face the entire range of challenges characterizing the sector and so

the Mexican petroleum industry will need to pursue technological

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

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

these technically challenging fields.”

Having supported Pemex’s production development plans across

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

shore GoM, FMC’s Ernesto Iniesta elaborates that by engaging in

partnerships in deepwaters areas where it lacks experience, “Pemex

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

or major operator, of subsea projects.”

Enhancing rEcovEry ratEs Although Mexico has more than 500 reservoirs,

only about 100 of these account for about 80

percent of total current production. As these are

concentrated in mature fields with low recovery

factors, enhancing recovery rates will be central

to the company’s ambitions to boost production

levels, particularly over the short to mid-term.

Highlighting the extent of the issue, Sergio

Rivas, president of the Nordic Chamber in Mexi-

co, points out that at the moment, “Norway

achieves a 60 percent recovery rate compared to

a mere 23 percent in Mexico.”

However, Harry Bockmeulen, CEO at Petro-

fac, the first foreign company to operate state oil

fields in Mexico for more than 70 years, argues

that this isn’t necessarily an indication of Pemex’s

poor performance per se. “As an organization

trying to maximize the use of their limited re-

sources,” says Bockmeulen, “this illustrates that the NOC simply

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

wealth of hydrocarbons in Mexico, which until recently were easily

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

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

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

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

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

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

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

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

cade or so to materialize.”

Indeed, enhancing recovery factors can have a

profound impact on reserve and production lev-

els. José Rinkenbach, managing partner at Ainda

Consultores illustrates the fact through one of the

projects they took on with Pemex addressing the

famous Chicontepec formation. With an initially

dismal recovery factor of just 5.5 percent, Rinken-

bach explains that by “looking at fields that are

comparable in characteristics to Chicontepec, we

were able to determine that Chicontepec’s recov-

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

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

tive, operational field labs that would work together to maximize

the field resource potential while viewing their third party service

providers as allies rather than contractors. This translated into

changing Pemex’s mindset in that it would first focus on its business

model, then its technology requirements, followed by the support

functions and finally the organizational requirements. After estab-

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

cant increase in Chicontepec’s production levels in the thousands of

bpd while also reducing the company’s drilling activities. As of mid-

2013, those labs represented a third of Chicontepec’s entire

production.”

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

yses of the reforms and understanding the new

changes and legal frameworks they introduce,” be-

lieves Nicolas Borda, partner and energy specialist

at Greenberg Traurig, a leading international law

firm with a strong presence in Mexico.

In other words, this era of understanding

means that activities across the value chain have

slowed. John Lawrence, founder and managing director of

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

zation of petroleum exploration and production, illustrates that,

“Due to the introduction of the extensive energy reforms currently

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

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

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

fore as the industry is transformed and certain responsibilities are

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

therefore not expecting much growth in Mexico this year.”

Harry Bockmeulen, CEO, Petrofac

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

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

Nicolas Borda, partner, Greenberg Traurig

17


Pemex’s Round Zero request suggests that the firm is leaving

significant room for private investors in unconventional as well as

deepwater oil and gas projects which the firm lacks the resources

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

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

edge technologies and significant investments for development, are

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

says José Serrano, president of Colegio de Ingenieros Petroleros de

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

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

face the entire range of challenges characterizing the sector and so

the Mexican petroleum industry will need to pursue technological

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

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

these technically challenging fields.”

Having supported Pemex’s production development plans across

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

shore GoM, FMC’s Ernesto Iniesta elaborates that by engaging in

partnerships in deepwaters areas where it lacks experience, “Pemex

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

or major operator, of subsea projects.”

Enhancing rEcovEry ratEs Although Mexico has more than 500 reservoirs,

only about 100 of these account for about 80

percent of total current production. As these are

concentrated in mature fields with low recovery

factors, enhancing recovery rates will be central

to the company’s ambitions to boost production

levels, particularly over the short to mid-term.

Highlighting the extent of the issue, Sergio

Rivas, president of the Nordic Chamber in Mexi-

co, points out that at the moment, “Norway

achieves a 60 percent recovery rate compared to

a mere 23 percent in Mexico.”

However, Harry Bockmeulen, CEO at Petro-

fac, the first foreign company to operate state oil

fields in Mexico for more than 70 years, argues

that this isn’t necessarily an indication of Pemex’s

poor performance per se. “As an organization

trying to maximize the use of their limited re-

sources,” says Bockmeulen, “this illustrates that the NOC simply

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

wealth of hydrocarbons in Mexico, which until recently were easily

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

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

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

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

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

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

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

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

cade or so to materialize.”

Indeed, enhancing recovery factors can have a

profound impact on reserve and production lev-

els. José Rinkenbach, managing partner at Ainda

Consultores illustrates the fact through one of the

projects they took on with Pemex addressing the

famous Chicontepec formation. With an initially

dismal recovery factor of just 5.5 percent, Rinken-

bach explains that by “looking at fields that are

comparable in characteristics to Chicontepec, we

were able to determine that Chicontepec’s recov-

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

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

tive, operational field labs that would work together to maximize

the field resource potential while viewing their third party service

providers as allies rather than contractors. This translated into

changing Pemex’s mindset in that it would first focus on its business

model, then its technology requirements, followed by the support

functions and finally the organizational requirements. After estab-

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

cant increase in Chicontepec’s production levels in the thousands of

bpd while also reducing the company’s drilling activities. As of mid-

2013, those labs represented a third of Chicontepec’s entire

production.”

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

yses of the reforms and understanding the new

changes and legal frameworks they introduce,” be-

lieves Nicolas Borda, partner and energy specialist

at Greenberg Traurig, a leading international law

firm with a strong presence in Mexico.

In other words, this era of understanding

means that activities across the value chain have

slowed. John Lawrence, founder and managing director of

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

zation of petroleum exploration and production, illustrates that,

“Due to the introduction of the extensive energy reforms currently

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

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

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

fore as the industry is transformed and certain responsibilities are

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

therefore not expecting much growth in Mexico this year.”

Harry Bockmeulen, CEO, Petrofac

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

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

Nicolas Borda, partner, Greenberg Traurig

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PetrofFR_OGFJ_1405 1 4/24/14 11:26 AM



easiNG The burDeN

Following the anticipated implementation of the energy reforms this year, international in-

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

how do you expect the reforms to impact Mexico’s energy sector from an hr perspective?

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

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

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

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

to be, a central component of DTK-Group’s operations. Although the

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

ticularly in its core analysis and mudlogging services business lines,

the company is now looking to leverage its experiences and pursue

international expansion. “As our business in Mexico matured, the

new strong growth we have forecasted for the company will largely

stem from international markets,” explains John Lawrence. “We have

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

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

build a new lab in Houston, Texas.”

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

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

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

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

ships in the areas it choses, “we don’t have to wait until 2016 for the

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

tional companies will be keen to embrace the

chance to work with Pemex.”

Partly in anticipation of this slowdown in activi-

ty, companies like Constructora y Perforadora La-

tina (Latina) have taken another approach. With

over 60 years’ experience in the energy sector, the

Mexican firm first began operations in geothermal

drilling and later extended its services to include

onshore oil and gas drilling. Eager to maintain that

momentum, the company dove into offshore ac-

tivities by making a string of offshore rig acquisi-

tions in 2013.

In light of the reforms, Latina worked diligently

throughout the year to secure and lock in contracts

for its newly-acquired offshore rigs, says Santiago

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

pens following the reforms is anyone’s guess and we wanted to limit

our exposure to that risk.”

Del Valle’s colleague and Latina’s CFO, Enrique Romo, adds that,

“our ability to secure these contracts during these relatively turbulent

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

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

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

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

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

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

clearly demonstrates Latina’s operational and managerial capabili-

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

cal and operational requirements that Pemex expects of its

contractors.”

financing growth“It must be said,” proclaims Manuel Rodriguez, CEO of GBM Infrae-

structura, Mexico’s largest infrastructure and energy fund, “that a

majority of the hype surrounding the reforms has been dispropor-

tionately placed on the upstream segment, and with undeservedly

little attention being paid to the midstream, downstream and electric

power sector. The respective implications to the latter sectors are

also huge.”

The huge opportunities unlocked by the reforms across the board

will require equally large financing in an industry characterized by

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

recognized player specialized in the financing of energy projects in

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

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

lack of dedication and focus to the energy sector.”

Ulises Muñiz Patiño, vice president, North America Grupo PAE Empresarial

Enrique Romo, CFO, Constructora y Perforadora LATINA

John D. Lawrence, CEO, DTK-Group


DTK Group

Av. Universidad No. 288Col. El Recreo

86020 Villahermosa, [email protected]

Reliable Formation

Evaluation Services

Innovative and

Proven Technology

LABORATORY SERVICES

ï Conventional core analysisï Digital rock analysis

ï Micro imagingï e-Core technology

WELLSITE SERVICES -

MUDLOGGING

MATERIALS FOR

DRILLING FLUIDS

London ï Houston ï Villahermosa

Bogota ï Maracaibo ï Dammam

Abu Dhabi ï Trondheim

DTKFR_OGFJ_1405 1 4/23/14 5:24 PM

a real caTalysT For social WealTh

Not only is the oil industry of strategic importance to Mexico, it has been central to the country’s economic development and formative in Mexico’s

distinct sense of nationalism. When then-President Lázaro Cárdenas national-ized the energy sector, seizing fields from US and British companies in 1938, he constitutionally guaranteed Mexican people legal property of the blackgold.

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

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

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

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

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

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

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

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

government did its part by issuing government securities to ‘clean’ their

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

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

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

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

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

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

ects, leading to a significant gap in the market.”

As a result of the domestic financial industry’s relative inexperience with the energy sector,

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

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

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

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

its first new build jack-up drilling rig.

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

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

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

doubt, that was a challenging experience.”

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

for energy projects is typically raised through public and private investments, Mexico’s public

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

Didier Mena, CEO, Navix

Manuel Rodriguez Arregui, CEO, GBM Infraestructura

19


DTK Group

Av. Universidad No. 288Col. El Recreo

86020 Villahermosa, [email protected]

Reliable Formation

Evaluation Services

Innovative and

Proven Technology

LABORATORY SERVICES

ï Conventional core analysisï Digital rock analysis

ï Micro imagingï e-Core technology

WELLSITE SERVICES -

MUDLOGGING

MATERIALS FOR

DRILLING FLUIDS

London ï Houston ï Villahermosa

Bogota ï Maracaibo ï Dammam

Abu Dhabi ï Trondheim

DTKFR_OGFJ_1405 1 4/23/14 5:24 PM

a real caTalysT For social WealTh

Not only is the oil industry of strategic importance to Mexico, it has been central to the country’s economic development and formative in Mexico’s

distinct sense of nationalism. When then-President Lázaro Cárdenas national-ized the energy sector, seizing fields from US and British companies in 1938, he constitutionally guaranteed Mexican people legal property of the blackgold.

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

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

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

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

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

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

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

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

government did its part by issuing government securities to ‘clean’ their

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

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

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

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

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

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

ects, leading to a significant gap in the market.”

As a result of the domestic financial industry’s relative inexperience with the energy sector,

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

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

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

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

its first new build jack-up drilling rig.

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

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

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

doubt, that was a challenging experience.”

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

for energy projects is typically raised through public and private investments, Mexico’s public

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

Didier Mena, CEO, Navix

Manuel Rodriguez Arregui, CEO, GBM Infraestructura



Onshore Drilling. Courtesy of Pemex

the market. It needs to enhance its transparency,

establish clear rules and provide investors with se-

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

proving recently and we can expect to see energy

companies financing larger projects through the

local market.”

At the same time, instead of just waiting for the

financial industry to catch up, Reynoso and Blue

Marine have taken matters into their own hands

and established the Blue Energy Fund, which allows individuals to

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

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

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

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

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

low investors to participate in the industry’s growth. We have already

identified many potential investors, domestic and foreign, that are

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

tise in our field,” he explains.

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

try’s energy sector, the first attempt to do so since the sector’s nation-

alization in 1938. Seeking to reverse the country’s fortunes, Calderón’s

government passed the reforms which aimed to achieve the same

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

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

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

bach at Ainda Consultores, who was involved in the design of the bill’s

key elements.

Despite Mexico’s questionable history with reforms, industry lead-

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

with regards to the extent and depth of the governments renewed

attempt to reform the sector. Ainda’s strategic partner, Luis Vielma of

CBM Exploration and Production Engineering says: “if someone were

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

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

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

Similarly, having witnessed the generally disappointing 2008 ener-

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

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

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

challenges and the different approaches to address these challenges.

They are well supported by industry experts in making their decisions

and I expect that the final outcome will mirror international standards

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

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

hopes and expectations.”

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

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

managing director at Ensayos No Destructivos, a company dedicated

providing solutions and equipment for nondestructive testing (NDT),

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

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

effect across the industry value chain. Increased production needs to

be complemented with a proportional increase in exploration and

production assets, infrastructure of all sorts including pipelines, as

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

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

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

the industry, if not more.”

Having drawn the global industry’s attention with the reforms at

the constitutional level, domestic and foreign investors alike are now

eagerly anticipating the final hurdle that arguably lies between the

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

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

lished presence in the country, the secondary legislations are critical

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

the general consensus agrees that the secondary laws will promote

international participation and investment, we would be hard-pressed

to make any strategic decisions before we have had the opportunity

to study these closely.”

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

trend and implement a comprehensive set of energy reforms? Will

Mexico and Pemex continue to risk missing valuable foreign invest-

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

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

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

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

line, the ball is still in the legislators’ court.

Juan Reynoso Durand, CEO, Blue Marine Technologies

21


Onshore Drilling. Courtesy of Pemex

the market. It needs to enhance its transparency,

establish clear rules and provide investors with se-

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

proving recently and we can expect to see energy

companies financing larger projects through the

local market.”

At the same time, instead of just waiting for the

financial industry to catch up, Reynoso and Blue

Marine have taken matters into their own hands

and established the Blue Energy Fund, which allows individuals to

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

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

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

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

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

low investors to participate in the industry’s growth. We have already

identified many potential investors, domestic and foreign, that are

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

tise in our field,” he explains.

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

try’s energy sector, the first attempt to do so since the sector’s nation-

alization in 1938. Seeking to reverse the country’s fortunes, Calderón’s

government passed the reforms which aimed to achieve the same

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

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

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

bach at Ainda Consultores, who was involved in the design of the bill’s

key elements.

Despite Mexico’s questionable history with reforms, industry lead-

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

with regards to the extent and depth of the governments renewed

attempt to reform the sector. Ainda’s strategic partner, Luis Vielma of

CBM Exploration and Production Engineering says: “if someone were

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

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

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

Similarly, having witnessed the generally disappointing 2008 ener-

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

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

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

challenges and the different approaches to address these challenges.

They are well supported by industry experts in making their decisions

and I expect that the final outcome will mirror international standards

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

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

hopes and expectations.”

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

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

managing director at Ensayos No Destructivos, a company dedicated

providing solutions and equipment for nondestructive testing (NDT),

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

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

effect across the industry value chain. Increased production needs to

be complemented with a proportional increase in exploration and

production assets, infrastructure of all sorts including pipelines, as

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

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

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

the industry, if not more.”

Having drawn the global industry’s attention with the reforms at

the constitutional level, domestic and foreign investors alike are now

eagerly anticipating the final hurdle that arguably lies between the

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

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

lished presence in the country, the secondary legislations are critical

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

the general consensus agrees that the secondary laws will promote

international participation and investment, we would be hard-pressed

to make any strategic decisions before we have had the opportunity

to study these closely.”

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

trend and implement a comprehensive set of energy reforms? Will

Mexico and Pemex continue to risk missing valuable foreign invest-

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

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

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

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

line, the ball is still in the legislators’ court.

Juan Reynoso Durand, CEO, Blue Marine Technologies

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22

INTERVIEW WITH:

Guillermo I. García Alcocer, Director General , Exploration and Exploitation of Hydrocarbons - SENER

Guillermo I. García Alcocer, DIRECTOR GENERAL , EXPLORATION AND EXPLOITATION OF HYDROCARBONS - SENER

Energyboardroom: Most of the stakeholders we spoke to in the industry have were astounded by the extent and depth of the energy reforms. How did such radical change come about?GUILLERMO I. GARCÍA ALCOCER: We were, our-selves pleasantly surprised at the way in which the politicians embraced our propos-als. The energy reform is a positive example of politicians taking into account the advice of technical experts on best practices in order to determine what is most beneficial for the country as a whole.

Our main challenge was to meet these expectations and provide the decision mak-ers with innovative ideas on how to move away from a state monopoly to build a new industry and its corresponding regulatory structure.

I actually had the privilege to be board member of Pemex and therefore hold an insider perspective on how corporate cul-ture has been changing within the com-pany. Current Pemex CEO, Emilio Lozoya Austin, is an exceptionally market-orien-tated individual and has been making real headway in transforming the corporate mentality of the company from that of a monopoly to that of a competitive entity.

EBR: What were the original objectives behind the reforms? And is the legislation that has now been approved by Congress fit-for-purpose to achieve those original objectives?

GUILLERMO I. GARCÍA ALCOCER: In Mexico we have experienced a long trajectory of declining field production volumes. Maxi-mum production actually peaked in 2004 at 3.4 million barrels per day and we were reliant on big fields in shallow waters. Meanwhile Pemex had become a real cham-pion in shallow water production which represented much more of a technical chal-lenge back then than it is today. Even the Norwegians came to Mexico to study Pemex’s techniques and methods. Never-theless nothing could reverse the normal lifecycle of these fields and the production in the mega-oil field Cantarell, declined from 2.1 million barrels per day to only 400,000 barrels which represented a sig-nificant drop. Oil is, of course, an impor-tant source of income for the government with almost 30 percent of the budget com-ing from oil appropriations and therefore the main objective of the reform is to stim-ulate greater levels of production.

To date, Pemex has been doing a solid job to maintain production at a relatively constant level for the fifth consecutive year but, by opening up the sector, we will allow Mexico go much further in exploiting her energy potential. The current situation in which we possess 44,000 million barrels of reserves, but are still reliant on LNG imports at high prices is obviously unsus-tainable in the long-term and liberalizing the industry should help to transform this state of affairs.

Our objectives at SENER were to come

Interview with: Guillermo I. García Alcocer, Director General , Exploration andExploitation of Hydrocarbons - SENER

23

Guillermo I. García Alcocer, DIRECTOR GENERAL , EXPLORATION AND EXPLOITATION OF HYDROCARBONS - SENER

up with a reform that would better enable the country to access its untapped reserves while, at the same time, maintaining Pemex’s status as a national jewel, by unleashing the company to focus on what it does best, which is the production in shallow water. Far from being weakened by the reform process, Pemex will also have the opportunity to realise its full potential by being able to fully participate in joint ventures and technology transfer and thus enhance the efficiency of its operations.

EBR: How important are the reforms for Mexico’s energy security and industrial development?GUILLERMO I. GARCÍA ALCOCER: If we analyse the value chain, we can see problems with gasoline whereby Mexico is importing approximately half of what eventually appears in the pumps at the filling stations. We are effectively exporting oil to other countries and having them process it and add value before buying it back so signifi-cant numbers of jobs, investment and prof-its are simply lost abroad. One important aspect about the energy reform process is that it is forecast to improve Mexico’s growth by a whole percentage point by the end of the current administration’s first term in office. Mexico’s growth rate fore-cast for 2014 is expected to be in the region of 3 percent so an additional percentage point would equate to growing the economy by a third. The end result will be massive.

Mexico will also benefit from the same shale gas phenomenon that has generated an additional 1.7 million jobs in the United States over a four year period. We are con-fident that, unlike China and Argentina, the country will be able to duplicate the sorts of benefits being reaped just over the border. Mexico’s advantage is its proximity to American providers. This means we have ready access to the facilities, petrochemi-cals and modalities needed to execute the

fracking process. We also believe there is a very strong possibility that some of the pro-viders, in time, will base part of their oper-ations in Mexico.

EBR: Now that the amendments to articles 25, 27 and 28 of the constitution have been passed and approved, what are the next steps to finalise the reform process?GUILLERMO I. GARCÍA ALCOCER: In the same manner as the telecommunications reforms, we abandoned the idea of just altering existing articles within the consti-tution. Instead we are adding a strong new section of secondary law (the 21 transitory dispositions included in the constitutional energy reform approved in Mexico in December 2013) which essentially draws up the industry and regulatory frame-works. This means that all the fine details from rules governing contracts and pay-ments to protocol for separation of pipe-lines from Pemex are all addressed and cod-ified. It may well be challenging to compile these sorts of secondary laws, but it would have been even more risky to attempt to proceed with the liberalisation of the sector by just relying on the amendments to three articles. Having comprehensive secondary law in place will keep the reform process on track, ensure that the original intent of the lawmakers is adhered to and prevent any backsliding.

Our main challenge was to meet these expectations and provide the decision makers with innovative ideas on how to move away from a state monopoly to build a new industry and its corresponding regulatory structure.

24

INTERVIEW WITH:

Marco Bernal, President - Energy Commission, Chamber of Deputies

Marco Bernal, PRESIDENT - ENERGY COMMISSION, CHAMBER OF DEPUTIES

Energyboardroom: What are the strategic priorities that will enable Mexico to achieve energy security, increase pro-duction capacity and boost the nation’s economy during President Peña Nieto’s term?MARCO BERNAL: We feel that it will be very difficult to realize the results of the Energy Reform within the 6-year-admin-istration of the President Peña Nieto. This is a reform that will enable Mexico to grow in the long term. The days of “easy petroleum” are over. We now need to explore deep water plays and, if all goes well, can expect the timeframe needed to properly mature the petroleum industry to be at least five or six years. Shale gas is an immediate priority since we believe it could give us prompt results that will, at the very least, let us properly evaluate the growth of the sector and the extent of the country’s resource poten-tial.

There are still multiple topics to take care of. The issue of energy security is of high priority as it is essential for us to have the certainty that Mexico will be an important producer of energy over the next 25 years. Another sensitive topic is the need to reduce the prices of gas as soon as possible; this could be something that will boost the economy over the next 6 years. The petroleum sector is and will remain relevant for us, but the gas indus-try is of pressing concern at the moment.

EBR: What, in your opinion, were the most important energy related amendments made to the constitution and what benefits do you expect these to generate?MARCO BERNAL: We previously made a quite broad constitutional reform with many pro-visional articles. Every provisional article reflects the level of trust the various parlia-mentary groups participating possess, so it was important for us to be sure about the effect that the different modifications, through provisional articles, have under the secondary laws. More than 20 provisional articles were eventually formulated.

Mexico is a country that has only the con-stitution and ordinary laws. Other countries tend to possess both constitutional and ordi-nary laws in addition to the constitution. The result of this is that the transitory arti-cles in Mexico sometimes work like consti-tutional laws. For instance, our work now consists in lowering the provisional articles that were made into ordinary laws. We are looking for the government to increase its regulation capacity and develop strong reg-ulatory authorities for the energy sector as in other countries such as the UK, Norway, Brazil and the U.S. We also seek to own a competitive and strong state-owned com-pany like those of Brazil, Norway and Saudi Arabia. This is the common denominator in most oil and gas producing countries except the U.S.

Before bringing Pemex to a competitive market, we need to “clean it up” and avoid a most probable failure due to the lack of com-

Interview with: Marco Bernal, President - Energy Commission, Chamber of Deputies

25

Marco Bernal, PRESIDENT - ENERGY COMMISSION, CHAMBER OF DEPUTIES

petitiveness that we are currently being faced with. As well as learning from past mistakes, it is important to have a better Board of Directors in place, as well as budget and financial autonomy in order to encour-age better decision making and compliance processes. Another problem that Pemex is facing, like many Mexican public companies, is the one related to employees’ pensions. Pemex shoulders a considerable debt burden stemming from pensions and if we leave this up to Pemex solely to sort out, then we will encounter many problems.

EBR: You publicly called for Pemex to be run independently of government. Can you please elaborate more on that?MARCO BERNAL: In Mexico, we have a struc-ture called “parastatal industry”, which is essentially an extension of public adminis-tration. With the Energy Reform, we have created a new structure called “state-owned productive enterprises”. Through this, we want Pemex to operate according to the cor-porate governance regulations like any other company in the world irrespective of whether publically or privately owned. We would like Pemex to have a Board of Directors that is not appointed by the government or public servants, but comprised of independent technical professionals that do not depend economically on the sector – in other words, a Board fit to govern the interests and the business development of Pemex. We would also like Pemex to adopt the best corporate governance practices that any company in the world can afford to have. In this sense, the company will need to be re-organized.

In accordance with the structure of “state-owned productive enterprise”, the absolute control of the company should be left either to the Treasury or the Energy Sec-retariat, thus affording the enterprise a rela-tionship of enhanced responsibility, but not of dependence on the government. Pemex will be required to compete with other com-panies in the market. This means competing

to win public bidding rounds, and entering into new ventures with other enterprises that will have the right to ask for informa-tion before signing a contract.

EBR: With the progression of the energy reforms, what role do you see Mexico play-ing in this North American Energy revolu-tion? MARCO BERNAL: We are fully committed and believe that Mexico will become an energy superpower. Besides our close relationship with the U.S., we have all Central America and multiple possibilities in the Pacific Region and South America. We want to be a first-class energy power and we have the resources to be so. We believe that, with the Energy Reform, we can attract enough investments in order to become the energy matrix supplier in Central and South Amer-ica, at least within the Pacific region. We understand that accomplishing this is not immediate and requires time, so this will be only possible in the long term. Just like Mex-ico’s FTA (Free Trade Agreement) in the 90’s, leveraging the Energy industry today, should become a critical driver of successful devel-opment over the forthcoming 15 to 20 year period.

Nowadays, there is a geostrategic dimen-sion that stems from the relationships with U.S. and Canada, but there are also many other sectors that we want to develop through that relationship.

Before bringing Pemex to a competitive market, we need to “clean it up” and avoid a most probable failure due to the lack of competitiveness that we are currently being faced with.

26

INTERVIEW WITH:

José R. Serrano Lozano, President - Colegio de Ingenieros Petroleros de Mexico (CIPM)

José R. Serrano Lozano, PRESIDENT - COLEGIO DE INGENIEROS PETROLEROS DE MEXICO (CIPM)

Energyboardroom: How would you describe the supply and demand conditions of petroleum engineers in Mexico?JOSÉ R. SERRANO LOZANO: Petroleum Engi-neering in Mexico has been always a priv-ileged and successful profession, with a high demand of professionals, both nationally and internationally. In the past, only two educational institutions taught the curriculum (National Univer-sity –UNAM and Polytechnic Institute –IPN). Nowadays, there are more than 25 universities teaching and preparing new petroleum engineering generations. National demand for engineers has recently increased, driven by demand from var ious companies, including upstream players like Pemex E&P, as well as integrated services suppliers, among others.

A certain kind of scarcity has been felt due to many of our engineers being sought after internationally by large mul-tinational companies for projects around the world.

Having said that, it’s clear that there is a great demand for qualified engineers, as well as a certain recognition by the industry of the qualities demonstrated by Mexican professionals. To face the ongoing energy reforms requirements and the transformation of the oil and gas industry, an increasing number of highly skil led professionals specialized on petroleum industry will be required in order to meet the challenges faced by the

industry and realize the goals of the nation’s energy industry, particularly with regards to E&P activities.

EBR: How are the energy reforms going to impact or affect your institution and its activities?JOSÉ R. SERRANO LOZANO: The perspectives are quite interesting because the energy reforms and globalization imply an increasing demand for petroleum engi-neers, national and internationally. This trend will expand through each and every area of expertise; from services compa-nies that support production and field exploration to field management, produc-tion processes, and many others.

These events will give more relevance to our responsibility in the Colegio de Ingenieros Petroleros de México, to enhance its capabilities and skills in order to strengthen our competitiveness while also adhering to international stan-dards.

To overcome these new challenges, we are implementing certification programs in different engineering areas where we be continuously focused on being aligned with international standards, best prac-tices, and knowledge development. On other hand, we have developed a strategy along with universities to set up R&D centers, in order to provide certified engi-neers, which will support Mexico’s long term energy HR requirements.

Interview with: José R. Serrano Lozano, President - Colegio de Ingenieros Petroleros de Mexico (CIPM)

27

José R. Serrano Lozano, PRESIDENT - COLEGIO DE INGENIEROS PETROLEROS DE MEXICO (CIPM)

EBR: Considering the long lead times associ-ated with supplying professionals, how will Mexico meet the short to medium term demand of engineers?JOSÉ R. SERRANO LOZANO: As result of recently Mexican energy reform, the number of opportunities characterizing the market is expected to grow up sharply, creating a fiercely competitive environment for tal-ented professionals. Although this is excit-ing, this would require we deploy a strategy to retain and develop the best talents in Mexico, and hopefully in Mexican compa-nies, including our NOC.

Pemex E&P is developing a strategy to train and prepare young engineers, ensuring they could develop adequate skills level and qualifications before joining the workforce. Once graduated, they will have an initial phase of training that lasts around one year in order to consolidate their standardized and base technology knowledge. Subse-quently, they would have another prepara-tion period, lasting from six months to one year, during which they gain practical field experience, applying their knowledge into practice. Specialized engineers are not cul-tivated overnight and will require many years of field experience and training span-ning at least a decade. Meeting the growing demand for capable talents will require streamlining that process to provide the right talent for the industry; one that is fully aligned to the prevailing and upcoming cir-cumstances.

EBR: We have seen Lukoil and Pemex sign an E&P agreement in Davos recently that will help Pemex “bolster its operating and technological capacity”. In what areas do you think Pemex should forge alliances with internationals?JOSÉ R. SERRANO LOZANO: There is a variety of opinions regarding this topic, but the most important issue to emphasize is the fact that

there is a huge hydrocarbon potential in Mexico and there are certain areas of E&P requiring technology and significant CAPEX expenditures. Given this magnitude of activities, Mexico will only be able to reach its goals through the application of strategic alliances with a variety of industry players.

I believe that deep water, shale gas, shale oil and other complex fields whose development options rely on cutting edge technologies and significant investments, are the areas in which we will see great opportunities for collaborative activities. It has been demonstrated over the past decades that Pemex has been able to face the entire range of challenges character-izing the sector however the Mexican petroleum industry will need to pursue technological and financial partnerships not only to tap into the unexplored resources and revitalize its production, but also to gain experience in these tech-nically challenging fields.

A certain kind of scarcity has been felt due to many of our engineers being sought after internationally by large multinational companies for projects around the world.

28

INTERVIEW WITH:

Jorge Castilla, Partner - Deloitte Mexico

Jorge Castilla, PARTNER - DELOITTE MEXICO

Energyboardroom: Over the past decade, Pemex has struggled with decreasing reserves and crude oil production levels – down from a peak of 3.5 mbpd in 2005 to 2.6 mbpd at the end of 2012. How have you seen the E&P landscape evolve in Mexico?JORGE CASTILLA: Going beyond the declining oil output figures, it is often overlooked that Pemex was traditionally accustomed to hav-ing a fantastic situation from a production point of view. In terms of cumulative produc-tion to date, the Cantarell field is by far the largest oil field in Mexico, and one of the larg-est in the world that enjoyed great access and stellar productivity. In the past, a vast major-ity of invested capital was channeled into additional production in order to increase overall output, whereas few resources were dedicated to exploration activities. This is understandable considering Pemex’s role as a state-owned company, helping to generate in excess of 30% of the government’s revenues.

However, when Cantarell’s output began to decline more rapidly than anticipated, Pemex in turn needed to grow into a more typical oil and gas operator. Pemex had to mold itself into an oil company that maintains exploration activities in more challenging geologies and incurs generally higher extrac-tion costs; an unfamiliar territory for one of the world’s largest oil companies. This acceler-ated decline in production and the general change in business and operational practices saw Pemex undergo some turbulent times over the past few years. Nevertheless, I genu-inely believe that the company has finally begun to stabilize and make the right invest-ments in exploration and production. In fact,

when former President Felipe Calderón served in office, exploration based investments were so good that they actually achieved a one-to-one rate of production to reserves. Although this was often overlooked, this was a superb initiative.

On the other hand, expanding Pemex’s overall production will certainly remain a key challenge as they attempt to arrest the output decline. In any case, I believe Pemex have done an outstanding job of addressing a highly com-plex problem and I am optimistic about their future.

With respect to gas, although there have undoubtedly been a number of good discover-ies, investment shortfalls have also limited their full exploitation. Concurrently, the shale gas revolution that began in the US also lead to some significant discoveries of the uncon-ventional resource and industry leaders in Mexico are currently debating how best to proceed.

Another important and welcomed indus-try development was the introduction of incentivized contracts over the recent past. Although it might not have been the solution to all problems, it was a good and necessary first step towards opening up Mexico’s oil and gas monopoly and give an idea of what could be achieved. This saw the likes of Petrofac, Schlumberger and Halliburton to participate in Mexico’s hydrocarbons industry. However, it should be noted that these international players participated in Mexico’s more mature, and less risky, fields where experts such as themselves can do what they do best. By con-trast, fields such as Chicontepec in the north-east of Mexico City still present significant development challenges which continue to

Interview with: Jorge Castilla, Partner - Deloitte Mexico

29

Jorge Castilla, PARTNER - DELOITTE MEXICO

restrict their full exploitation. The same applies to the prospective deepwater fields which will also represent a set of new chal-lenges.

Considering that the imminent energy reforms in Mexico are intended to tackle these challenges and the envelopment of so many stakeholders in the matter create for a highly complex issue. Few people truly appreciate the vast amounts of investments needed to over-come these challenges and the risks that accompany them. Fundamentally, the issues facing Mexico’s oil and gas industry are tech-nical in nature. Instead of being treated as such, these issues are quickly treated as polit-ical instead.

Adding to this complexity is the larger issue of the shale revolution in the US and its implications for Mexico. In my opinion, the driver of change in Mexico’s energy frame-work is the US’s current positioning as a main export market of Mexican production. Over the next decade, it is expected that our north-ern neighbors will become a net importer of hydrocarbons while increasing the relative importance of gas to oil as a fuel. Gas is fore-casted to play an increasingly important role in the future and the investments flowing into the US will only accelerate its production. Although these are only expectations, Mexico cannot afford to sit idle and lose its position-ing in the global energy map. This is especially true once you consider other global energy players such as China.

EBR: With corruption, poor management, a union that demands enormous benefits and a corporate structure that fosters duplicate jobs, many say that Pemex is a model of how not to run an oil company. How optimistic are you about the reforms to change this real-ity?JORGE CASTILLA: When I first started working in the oil and gas industry, I used to share these view about Pemex as well. However after

many years in the industry, my views have certainly changed. The overall situation at Pemex is not as bad as it is made out to be. Is there corruption? Yes. Is everyone corrupt? Certainly not. There certainly negative influ-ences characterizing the oil giant but it is not a hopeless case.

Although Pemex’s segmentation into indi-vidual business units some years ago was nec-essary, I believe the time has come for them to again reorganize the company. This will help the company respond to these issues more effectively. Pemex should be consoli-dated into one unit with a central and com-mon vision. I am confident that for Pemex to realize a productivity increase, it should begin with an internal reorganization. In doing so, they will be able to eliminate duplicate and overlapping functions so they can focus on their core business.

Going further, I also believe that Pemex should establish a separate company respon-sible for managing complex niches such as unconventional resource development. Again, this will allow them to focus on their respec-tive activities. Pemex already has enough on its plate. In this respect, the government needs to clearly define Pemex’s role and that of its subsidiaries. The shale revolution in the US, for instance, is a market driven revolution; all of the necessary factors are in place to allow investments to flow and quickly unlock it potential. This demonstrates how much more Mexico and its leaders as a whole can do in order to attract the investments and technol-ogies it so needs.

Fundamentally, the issues facing Mexico’s oil and gas industry are technical in nature. Instead of being treated as such, these issues are quickly treated as political instead.

30

INTERVIEW WITH:

Luis Vielma Lobo, Director General - CBM Exploration & Production Engineering

Luis Vielma Lobo, DIRECTOR GENERAL - CBM EXPLORATION & PRODUCTION ENGINEERING

Energyboardroom: Mr. Vielma, CBM was originally born as an upstream engineer-ing processes consultancy in 2003. Can you elaborate on your service lines and explain how do CBM’s services assist cli-ents in their ongoing quest for efficiency and higher margins?LUIS VIELMA LOBO: To begin with, an impor-tant and distinctive attribute of CBM is that we are defined as a conglomerate of practitioners. In other words, the profes-sionals that make up CBM possess a high degree of knowledge and practical experi-ence in their respective fields. This is in sharp contrast to consultants who may indeed have the knowledge, but might lack the hands-on experience of working in var-ious parts of the industry value chain.

When we first came to Mexico, we made the decision to bring along with us many tal-ents with a long track record at Petróleos de Venezuela S.A. (PDVSA), across the entire hydrocarbons value chain. In this respect, CBM is effectively a small Exploration and Production (E&P) company, with the differ-ence being that we are more of a technical center than an operator. We do not yet oper-ate or provide operating support in the upstream business.

Currently, CBM is composed of about 200 professionals, with an average of 22 years’ experience in their respective fields, that provide support and technical assistance to the wider energy sector. We have collabo-rated not only with PEMEX, but also with

the Secretary of Energy (SENER) and the National Hydrocarbons Commission (CNH), as well as a number of oilfield service com-panies (OFS) and academic institutions.

Hence, the experience we have as practi-tioners has enabled us to build a unique Mexican firm that has defined its own meth-odologies in each of the areas we support our customers in. Working together with our cli-ent, we apply our own methodologies and in the process, transfer the knowledge of the practitioner and the methodology to the cus-tomer; creating long term value; this is our differentiation strategy and competitive advantage.

What is important about this concept is that some of our clients, including Pemex, still continue to use the methodologies as internal practices of their organizations. Hence, we are not only responsible for help-ing our clients realize their goals; we also have the important role of transferring our knowledge and competencies. This enables them to learn and apply some of the best industry practices in a continuous and pro-ductive manner, on their own and well into the future.

EBR: As an experienced oil executive in the E&P business, among others, what do you make of the historic energy reforms head-lining the news locally and internation-ally? Is this what is needed to really unlock Mexico’s energy potential, or is there more?

Interview with: Luis Vielma Lobo, Director General - CBM Exploration & Production Engineering

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Luis Vielma Lobo, DIRECTOR GENERAL - CBM EXPLORATION & PRODUCTION ENGINEERING

LUIS VIELMA LOBO: I am rather impressed with both the dimension and comprehen-siveness of the energy reforms approved by congress. Mexico’s energy reforms encom-pass all of the critical elements that any transformation of the sector will require in any country. In particular, this involves adapting the constitution, secondary laws and regulations to steer all of the processes, the clear definition of who the resource owner are, as well as outlining what sort of company they want their national oil com-pany to be. In addition to this, ensuring transparency in the sector is paramount for attracting international investors, consid-ering some of the adverse practices plagu-ing the region.

The reform document also considers spe-cific types of contracts that will be used in the various regions of the country and an Economic Fund that will save surplus income base on certain considerations tied to wind-fall profits. This fund will be administered by the Bank of Mexico, a decentralized insti-tution that has the highest reputation within the Mexican society and finally the preser-vation of the environment and the imple-mentation of sustainable business practices will allow a seamless transformation pro-cess.

In sum, the constitutional phase of the reform has been cleared, and now the focus lies on the estimated 28 secondary laws and regulations that will be (re-)defined and have to be ready by the end of April. We realize that government and industry have taken a holistic approach that touch upon the indus-try main components, spanning from orga-nizational to regulatory considerations, as well as environmental and sustainability concerns. The job done, sends a clear mes-sage to investors worldwide about what they can expect if they choose to pursue oppor-tunities in Mexico’s energy sector, and in turn, what Mexico expects from them too.

Over the long term, I am confident these

will have a far-reaching and strongly positive impact on Mexico’s energy industry, econ-omy and society.

EBR: Many have noted that Pemex is the perfect example of how not to run an oil company – even Mr. Oscar Vasquez of Grupo Diavaz, previously told us he thought of the company as “an unattract-ive wife, whom we must love and kiss on a daily basis, even if it is not appealing to us”. To what extent do you think Pemex can streamline its structure and improve its slow decision making processes?LUIS VIELMA LOBO: I will address this ques-tion with another metaphor Mr. Carlos Morales Gil, PEMEX E&P General Director had used lately in his public presentations which provides a different and particular point of view. He said that, ‘PEMEX, as seen from the outside, is perceived as a 75 year-old child; a child whose parents forbid from having his own money, his own bank account, his own savings and disallow him from enjoying the company of friends. And when the child tries to stay out late, he is then faced with the occasional severe pun-ishment.’

For me, this metaphor captures the essence of the challenges at hand; the issue is not about PEMEX, it is about the institu-tions that control it; because the company has never enjoyed the autonomy of assigning its own budgets, making its own strategic decisions, nor retaining its revenues.

With the reform appointing PEMEX as a ‘public productive company’, the company will finally be allowed greater autonomy and decision making power. It will no longer be weighed down by over-bearing institutions or ‘parents’. PEMEX will finally begin to enjoy greater responsibilities and socialize with friends while looking to show his par-ents better results.

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INTERVIEW WITH:

Dr. Ernesto Marcos, Founding Senior Partner - Marcos y Asociados

Dr. Ernesto Marcos, FOUNDING SENIOR PARTNER - MARCOS Y ASOCIADOS

Energyboardroom: Marcos y Asociados was founded in 1995, coinciding with Mexico’s energy industry taking its first steps towards liberalization across the upstream and downstream gas market. From your perspective, what was the guiding vision behind founding this firm?DR. ERNESTO MARCOS: I had previously worked in finance, having been the head of the industrial development bank of Mexico, Nacional Financiera, S.N.C., (NAFINSA). I also previously worked for PEMEX as the CFO dealing with the administration of the budget while ensur-ing taxes due the government were paid. Including indirect taxes, this consistently equated to about 40 percent of total gov-ernment fiscal revenues.

Following my departure from Pemex, I decided to establish my own private prac-tice, initially helping several Mexican companies finance large infrastructure projects. The main focus of our work as consultants was putting together finance for such projects. Twenty years ago the government began with the trend of issu-ing concessions for toll-roads, ports, air-ports, marine facilities and the like. All these opportunities were opened to pri-vate involvement but there was a real lack of industry wide experience in financing these sorts of large projects. I therefore decided to apply my experience with NAFINSA and Pemex, and so it was natu-ral for our firm to expand into this niche. Gradually, the oil and gas industry became our company’s core focus, as was business development services for international

companies who were keen to enter the Mexican market. Identifying opportuni-ties for potential entrants and analyzing which of their strengths best comple-ments the domestic marketplace is Marcos y Asociados’ specialty. Our business can set out what positive attributes a company can deploy, and where risks should be avoided. Early on, international oil service companies were key clients. Now, however, the opening of the market to a wider range of clients means that opportunities are more widespread. Everything has changed as recent government reforms have seen new entrants and private engagement all along the value chain. Although the reforms have been dramatic, it is not yet very clear what the exact opportunities are; there is still a great deal of work to be undertaken to fine tune the strategic heading of Pemex, for example. Compa-nies operating in a more liberalized Mex-ican market will need to focus on their core strengths, or risk being surpassed by competitors.

With the departure to a novel model, Mexico will also need to empower its reg-ulatory bodies to ensure that corporate activities are monitored and operate within acceptable bounds. The success of the reforms, which have gone further than expected, will be measured by how chief actors in the market, such as Pemex, react to the new rules and norms of business.

EBR: How will these energy reforms alter Mexico’s geopolitical standing, in the region and around the world?DR. ERNESTO MARCOS: Mexico has the oppor-

Interview with: Dr. Ernesto Marcos, Founding Senior Partner - Marcos y Asociados

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Dr. Ernesto Marcos, FOUNDING SENIOR PARTNER - MARCOS Y ASOCIADOS

tunity to be the party that extracts the largest benefit from the North American energy revolution. The country shares the abundance of resources, both conven-tional and non-conventional, and has an industrial base which means the country is the largest exporter of manufactured products in Latin America; more than all the Latin American countries combined. There is no previous case in history of a country opening its energy sector as Mex-ico has, whilst having such a large indus-trial capacity. The opportunities to attract foreign direct investment at this moment are substantial.

This adds to Mexico’s competitiveness and contributes to the further industrial-ization of the country. Should the country be able to play the same role as we have with the U.S. and Canada, in terms of the division of labor with regard to exports for the oil and gas industry, then Mexico can benefit substantially.

The price of oil and gas in North Amer-ica is far different to the rest of the world. New opportunities for private investment are particularly valuable here. Post reform, in exploration and production with the new contractual forms, Pemex and new comers will be able to develop many new openings. Seismic in particular, is now no longer exclusively the responsibility of Pemex, translating into significant oppor-tunities for seismic companies. The invest-ments in this sector are especially mouth-watering.

EBR: With regard to financial markets, would a partial listing of Pemex help increase transparency and efficiency across the company’s operations, and therefore overall investor confidence?DR. ERNESTO MARCOS: This has been dis-cussed, but has not been pursued as yet. At this phase, it would be difficult to

undertake an IPO for Pemex as their finances are currently none marketable. They have a negative equity structure. At the moment, Pemex cannot account for the reserves they have discovered, as the owner is the Mexican state. The solution that has been adapted to this in the reform is that Mexico’s oil companies will be able to report the ‘economic interest’ from these reserves, though they are still owned by the Mexican nation. This means that Pemex will be able to include the economic interests in their balance sheets.

In turn, Pemex will be able to capitalize on the reserves it has, to the tune of approximately 130 billion barrels of oil equivalent (boe). The economic interest in Pemex could be valued at over US $100 billion dollars.

Ultimately, this will take five or six years, but at the end of this process Pemex ought to be ready for an IPO.

The success of the reforms, which have gone further than expected, will be measured by how chief actors in the market, such as Pemex, react to the new rules and norms of business.

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INTERVIEW WITH:

Jorge Jiménez, Partner - López Velarde, Heftye y Soria (LVHS)

Jorge Jiménez, PARTNER - LÓPEZ VELARDE, HEFTYE Y SORIA (LVHS)

Energyboardroom: LVHS is a Mexican full service law firm with attorneys experi-enced in handling the unique legal needs of international clients. In your own words, can you tell our international read-ers about the firm’s background and areas of specialization?JORGE JIMÉNEZ: Since its inception in 1995, our firm has been dedicated to serving the energy sector. In fact, LVHS was estab-lished at the same time when Mexico took its first step towards partial energy market liberalization; in the mid and downstream of its natural gas segment. This was the cat-alyst that inspired the creation of LVHS and thus became the first energy focused practice in Mexico.

Although it was surprising that a country as dependent on the oil and gas industry was void of any energy practices, it was also indicative of the way in which the industry has functioned in Mexico for decades – with a single operator that lacked regulations.

Over the years, we evolved from our ini-tial coverage of the natural gas segment into the exploration and production of hydrocar-bons, and subsequently into the power industry and renewable energies. Today, LVHS caters to a variety of the energy sector players, addressing all the requirements an organization might have, from a legal point of view, with respect to its participation in the domestic energy industry. This includes considerations from the regulatory side to legal structuring, as well as corporate mat-ters, project finance and joint ventures, among others. In doing so, we have built up a strong relationship with the major players

in the domestic market which have been, and are likely to continue to be for a long time ahead, the Federal Electricity Commis-sion (CFE) and Pemex.

EBR: How well developed would you say is the Mexican legal environment, particu-larly in the energy field?JORGE JIMÉNEZ: The legal environment in Mexico has also been undergoing a major overhaul over the past few years. It is no secret that Mexico is often associated with slow legal procedures, bureaucracies and intricate administrative procedures.

Nevertheless, the situation has been evolving and there have been a number of major changes being implemented in the financial sector, as well as antitrust laws and government procurement processes, among others. These improvements have allowed for a much more sophisticated profession and provision of legal services, leading to a higher degree of specialization in the indus-try, higher quality of services as well as a more competitive environment. Simultane-ously, however, this has also resulted in addi-tional pressures on the legal system to keep pace with industry developments.

In sum, we have been seeing that many of the relatively newly established agencies have also become more sophisticated from a bureaucratic or administrative point of view. For instance, the CRE has not only become increasingly specialized, but also more streamlined in its procedures with pro-fessionally oriented officials. The same applies to the CNH which has the mammoth task of regulating the giant that is Pemex, and now also other private operators.

Interview with: Jorge Jiménez, Partner - López Velarde, Heftye y Soria (LVHS)

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Jorge Jiménez, PARTNER - LÓPEZ VELARDE, HEFTYE Y SORIA (LVHS)

EBR: What impact have the energy reforms had on the sectors legal environment and how are you responding to these?JORGE JIMÉNEZ: At this point, we are undoubt-edly at cross roads, involved in the reshap-ing of the industry. As such, we are in the process of piecing together the elements and understanding, along with industry players, the role each participating party will be entitled to play. In addition to this, we are also assessing the opportunities available in the market and the type of interactions that can occur between domes-tic and international companies.

When a market monopoly suddenly becomes opened up to the international community, one thing that happens is that the only parties that possess the transitory knowledge are the foreign players. The pri-vate parties lack the experience of operating in a non-monopolistic environment and this represents one of the major challenges char-acterizing Mexico’s transformation. In this regard, domestic industry associations will be key in the shaping of national content rules that have to be different from Brazil or Colombia and specific to this market. I believe that instead of forcing national con-tent through inefficient regulations, the authorities should focus on creating produc-tive chains that would promote greater coop-eration across various parties in the value chain as well as greater knowledge and tech-nology transfer, among others.

EBR: Unlike the 2008 reforms, the current ones have really drawn the attention of the global energy community. How soon do you expect we will see investments to begin flowing in and which type of compa-nies are best positioned to reap the bene-fits of the reforms?JORGE JIMÉNEZ: Unlike in 2008, the latest energy reforms have the depth to attract all sorts of industry players, including the

majors. As noted, the reforms are detailed enough at the constitutional level to clarify that companies will be able to book reserves; the crux of international investors.

Much like the case of ‘the boy who cried wolf’, no one really anticipated, or believed, that the reforms would go as far as they did. In our view, this has created a great deal of enthusiasm across the international invest-ment community now that they have a clearer picture of the playing field. Having said that, there will be an increasing level of investments flowing to Mexico in the near future from the traditional heavyweights in of the industry. Simultaneously, we also see a lot of opportunity for North American companies with experience in exploiting unconventional resources. Developing Mex-ico’s shale resources, estimated as the sixth largest technically recoverable reserves of shale gas in the world, could potentially posi-tion the country as a major component of the North American energy revolution.

Much like the case of ‘the boy who cried wolf’, no one really anticipated, or believed, that the reforms would go as far as they did.

Jorge Jimenez with the EnergyBoardroom Mexico project director, Mariuca Georgescu

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INTERVIEW WITH:

Franco Colloridi, Oil & Gas Director for Mesoamerica- Siemens Energy

Franco Colloridi, OIL & GAS DIRECTOR FOR MESOAMERICA- SIEMENS ENERGY

Energyboardroom: Siemens has enjoyed a presence in Mexico since 1894 and today represents the company’s regional HQ for Central America. As director of oil and gas markets, could you introduce Siemens Energy and provide us with an overview of the company’s current objec-tives?FRANCO COLLORIDI: Siemens has played a huge part in the infrastructure that Pemex established throughout the coun-try. Despite our activities with Pemex have been limited by the past market environment, we still possess an installed base of close to 400 turbines. We have been highly involved in the infrastructure and distribution network, refineries and petrochemical complexes. The area which we have not yet penetrated that deeply is Exploration and Production (E&P), but this is an aspect that we are actively try-ing to change. It actually falls under my responsibility to open this market and deepen our E&P participation.

Our aspiration is to get much closer to the well heads. Initially our involvement was limited to mid and downstream industrial activities dealing with com-pressors and generators. Siemens’ fledg-ling Oil & Gas Division since 2008 aim is to also increase Siemens’ upstream activ-ities and this is a strategy which we con-tinue to forge ahead with today. We have a suite of products and services that will enable us to achieve this goal.

We continue to base our strength on

the sheer quality of our products and the very high technical knowledge of our spe-cialties. In these aspects, I am confident to say that we lead the pack. At the begin-ning of the 2000 century we had to slightly reconfigure our strategy on our approach to Pemex. Nevertheless our com m it me nt to Me x ico re m a i n s unchanged. Having been around in Mex-ico for over 120 years you could even say that we are more Mexican than some! What’s more, our products are very well regarded here. Today we possess a work-force of over 7,000 people and more than ten production facilities across the coun-try in cities as diverse as Guadalajara, Querétaro and Monterrey.

EBR: What is strategic importance of Mexico to Siemen’s global performance?FRANCO COLLORIDI: Brazil was the country of the future for many years. Now we see a change in opinion due to the Mexican government’s energy reforms and the eyes of the whole world are turning here. For what it brings to Mexico, the PRI’s ability to forge agreement on the energy bill represents a massive achievement with far-reaching repercussions. The BRICs will, of course, continue to grow, but their path is pretty much fixed. The same can be said for the secondary wave of emerging countries such as South Africa, Nigeria, Indonesia and Turkey. The Mexican market, in contrast, epitomizes new opportunities and possibilities.

Interview with: Franco Colloridi, Oil & Gas Director for Mesoamerica - Siemens Energy

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Franco Colloridi, OIL & GAS DIRECTOR FOR MESOAMERICA- SIEMENS ENERGY

Our analysis within Siemens today is that a product placed on the US market is cheaper coming from Mexico than China. In the past, Mexico’s attractiveness in terms of cost was somewhat offset by risks such as the unstable security situa-tion and the unwieldy regulatory struc-tures. The liberalization and opening-up brought about by the reforms reduce or remove most of these risks. The security situation is still very much alive and this remains a problem, but we do believe in the present administration’s efforts at containment.

There are a number of variables that now make Mexico a very attractive prop-osition for international companies. Firstly, Mexico has a very strong internal market that enabled the country to weather the 2008 financial crisis very well indeed. Secondly, its integration with the North American market through NAFTA renders it an ideal platform for penetrat-ing the region as a whole. Mexico is today the third biggest commercial partner with the US after Canada and China. Thirdly the huge hydrocarbon potential means there is a vast array of opportunities ranging from development of oil and shale to introduction of new technologies, and as a result of the reforms, interna-tional entities can now move in and exploit these opportunities.

There is a real demand to develop the Mexican energy sector and Pemex has been struggling to meet this need. The country, in effect, lost a million barrels a day since 2004 and it was only the fact that the price of oil rose from forty or fifty dollars a barrel to one hundred dol-lars that meant this didn’t adversely impact the Mexico’s fiscal wellbeing. The ageing Cantarell Field made life easy for Pemex and allowed the company to main-tain production above the 2.5 million mark without having to invest in the sorts

of technological upgrades that we would normally expect. Pemex’s struggle to increase production is the challenge that private sector companies are now ready and able to take up.

EBR: What does this mean for Siemens and its strategic positioning within the market?FRANCO COLLORIDI: In the oil and gas sector, with the entrance of new players and the general adjustment of Oil & Gas industry contractual and regulatory conditions, there will also be unprecedented oppor-tunities. Pemex will be challenged to become much more efficient as an entity because it will be competing against new entrants that achieve the same results much more effectively, thus much more cost competitive.

For Siemens, it will be great to have more than one client in the market. What’s more there is going to be an intense need for developing new infra-structure such as roads, railways and air-ports and Siemens is very strong in this dimension. Distribution of electricity will become a major growth spot and we will be highly involved. There will be much to do: for example many cities in Mexico still depend on trucks and boat to deliver its oil. Within Siemens, the Mexican portfo-lio has assumed high priority for our top management as testament to the strategic importance of Mexico to Siemens’ world-wide operations.

There are a number of variables that now make Mexico a very attractive proposition for international companies.

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INTERVIEW WITH:

Eric Bustamante, CEO - Oil International Services (OIS)

Eric Bustamante, CEO - OIL INTERNATIONAL SERVICES (OIS)

Energyboardroom: How would you describe OIS’s portfolio of services to those not familiar with the company?ERIC BUSTAMANTE: Since the beginning, the vision of our company was, and still is, to become a leading integrated solutions pro-vider to the energy industry. In our experi-ence, we have seen that many companies tend to provide disjoined products or ser-vices as opposed to providing customers with complete solutions. This gap in the market inspired us to establish a company that can provide a comprehensive set of integrated solutions and turn-key projects in Mexico’s oil and gas industry.

With that guiding vision, we have for long focused on a particular set of market segments. These include the maintenance of dynamic equipment and auxiliary sys-tems, fire and blast solutions, onshore and offshore engineering, construction, instal-lation, commissioning, operation and maintenance services, as well as qualified labor supply, offering turnkey/EPC proj-ects. In addition to this focus, OIS offers consultancy services designed to help our clients not lose sight of their strategic approach, thus allowing them to accurately measure performance across all avenues.

In the fire and blast niche, for instance, some of our competitors only have the capacity to provide equipment to the client. They lack the capability to integrate the entire solution in terms of engineering, procurement and installation or even after-market services. Clearly, this ability to inte-grate represents one of OIS’s key competi-tive advantages and organizational

strengths. Going further, it represents a great growth opportunity for both OIS and potential foreign investors looking to come to Mexico. The fact of the matter is that international newcomers are likely to seek out integrated solutions providers which can cater to a wide range of their needs, rather than a number of individual service providers. This demonstrates our commit-ment to generating value for our customers and partnering with them for the long haul.

EBR: OIS has expanded its reach beyond the Mexican market alone into the inter-national market with a presence in the US. What is the strategic importance of that market for the firm?ERIC BUSTAMANTE: Our presence in the US is primarily a result of the fact that Mexico is lagging behind the international industry in terms of technology and equipment. By contrast, the US is among the global lead-ers in these areas and our presence there is designed to grant OIS, and therefore our clients, with better access to both.

In addition to this reality, it can some-times be rather difficult for foreign players to do business with Mexican firms that lack the experience of doing business abroad. There are many Mexican companies out there that do not understand the nuances of doing business in the US or other mar-kets. For this reason, our US branch is set up as an international entity, managed by a non-Mexican, in order for them to develop their own natural capabilities and cultivate their own joint ventures.

Not only has our presence in the inter-national area expanded our reach and

Interview with: Eric Bustamante, CEO - Oil International Services (OIS)

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Eric Bustamante, CEO - OIL INTERNATIONAL SERVICES (OIS)

diversified our operations, but it has also enabled us to anticipate our clients’ require-ments and quickly provide them with the industry’s latest technologies and imple-ment best practices. This is only possible because we do have a presence and are active in one of the world’s leading energy hubs; Houston, Texas.

EBR: How important is it for foreign inves-tors to pursue alliances with local firms, as opposed to going at it alone when enter-ing the Mexican Market?ERIC BUSTAMANTE: I have seen numerous companies attempt to enter Mexico on their own and fail. In the process, they end up losing their identified opportunity and wasting a lot of money. I have even wit-nessed companies, with signed contracts from Pemex in their possession, fail to deliver on their commitments due to the lack of understanding of Mexican business procedures, practices or customs.

Cleary, partnerships represent an excel-lent means for international investors to penetrate the local market. More impor-tantly, internationals must seek out part-nerships with the right local organization that shares the same vision which can lead to a synergistic alliance.

EBR: Investing in innovation and R&D is another way to gain access to better tech-nology and equipment. How do you antic-ipate these kinds of investments to change over the long term in the country with the liberalization of the market? ERIC BUSTAMANTE: These kinds of invest-ments will only grow over time with the Energy Reform being the catalyst for this kind of investment. To observe what has happened in the US with the shale oil and gas boom, and how those energy companies have applied new technologies and know how to further extract very significant oil

and gas deposits from lands that had been previously explored and exploited is proof of what better technology, equipment and know how can accomplish with the proper investment environment. If the Energy Reform is implemented successfully, the future portends exciting times for Mexico.

EBR: With the implementation of the Energy Reform over the horizon, the Mex-ican energy industry will be increasingly exposed to international market in terms of standards and practices. In your view, what are the main challenges and oppor-tunities facing OIS Corp? There are two sides to this coin. On the one hand, we have to adapt our business in order to keep pace with the energy reforms and anticipate the challenges and opportu-nities it introduces. On the other hand, we must also assess the potential and benefits that can be derived from forming strategic alliance with prospective investors. How-ever, the real challenge will be in combining the two together and making them work.

These are the types of projects we at OIS like to pursue. For this reason, we are ded-icated to seeking out the right international partners with which we can team up. We are confident that such an alliance can result in a mutually beneficial venture. Once that happens, we will be committed to seeing it through, in the good times and the bad.

If the Energy Reform is implemented successfully, the future portends exciting times for Mexico.

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INTERVIEW WITH:

Juan Reynoso Durand, Founder & Managing Director - Blue Marine Technology Group

Juan Reynoso Durand, FOUNDER & MANAGING DIRECTOR - BLUE MARINE TECHNOLOGY GROUP

Energyboardroom: From its beginnings as a diving company, Blue Marine has come a long way, becoming a key player in pro-viding supply and service offshore vessels in Mexico. What was your vision when you founded the company and how close have you come to that?JUAN REYNOSO DURAND: When Blue Marine commenced operations over a decade ago, the offshore industry in Mexico was at a turning point. In those days, Pemex’s overall expenditure budget for was already rather large, at approximately US $11 bil-lion per annum. They had communicated that they will be investing a substantial proportion of these resources into the off-shore segment, with the aim of increasing production. As an industrial group, we identified this as an opportunity and decided to create a multidisciplinary group that can participate in some of the key seg-ments of the production value chain. Since then, we have persistently focused on maintaining our vision on developing our market niches to a level that would see the group become the leading player it is today.

Nevertheless, this was by no means an easy feat. Traditionally, the offshore indus-try in Mexico has been rather closed off from the rest of the world and the old fash-ioned way in which the demand for prod-ucts and services was created and con-tracted was not necessarily up to par with global standards and practices. In

response, we began to work, closely track-ing Pemex’s various projects, trying to provide the most up-to-date solutions through international alliances. This phi-losophy of creating synergies through partnerships has always been central to our vision.

EBR: You have previously mentioned that the industry in Mexico was in some ways old fashioned. How has this reality changed so far?JUAN REYNOSO DURAND: There have certainly been significant improvements in this regard. Fifteen years ago, most of Pemex’s procurement and service contracts were typically awarded solely on cost basis. Over the years however, there has been a positive shift in the way the evaluated projects. Internal rates of return and best practices are other factors that Pemex takes into consideration. This change in vision has given us the opportunity to present differentiated services that focus more on performance, speed of execution and safety aspects, among others. These developments have helped increase the overall service offers in the industry, which in turn has enhanced Blue Marines competitiveness and efficiency in the ser-vices it provides.

With the energy reforms, as well as the new philosophies of the current administra-tion, we are now seeing an even greater improvement in the energy industry’s will-ingness to align itself with global standards.

Interview with: Juan Reynoso Durand, Founder & Managing Director - Blue Marine Technology Group

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Juan Reynoso Durand, FOUNDER & MANAGING DIRECTOR - BLUE MARINE TECHNOLOGY GROUP

EBR: Considering the far reaching implica-tions of the energy reforms, what changes can we expect to see in Mexico’s offshore industry?JUAN REYNOSO DURAND: We are certainly very excited about the reforms reshaping Mexico’s energy industry. As with any change, there are two ways in which one can respond. You can either resist and risk falling behind, or you can embrace the changes and adapt your-self to the new environment. In our case, we certainly consider this as a great opportunity.

Needless to say, having a monopoly as a client is challenging and unfavorable. The reforms will put an end to this and allow off-shore service companies the opportunity to diversify its pool of clients. Although the upside to this is clear, the opening of the mar-ket will also pose a significant challenge for all Mexican service providers. Among others, Mexican players will have to forge strong alli-ances with international players, increase their capabilities, invest in technology and enhance their safety practices. Nevertheless, I believe Mexico is up to the task. Mexico has a wealth of quality professionals that are able to perform in various fields.

EBR: How is Blue Marine adapting itself for the new environment?JUAN REYNOSO DURAND: For one, we have been increasingly focusing on developing our com-petencies across the four segments in which we operate. In doing so, we are dedicated to creating a platform of assets that will be able to satisfy the surge in demand resulting from increased offshore activities.

For instance, in December of 2013, we invested US $85 million in a construction and an accommodation vessel acquired from the North Sea. This represents an important investment for our group as we anticipate that the demand for accommodation and maintenance services will continue to grow for these types of assets. In addition to this,

we have recently created a new entity, Typhoon Platform Services, designed to sup-port Blue Marines oil and gas division that is primarily active in work-over and well inter-vention and maintenance services. Within the new entity, we also have the Crystal Ocean FPSO as well as the Miltiadis MII floating storage and offloading unit (FSO).

In order to combat maturing fields and maintain production, Mexico’s shallow water opportunities are growing at a rapid rate. Oil companies will therefore need these sort of assets to develop new fields or optimize the assets they have. This is in line with Pemex’s vision to recuperate secondary production at mature wells in shallow waters. This high level of drilling activity is creating the oppor-tunity for us to invest in well maintenance services and capabilities. We are very opti-mistic about the growth potential this niche presents, as is demonstrated by the signifi-cant investments we have recently made.

Similarly, our joint venture with Subsea 7 is coming along rather well and they were able to report 2013 revenues of some US$ 300 million. Looking ahead, we are in the process of preparing for deepwater opportu-nities in Mexico – a specialty are for Subsea 7 - which are expected to take off with the implementation of the reforms. In fact, prior to the reforms Pemex increased its yearly budget of approximately US$ 17 billion to US$ 32 billion.

With the energy reforms, as well as the new philosophies of the current administration, we are now seeing an even greater improvement in the energy industry’s willingness to align itself with global standards.

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SOURCE: COURTESY OF PEMEX

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Company index

Ainda Consultores ...................... 14, 16, 20

Blue Marine ........................... 19, 20, 40, 41

CBM Ingenieria Exploracion y

Produccion ............................ 14, 20, 30, 31

Chamber of Deputies ................ 14, 24, 25

Colegio de Ingenieros Petroleros de

Mexico ......................................... 16, 26, 27


(CP Latina) ......................................... 18, 19

Deloitte .............................................. 28, 29

DTK-Group ........................................ 16, 18

Ensayos no Destructivos ....................... 20

FMC Technologies ....................... 14, 16, 20

GBM Infraestructura ........................ 18, 19

Greenberg Traurig ................................... 16

Grupo PAE ............................................... 18

Legotec .....................................................11

Lopez Velarde, Heftye y

Soria (LVHS) ...................................... 34, 35

Marcos y Asociados ..................... 8, 32, 33

Navix .................................................. 18, 19

Nordic Chamber of Commerce ............. 16

Oil International Services Corp.

(OIS Corp.) ....................................11, 38, 39

Pemex ...................... 7, 8, 10, 12, 13, 14, 16,

18, 20, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31,

32, 33, 34, 36, 37, 39, 40, 41

Petrofac........................................ 16, 20, 28

PwC ............................................................ 8

Santamarina y Steta ............................ §12

Secretaria de Energia

(SENER) ................. 8, 12, 13, 16, 22, 23, 30

Siemens ............................................ 36, 37

45

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oil and gas mexico report 2014

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