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PEMEX Risk Management
David Ruelas
Managing Director Risk Management
May 20th, 2014
Contents
2
Risk Management Framework
Main Challenges facing the
Energy Reform
New Strategy & Action Plan
Contents
3
Risk Management Framework
Main Challenges facing the
Energy Reform
New Strategy & Action Plan
4
Evolution of Risk Management in PEMEX
Before
1990 2000 - 2010
After
2010 1991 - 2000
1993: Birth of Kot
Insurance
Company, Ltd.
(Bermuda)
2001: Risk Management Unit
Financial Risk
Insurance
2002: Internal Control
(Operational Risk)
Insurance Unit
reporting to the
Treasury
2004: Change of domicile
of Kot Insurance
Company, AG.
(Switzerland)
Reinsurance
placed by ceding
companies
Reinsurance placed
by PEMEX‘s captive
Financial Risk
Unit reporting to
the Treasury 2008: Corporate
Governance
2013: ERM
Strategy
5
Main risks insured by PEMEX
Bienes en
Mar
Physical Damage
Hurricane
Earthquake
Fire
Hull and Cargo
Electronic
Equipment
Robbery
Malicious Acts
Terrorism
Death
Third Party
Liability
Environmental
Liability
Average Paid Premiums (2013 – 2014)
100% = USD 493 million
6
Insurance in PEMEX
PEMEX covers 100% of its facilities, responsibilities and employees.
44%
18%
15%
11%
6% 6%
0.5% 0.2% Multiperil
Construction
Deep Water
Mobile Platforms
Life
Hull & Cargo
Auto
Fidelity
PEMEX acquires its insurance policies through public tenders
Only insurance companies established in Mexico can cover risk in the country*.
PEMEX invites all the insurance companies to participate, promoting competition.
Online public tenders with total transparency according to the legal framework.
Insurance company awarded based on best coverage and lower cost.
Insurance sector as part of GDP for some Latin American Countries
* Mutual and Insurance Institutions Act, Articles 3rd and 141st
USD
billion
7
PEMEX is looking for more market share
4.1%
2.4%
3.4%
2.8%
2.0%
4.0%
270
370
381
476
1,178
2,253
0 1,000 2,000 3,000
Insurance
GDP
Brazil
Mexico
Argentina
Venezuela
Colombia
Chile
Reinsurance Captive 3
Reinsurers
5
Reinsurance
brokers
4
Insured
1
Mexican Ceding
Companies
2
•Optimize Insurance
Program.
•Privileged access to
international insurance
capacities.
•Non-traditional risks’
coverage.
•Wider sources of capacity.
Benefits
8
Insurance and Reinsurance Scheme
• The percentage allocated to maintenance
has remained stable. Nevertheless, the
total investment budget has grown
Distribution of Maintenance
Budget 2014E
100% = 7.3 Billion USD
PEMEX Investment Program
(Billion USD)
• As in previous years, in 2014
more than 84% of the
maintenance budget will be
allocated to E&P and Refining
E = Expected
Note: CAPEX and OPEX excludes maintenance. 2014 figures are based on Mexican Expenditure Budget.
59.3% 24.1%
9.0%
7.2% 0.5%
E&P RefiningGas PetrochemicalCorporate
54% 55% 54% 54% 54% 55%
28% 28% 28% 27% 27% 27%
18% 17% 18% 19% 19% 18%
28.9 33.4
29.6
36.0 38.7 40.4
2009 2010 2011 2012 2013 2014E
CAPEX OPEX Maintenance Investment
Loss Prevention Program: Controlled risks
9
Contents
10
Risk Management Framework
Main Challenges facing the
Energy Reform
New Strategy & Action Plan
11
Placed capacity on international markets by Oil and Gas companies(1)
Deep water insurance capacity
350500
700
1,000
1,300 1,300
1,300
1,100
Marathon Oil Nexon Maersk PEMEX
Deep water coverage limit (well control, re-drilling, leaking,
cleanup and pollution)
USD million 2,400
Average = 858.3
Additional
capacity of
third party and
environmental
liabilities
(worst case
scenario)(2)
(1) Source: Aon
(2) Maximum value between capacity available in the market and mean value of the worst case
scenario analysis for high pressure oil well developed by GL Noble Denton.
12
Changes in the PEMEX’s risk profile
Refining
• Investment opportunity to
increase refining capacity.
• Infrastructure modernization
(v.gr., fuel quality projects).
E&P
• Deep water exploration.
• Deep water production (v.gr.,
Lakach project).
• E&P activities in shallow waters.
• E&P strategy for shale gas and
shale oil.
Petrochemical
• Transferring infrastructure to
third parties for the operation.
• Meeting Ethane demand (v.gr.,
Etileno XXI project).
Gas
• Construction and cargo operation
of gas pipelines (v.gr., Los
Ramones projects).
• Increase of transportation
capacity of National Pipeline
System and its monitoring
(SCADA).
Activities that will change PEMEX’s risk profile in the near future:
13
Challenges for insurance
• Achieving the Business Plan goals in competitive conditions
(e.g., knock-for-knock, responsibility limit, subrogation rights).
• Retain insurable risks.
• Risk transfer with efficient costs.
• Non-traditional insurance schemes (e.g., parametric coverage,
contingency funds).
• Risk sharing due to Energy Reform.
• Impact on public finance (approval of the Ministry of Finance).
• Adequate coverage limits, according to regulators rules (e.g.,
National Hydrocarbon Commission).
14
Business Risks
Input Process Product
Procurement Production
Marketing
Business
risks:
• Supply chain • Credit for
clients
• Implementation
of projects
Other operating risks:
• Business Interruption
• Cyber Risks
In the light of the Energy Reform PEMEX has to re-evaluate
the need of coverage for all insurable risks
Process:
Contents
15
Risk Management Framework
Main Challenges facing the
Energy Reform
New Strategy & Action Plan
16
Enterprise Risk Management Philosophy
Source: Lam, James (2003). Enterprise Risk Management.
From Incentives to Controls. Wiley, Finance.
PEMEX is embracing best practices of Risk Management: ERM
Risk Analysis Tools Integrated Data Systems 6 5
Corporate
Governance
• Top-down Risk Management approach.
• Risk policy and definition of risk appetite.
• Risk culture and corporate values.
1
Aligned
Administration
Portfolio
Management
Risk
Transference
• Alignment to business
strategy.
• Planning and performance
evaluation.
• New products and business
development.
• Thinking and acting as an
investment fund’s risk
manager.
• Isolation of origin, retention
and risk transference.
• Transversal aggregation of
risks.
• Transfer of inefficient
risks or risk clusters.
• Alternative mechanisms
(non-traditional
insurance, financial
coverage).
2 3 4
Management of the
involved parties
• Improve transparency risk to the involved parties.
• Effective communication with employees, clients, partners, etc. 7
Impact of the Energy Reform in Insurable Risks
17
Energy Reform New challenges
PEMEX is evolving
• New private operators,
participation will allow
strategic alliances and
achieve lower costs and more
efficiency.
• PEMEX will be able to retain
insurable risks.
• The Energy Regulatory
Commission and the
Mexican National
Hydrocarbons Commission
will have attributions to
transfer risks and liabilities
from PEMEX to other
entities.
Transferring assets Sharing risks
Innovating our insurance
strategy
Homogeneous, open and effective information and communication with insurance and reinsurance brokers.
Choosing the best participants through public tenders to obtain optimal risk coverage.
Continuous improvement on advice and service: hiring procedure, claims and settlement process.
Reducing insurance costs.
Transparency
Competitive-
ness
Quality
Cost
18
Innovating our insurance strategy
More
efficiency
Insu
rance s
trate
gy
PEMEX has started its transformation
19
Conclusions
Loss prevention programs and inspection insurance and reinsurance
practices contribute to maintain risk controlled and a trustworthy
operation.
Confidence
Experience Management of PEMEX’s reinsurance captive, Kot Insurance Company
AG, has been constantly improving since its creation.
Transparency Competition Quality Cost
Energy
Reform
An opportunity to:
• Share risks
• Mutualize costs
• Adopt best practices
• Take advantage of a more
efficient legal framework
• Establish clear rules for risk
placement
•Trust for insurance
and reinsurance
markets.
•Trigger for the
growth of Mexican
insurance market.
PEMEX Risk Management David Ruelas
Managing Director Risk Management
Q & A