Mexico Oil & Gas Review 2017 by Mexico Business Publishing

2017

“The reforms implemented by this administration will allow the energy sector to grow, generate more jobs, attract more investment and Mexico will once again become an oil producing country” Enrique Peña Nieto, President of Mexico

2017

Mexico’s Energy Reform set in motion a series of changes that continue to revolutionize the country’s oil and gas industry. With vast untapped hydrocarbon reserves, increasing demand from a growing population and economy and a new regulatory framework, Mexico is quickly becoming one of the most exciting markets for oil and gas companies along the entire supply chain. Despite production declines of more than a decade, PEMEX remains Mexico’s oil and gas heavyweight, as the eighth largest oil producer, eighth largest drilling company and 15th largest refining company in the world. But its decades-long monopoly is over and new private and international companies are entering Mexico’s upstream market through CNH’s licensing rounds, while others have started to capitalize on midstream infrastructure and downstream gasoline distribution opportunities. PEMEX itself has set a clear path forward with a five-year business plan to stabilize and boost reserves and production as it faces the challenge of private competition.

While previous years were marked by expectation, concrete results defined 2016 and early 2017. The completion of the country’s first deepwater licensing round was the highlight of Round One, which attracted expected investments totaling US$49 billion. With this success behind it, the industry now awaits Round Two with optimism. The same year saw Australia’s BHP Billiton become PEMEX’s first-ever partner through a farm-out and together they will develop the deepwater Trion block. Four more farm-outs have already been announced: another in deepwater, two onshore and one in shallow waters. PEMEX also showed its competitiveness in the licensing rounds when it won a deepwater block in partnership with Chevron and INPEX in Round 1.4. Exciting projects are already up and running in the midstream segment, and others are planned. The past year also delivered the liberalization of gasoline prices in Mexico, the final stage in the process toward a competitive fuel distribution market with both Mexican and international companies competing for business.

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ISBN: 978-0-69289440-8

TABLE OF CONTENTS

STATE OF THE INDUSTRY

NATIONAL CHAMPIONS

LICENSING ROUNDS

TECHNOLOGY & AUTOMATION

EXPLORATION & DRILLING

SHALLOW WATER & FIELD DEVELOPMENT

NATURAL GAS & POWER GENERATION

DEEPWATER

INDUSTRIAL TRANSFORMATION & COMMERCIALIZATION

ONSHORE & EOR/IOR

BUSINESS & FINANCE

SUPPLY CHAIN

FUTURE OUTLOOK

ENVIRONMENT & SAFETY

PEMEX Tower, Mexico City, PEMEX

STATE OF THE INDUSTRY

The Mexican oil and gas industry is still taking its first steps into the liberalized, open-market paradigm brought about by 2013’s Energy Reform. PEMEX’s first ever farm-out, the success of deepwater licensing Round 1.4 and the opening of the fuel distribution market to private participation are just some of the industry’s many milestones that are inspiring optimism throughout the value chain. As the global oil and gas industry emerges from a period defined by low oil prices and an industry downturn, all eyes are on Mexico with its vast untapped reserves and newly attractive yet still untested operating and legal framework.

This chapter provides a bird’s-eye view of the events that defined the last 12 months in the Mexican oil and gas industry, from the perspective of its key political, regulatory and executive players. Their combined voices present a comprehensive overview of the industry while also offering a glimpse into its ambitions for the future.

CHAPTER 1: STATE OF THE INDUSTRY 8

ANALYSIS: The Year in Review

VIEW FROM THE TOP: Pedro Joaquín Coldwell, Ministry of Energy

EXPERT OPINION: José Antonio González Anaya, PEMEX

VIEW FROM THE TOP: Juan Carlos Zepeda, CNH

VIEW FROM THE TOP: Héctor Moreira, CNH

VIEW FROM THE TOP: Carlos de Regules, ASEA

VIEW FROM THE TOP: Mauricio Herrera, FMP

VIEW FROM THE TOP: Raymundo Piñones, AMEXHI

VIEW FROM THE TOP: Ernesto Marcos, Marcos y Asociados

VIEW FROM THE TOP: David Enríquez, Goodrich, Riquelme y Asociados

VIEW FROM THE TOP: Jorge Leis, Bain & Company

VIEW FROM THE TOP: Alejandra León, IHS Markit

VIEW FROM THE TOP: Rubén Cruz, KPMG Mexico

INSIGHT: Eduardo López, EY

INSIGHT: Bernardo Cardona, Deloitte Consulting Mexico

VIEW FROM THE TOP: Oscar González, ARHIP

VIEW FROM THE TOP: Ernesto Ríos, IMP

ROUNDTABLE: How Can the Industry Better Promote Gender Equality?

ANALYSIS

THE YEAR IN REVIEW Mexico’s oil and gas revolution continued unabated in 2016 and

Welcomed by operators and hailed as

through the first half of 2017. The country’s unfolding Energy

“industry-friendly,” the changes to the Five-

Reform bore fruit across segments and resulted in historic

Year Plan demonstrate Mexico’s oil and

firsts: the first deepwater round, the first farm-out and the

gas authorities’ willingness to incorporate

first foreign IOC to strike oil in the country’s shallow waters.

the voice of the industry into policy, which remains fluid as the Energy Reform continues

There is no doubt that since 2014’s Energy Reform, the

to unfold.

industry has undergone a profound transformation. The end of PEMEX’s near 80-year monopoly over the

“All this gives us a chance to think about scaling

country’s hydrocarbon reserves and its transition into a

up our process so that through the nomination and

productive state enterprise has resulted in far-reaching

standardization we can get to greater volumes of

consequences for every part of the oil and gas value

production and exploration,” says Aldo Flores, Deputy

chain; from upstream exploration and production,

Minister of Hydrocarbons.

to midstream logistics and downstream refining and gasoline commercialization, and all associated business

PRODUCTION GOALS

services.

Increasing oil exploration and production is the main objective of Five-Year Plan, with a target of stabilizing

“I do not know how you cannot admire what has been

PEMEX’s production at 2 million b/d. Flores believes this

happening in Mexico during the last two years. Very few

is already achievable. “The target for 2017 is around 1.94

countries have pulled it off in this fashion, at this rate,

million b/d, so with the private sector’s contribution to

building this much momentum,” says Jorge Leis, Partner

production we should reach close to 2 million b/d,” he

and Lead of Bain & Company’s Oil & Gas Practice in the

says. He is backed up by the results of the deepwater

Americas.

PRODUCCIÓN DE CRUDO POR REGIÓN

As well as each segment’s specific highlights, the

CRUDE OIL PRODUCTION 1Q17

Ministry of Energy updated its oil and gas energy policy in February 2017 to reflect changes in the industry since the document was first published two years ago. The overarching document, titled “Five-Year Plan for

19% Offshore 81% Onshore

Exploration and Production of Oil and Gas Bids 20152019,” announced a standardization of the process that dictates how Mexico’s oilfields are auctioned to private companies. In completed rounds, the blocks involved were selected by the authorities and were of varying sizes. With the

PRODUCCIÓN DE CRUDO POR TIPO (MBD)

CRUDE OIL PRODUCTION (thousand b/d) Ministry of Energy’s updated plan, the industry is granted Terrestre (19%) 2,500 the autonomy to nominate blocks, which will all be of Marina (81%)2,230 12.9% a standard size depending on whether they are found 2,000 in deepwater, shallow water, onshore unconventional

2,176 12.6%

2,138 12.2%

2,070 11.7%

2,018 11.1%

35.7%

35.6%

1,500

36.2%

37.1%

outlined a new process for inviting companies to bid in

36.9%

Source: PEMEX

or onshore conventional. Additionally, the revised plan rounds, which has now been simplified to two invitations

53.2%

500

52.7%

resources.

51.6%

1,000 50.5%

to bid per year according to the type of areas and

50.0%

1Q16

2Q16

3Q16

4Q16

1Q17

I nv i t a t i o n s to b i d o n d e e pwa te r a n d o n s h o re unconventional areas will be released in the first half of the year; shallow water and onshore conventional will be

held in the second. The actual bidding will be carried out

Heavy

about six months after the invitation to bid is announced.

Source: PEMEX

Pesado

Source: PEMEX

Light

Ligero

Extralight

Superligero

PRODUCCIÓN DE CRUDO POR ACTIVO TOTAL CRUDE PRODUCTION (million b/d) 2,400 2,000 14% 5% 11%

1,600 1,200

18% 10%

800

43%

400

1Q16

Ku-Maloob-Zaap Source: PEMEX Ku-Maloob-Zaap

2Q16

Cantarell Cantarell

3Q16

Litoral de Tabasco Litoral de Tabasco

round, which attracted an estimated investment of Source: PEMEX

4Q16

Abkatún-Pol Chuc Abkatún-Pol Chuc

1Q17

Samaria-Luna

Others

Otros

given the maturation and increase in fractional water flow

US$34.4 billion over the next 35 years from the private

at its Bellota-Jujo, Samaria-Luna, Macuspana-Muspac and

sector.

Litoral de Tabasco areas. Heavy crude production also fell but less significantly, by 3.8 percent, given the fractured

The private sector’s participation is accelerating at an

nature of Cantarell’s deposits.

impressive rate. By March 2017, a total 4,329 miilion boe of the country’s prospective resources and 273 million

Previously Mexico’s most productive oilfield, Cantarell’s

boe of its 2P reserves had been auctioned off through

production fell to an all-time low of 216,000mbd in 2016,

Round One, representing 4.9 percent and 9.5 percent,

down from a peak of 2.123 million b/d in 2004. The most

respectively, of all available resources under state

productive of the area’s 10 oil fields, Akal, accounted for

control. Should the process continue at the same rate,

31.7 percent of Cantarell’s production in January 2017,

the ministry says, it would take between 20 and 40 years to get through all of Mexico’s identified resources. POZOS PROMEDIO EN OPERACIÓN AVERAGE OPERATING WELLS BY FIELD POR TIPO DE CAMPO

CRUDE PRODUCTION IN DECLINE One area of concern is Mexico’s crude oil production, which has been in decline for over a decade. In 2016 total production averaged 2.155 million b/d; a drop of 5

7% Offshore 93% Onshore

percent on year. Production of crude oil has seen a steady decrease since peaking at 3.383 million b/d in 2004. “The only solution for PEMEX to reverse its 12-year production decline is to seize all the opportunities the Energy Reform offers. This involves seeking out private investment and productive partnerships,” says Ernesto Marcos, Founding Partner of Marcos y Asociados. Until it fully takes advantage of the possibilities offered by the Energy Reform, PEMEX must face the challenge

POZOS PROMEDIO EN OPERACIÓN

AVERAGE OPERATING WELLS Marina (7%) 10,000

8,932

8,514

8,351

8,240

8,000

Source: PEMEX of the aging nature of the oil fields it has relied on most

in recent years. The NOC saw a reduction of 9.1 percent

9,209

En tierra (93%)

3,484

3,413

3,265

3,146

3,060

5,725

5,519

5,249

5,205

5,180

1Q16

2Q16

3Q16

4Q16

1Q17

6,000

in its total crude oil output in the final quarter of 2016 compared to the same period in 2015. A 13.5 percent reduction in light oil is noted as a

4,000

2,000

contributing factor to the over decrease That is put down to the natural decline of the NOC’s Chuhuk, Chuc, Ixtal and Onel fields from the Abkatún-Pol-Chuc asset and also

the aging Tsimin field in the Litoral de Tabasco area. A 16.6

Non-associated gas

percent fall in super-light crude oil has also been cited,

Crudo Source: PEMEX Source: PEMEX

Crude oil Gas no asociado

NATURAL GAS PRODUCTION BY ASSET (MMcf/d) PRODUCCIÓN DE GAS NATURAL POR ACTIVO 6,400 5,600 4,800

27%

4,000 24%

2,400

6% 5%

1,600

8% 17%

800

13%

1Q16

Burgos

2Q16

Litoral de Tabasco

Burgos Source: PEMEX

3Q16

Samaria-Luna

Litoral de Tabasco

4Q16

Veracruz

Samaria-Luna

Veracruz

1Q17

Abkatún-Pol Chuc Abkatún-Pol Chuc

Cantarell Cantarell

Others Otros

Source: PEMEX

at an average 63,240b/d. But two years ago, Akal’s

In the final quarter of 2016, natural gas production

production stood at 120,310b/d, meaning it almost halved

originated almost evenly between onshore and offshore

in the 24 months from January 2015.

fields, with 49 percent and 51 percent produced from each type of field, respectively.

In 2009, Ku-Maloob-Zaap overtook Cantarell as Mexico’s most productive oil field and its 2016 production output

RESERVE REPLACEMENT

was 867,000b/d. This figure has been relatively steady

As well as falling production, Mexico’s reserve

since 2010, varying by only 25,000b/d since that year.

replacement ratio had been in decline year on year since 2012, before rising in 2016 to 62 percent, up 7 percent on

NATURAL GAS PRODUCTION

the previous year. Still, the figure remains low compared

The year 2016 saw Mexico’s average daily natural gas

to previous years, especially compared with its 10-year

production drop to 5,825mmcf/d, the first time in a

peak of 129 percent in 2009.

decade that production was below 6,000mmcf/d. In the last quarter of the year it dropped even further, reaching

For every 10 barrels of oil Mexico produced in 2016, just

4,580mmcf/d. In its 2016 yearly report, PEMEX cited the

over six were discovered. The deficit between the two does

natural decline of its Litoral de Tabasco and Abkatún-Pol-

not bode well for a country desperately trying to increase

Chuc fields as a contributing factor to lower natural gas

its crude oil output. To remain sustainable, the rate must

production, where the drop in crude oil production led to

be 100 percent or over. In Mexico’s case, it will have to

an increase in fractional water flow. It also mentioned the

be above this to address the debt it has racked up in the

natural decline of fields in the Macuspana-Muspac, Ballota-

past year, given that an average of 32.75 percent of its

Jujo and Samaria-Luna assets as an additional factor.

hydrocarbon reserves have not been replaced since 2013.

ANNUAL PRODUCTION AND RESERVE REPLACEMENT RATE Gráfica 1. Producción anual y tasa de restitución de reservas 1,800

250%

1,600 200%

1,400 1,200

150%

1,000 800

100%

600 400

50%

200 2005

——Production Source: CNH

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

reserve replacement by discoveriesde reservas totales por nuevos descubrimientos Restitución ——TotalProducción

Replacement rate

Annual production (million boe)

3,200

Valores al 1 de enero de cada año (miles de millones de barriles de petróleo crudo equivalente)

EVOLUTION OF 1P, 2P AND 3P RESERVES, VALUES TO JAN 1 OF EACH YEAR (million boe) 60 50 40 30 20 10 11

2002

2003

Source: CNH

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

3P 3p

Disminución del 67% 59% 51%

As well as defining one solution as reclassifying potential

companies such Grupo Diavaz diversifying to become

reserves into proven reserves, particularly through

operators.

deepwater exploration activity, the Ministry of Energy’s Five-Year Plan mentions CNH’s various licensing rounds

If Round 1.3 was a goldmine for national companies, Round

as a catalyst for successful exploration activity to get

1.4 was the equivalent for international businesses. Mexico’s

underway in the country.

first-ever deepwater licensing round lead to the successful allocation of eight out of 10 available blocks to an impressive

ROUND ONE

range of IOCs, NOCs and independents. Thrusting Mexico

With the completion of Round One, a total of 38 E&P

into the global oil and gas limelight, the round attracted an

contracts had been signed, including one between PEMEX

estimated US$34.4 billion in investments over the next 35

and a third-party operator. After getting off to a sobering

years, and 13 companies from nine countries are counted

start with shallow-water Round 1.1 in 2015, which saw only

among the winners. PEMEX won one block in partnership

two out of 14 contractual areas awarded, things started to

with US company Chevron and Japan’s INPEX. The NOC

look up with Round 1.2, when three out of the five shallow-

was joined by Sierra Oil & Gas as one of two Mexican

water blocks up for grabs were awarded to three bidders:

companies to experience deepwater success.

one independent and two consortiums. One notable difference between the two rounds was the fact that

Besides BHP Billiton, 2016 was defined by an influx of

Round 1.1’s blocks offered only exploratory potential, while

some of the world’s largest IOCs into the Mexican market.

Round 1.2 was an extraction round, increasing certainty

France’s Total, the UK’s BP, the US’s Chevron and Exxon

and reducing risks for vying companies.

and Norway’s Statoil are some of the big names which feature among Round 1.4’s winners. China Offshore Oil

The first categorical success of CNH’s licensing rounds

Corporation took away two blocks in the same round and

came in December 2015, when 25 onshore extraction

stood out for the high-royalty rates it bid to snatch them

blocks were awarded to a range of predominantly Mexican

up. Sierra Oil & Gas, Murphy, Ophir, INPEX and Petronas

companies through Round 1.3. Of the 25 contracts, which

were also among the winners.

were all signed by August 2016, 18 were signed by wholly Mexican companies, three by consortiums including a

Along with the eight blocks awarded in the round, the

Mexican entity, and four by a foreign company. With

same day marked PEMEX’s first-ever farm-out, which

production underway on several of the blocks, and others

involved the deepwater Trion block, won by Australian

awaiting permits and approval, the development marks

operator BHP Billiton. Taking on 60 percent of the share,

an exciting step forward for the Energy Reform, with

BHP will enter into a production-sharing agreement with

several examples of completely new Mexican companies

Mexico’s NOC to exploit the block, which has 3P reserves

taking on E&P challenges, as well as established service

totaling 485 million barrels of crude oil equivalent. To win,

Bid

Number of blocks

Type

Location

Call date

Bid date

R2.1

Shallow Waters

Tampico-Misantla, Veracruz, Southeast

Jul. 20, 2016

Jun. 19, 2017

R2.2

Onshore

Burgos, Southeast

Aug. 24, 2016

Jul. 12, 2017

R2.3

Onshore

Tampico-Misantla, Burgos, Southeast, Veracruz

Nov. 15, 2016

Jul. 12, 2017

Three more farmouts with PEMEX are scheduled for 2017: Ayín-Batsil, Cárdenas-Mora and Ogarrio 12

entered the market through Round 1.1 and 1.2 are already receiving drilling permits, and in some cases, striking oil. In March 2017, Italian operator Eni announced the successful drilling of exploratory well Amoca on the block it won in Round 1.2. The drilling permit was granted only five months earlier in October 2016.

Well

Operator

Authorization date

Amoca-3DEL

Eni

Feb. 27, 2017

the Australian heavyweight bid an additional royalty rate

Hokchi-4DEL

Hokchi Energy

Feb. 24, 2017

of 4 percent, on top of the 7.5 percent base rate, and

Zama-1SON

Talos 7 Energy

Feb. 20, 2017

offered a US$625 million after tying with BP. The amounts

Ichalkil-2DEL

Fieldwood Energy

Jan. 27, 2017

contributed by BHP mean that in four years PEMEX will not

Hokchi-3DEL

Hokchi Energy

Dec. 22, 2016

Amoca-2

Eni

Oct. 20, 2016

have to contribute any of its budget to the Trion project. With Round One completed, the industry now awaits Round Two with baited breath. Shallow-water Round 2.1

Operators entering through CNH’s licensing rounds will

and onshore Rounds 2.2 and 2.3 are scheduled to be

be looking to Mexico’s already well-established oil and

held in mid-2017, while an unconventional and deepwater

gas supply chain to not only provide essential products

stage is due to be held later in the year.

and services but also to meet local content quotas and, in the case of IOCs, gain regional knowledge and

CNH Commissioner, Gaspar Franco, says a higher number

experience. Despite the projection that more work will

of blocks with unconventional and deepwater fields are

be coming its way in the future, Mexico’s oil and gas

expected in future rounds. “Areas in Round 2.1 are 1.6

supply chain has various challenges to confront, including

times bigger than those from Round 1.1 and 1.2, while

compliance with international standards, recovery from

areas from Round 2.2 are 14 times bigger than those in

PEMEX’s payment and activity slowdown and from the

Round 1.3,” he says. The larger sizes of the blocks involved

wider oil price crisis. All this while learning the ropes of

could lead to the involvement of bigger, more capital-

a newly opened market and PEMEX’s updated process

intensive companies in the rounds as compared to the

for awarding service contracts.

corresponding rounds in Round One.

REFINING Three more farm-outs with PEMEX are scheduled for 2017.

While a new supply chain is beginning to develop,

The shallow-water Ayín-Batsil field will be auctioned off

PEMEX’s refineries are still presenting old challenges.

at the same time as Round 2.1’s winners are announced in

Mexico’s crude processing capacity at its PEMEX-owned

June 2017, while the onshore Cárdenas-Mora and Ogarrio

refineries at Cadereyta, Madero, Tula, Salina Cruz,

fields are due to be auctioned off on Oct. 4, 2017.

Minatitlan and Salamanca has decreased dramatically since the start of the 21st century as the state-owned oil

SUPPLY CHAIN DEVELOPMENT

giant has faced problems related to maintenance of its

While Round 1.4’s winners begin signing contracts and

aging infrastructure and has also struggled to maintain its

drafting workplans, the international operators that

oil production steady from maximums reached in 2004.

MARGEN VARIABLE DE REFINACIÓN

VARIABLE REFINING MARGIN ($US/b) 8

7.71

7 6 5.01

4.91

4 3 2

2.50

1Q16

Source: PEMEX

2.65

2Q16

3Q16

4Q16

1Q17

From the end of 2000 to December 2016, the total crude processing at the country’s refining facilities declined by nearly 24 percent to 933,062b/d from 1.227 million b/d. This increased slightly in the first three months of 2017,

THE JOURNEY TOWARD AN OPEN ENERGY MARKET Year

Event

2013 20-December

reaching an average of 1.108 million b/d. This is still below

The Energy Reform is approved by Senate

PEMEX’s nominal refining capacity, which its 2017-2021 business plan outlined as 1.640 million b/d.

2014 21 July

PEMEX become a Productive State

Fuel and other product output have also been hit hard by

Enterprise

operational problems and accidents at the refineries, the newest of which started operations in 1979. The refineries,

The Senate approves the rules by which

11 August

The Secondary Legislation is issued ASEA is created

now part of the PEMEX Industrial Transformation unit,

PEMEX law is issued

are mentioned in the state-owned company’s business

Mexican Petroleum Fund (FMP) is

plan to 2021 to reverse economic and operational losses

created

of close to MX$100 billion (US$5.1 billion) via initiatives such as cogeneration projects to cover the plants’ need

13 August

PEMEX is assigned 83% of 2P reserves

for steam and electricity. Another challenge is in the form of unplanned shutdowns

and 21% of prospective reserves 28 August

FUEL MARKET LIBERALIZATION Mexico’s declining refinery infrastructure is leading to an

2015 15 July

Results of Round 1.1 are published

4 September

Round 1.1 contracts are signed by

increasing reliance on imported fuel from the US, but it is hoped this can be turned around as the country’s own gasoline market is fully opened to foreign participation. Fuel prices were liberalized in January 2017 after years

CENACE is created CENAGAS is created

at PEMEX’s refineries, 65 percent of which were due to unreliable hydrogen sources.

Round Zero results are published.

winners 30 September

Results of Round 1.2 are published

17 December

Results of Round 1.3 are published

of subsidization and price control. Despite public outcry as gasoline prices rose from one day to the next, the

2016

news was welcomed by the industry as a big step toward

7 January

winners

creating a competitive gasoline market in Mexico. One palpable change that has already transpired is the

Round 1.2 contracts are signed by

10 May

appearance of international brand BP in the country,

First set of Round 1.3 contracts are signed by winners

which inaugurated its first Mexican gas station in March 2017 and plans to roll out 1,500 in the coming five years.

25 August

Second set of Round 1.3 contracts are

“In Mexico, we expect our planned 1,500 stations will

5 December

Results of Round 1.4 are published

13 December

Results of TRION farm-out bidding

signed by winners

lead to a 15-18 percent market share,” says Paul Augé, Vice President of New Businesses for Latin America at

round is published

BP Downstream. As the first international company to sell fuel in Mexico, for the time being BP will be supplied by PEMEX’s gasoline before developing capabilities to

2017 28 February

import or produce its own products. As well as eventually introducing different fuel qualities and prices into the market, the entry of international

First Round 1.4 contract is signed by winner

3 March

Contract for TRION farm-out is signed

8 March

CENAGAS publishes Round Zero results

firms will transform the consumer experience, says Juan

for Open Season

Gallástegui, President of Gallástegui Armella Franquicias. He says it will take more than just more competitive pricing

10 March

signed by winners

to attract clients in the new look market. “Companies should also invest in creativity to provide added value to

8 May

CENAGAS publishes Round One results for Open Season

consumers. When people start seeing new brands, they will be loyal to the brand that provides the best service.”

Remainder of Round 1.4 contracts are

Sources: PEMEX, CNH

VIEW FROM THE TOP

MEXICO ATTRACTS US$49 BILLION IN ROUND ONE PEDRO JOAQUÍN COLDWELL Minister of Energy

Q: What is the Ministry of Energy’s perspective on the

marketing of oil, private participation will allow us to

results of Round One and which parameters are used to

expand the existing infrastructure and strengthen the

measure its success?

country’s energy security.

A: In spite of the volatility of international crude oil markets, the results obtained in Round One were

Q: What is the expected result from the decision to allow

successful, transparent and highly competitive. With

companies to nominate areas in Round Three?

the four bidding rounds and the first PEMEX farm-out

A: We expect to receive feedback from those that have

concluded with Trion, we have achieved a result of 70

shown interest in tenders and to ultimately increase the

percent of the available areas awarded, well above

number of blocks to be auctioned, based on technical

the registered rate in the region. In addition, the best

justifications regarding potential production. The industry

conditions have been guaranteed by the state, which

selects areas in which it is interested in carrying out

will be receiving a 60 percent average profit during

exploration and production activities and proposes the

the commercial life of the contracts. The US$49 billion

configuration of areas with a greater surface area to

investment commitment by the 48 companies from 14

reduce geological risk. With the information received

countries reflects the confidence of new operators in the

and the technical support of CNH, the Ministry of Energy

Mexican bidding system, which has also been recognized

analyzes the nominations to include them in the tenders,

by international experts.

considering the investment strategy of the industry and the viability of the projects.

With the four bidding rounds and the first PEMEX farm-out concluded with Trion, we have achieved a result of 70 percent of the available areas awarded

Q: What are the objectives of the licensing rounds planned for each year? A: One of the objectives we have in hydrocarbons is to create a diversified industrial system, in which companies of different sizes, origins and specialties coexist. Under this premise, we have carefully designed the rounds so that every tender targets specific goals, either to boost the domestic industry, such as Round 1.3, or to attract

The Energy Reform opened the hydrocarbons industry to

the world’s largest oil companies that have the proven

private participation and achieved certainty in the rules,

ability to venture into deep and ultra-deepwaters, as in

transparency in the allocation of contracts and in tenders

Round 1.4.

and free competition for both PEMEX and private operators. Private investments are expected to complement those

For the remainder of this administration, we will design

that PEMEX has been making over the past seven decades

two new tenders for Round Two: one in deepwater and

to access deep, ultradeep, unconventional and mature

one in unconventional onshore. We will then start Round

fields, in which Mexico has resources that it was previously

Three, which will include a tender for shallow waters and

unable to take advantage of. In transport, storage and

conventional onshore areas and another for deepwater and unconventional onshore areas.

The Ministry of Energy is charged with executing energy

Q: Why prioritize exploration areas with reserves over

policy to ensure the competitive, sufficient, high-quality,

pure exploration areas for future licensing rounds?

economically viable and environmentally sustainable supply of

A: In Mexico, the production of crude oil from mature

energy required for the development of the nation

fields represents between 40 percent and 60 percent

The Five-Year Hydrocarbons Plan 2017-2021 incorporates the following improvements over the Five-Year Plan 2015-2019, which will facilitate the selection of blocks:

THE FIVE YEAR HYDROCARBONS PLAN 2017-2021

1. Area to be tendered: grows by 2 percent, compared to the previous round. It goes from 235,000km2 to more than 239,000km2. 2. Prospective resources: increased by 10 percent, from 38.884 billion to 42.681 billion boe, distributed across all the oil basins of our country. 3. Block size: is now standardized by project type. For deepwater, the area is 1,000km2, 400km2 for shallow water, 300km2 for conventional onshore areas and 200km2 for unconventional onshore areas. 4. Nominations: All oil areas will be open to industry nominations. To facilitate the nomination of areas, the Hydrocarbons Undersecretary developed an interactive map, which will allow companies to identify and propose the areas that are of interest to them. The map will be available to interested parties during the predefined deadlines for each tender

of total production. Due to our urgency in reversing the

that the current regulatory framework allows to enhance

decline in production, tenders have focused on areas

the development of the assignments it was granted in

where we know there is better potential for success. This

Round Zero. It can now compete, in equal conditions and

is why we follow the logical path to tackling this problem

on an equal footing, with other private companies and oil

through seeking to increase reserves with exploration

Majors entering Mexico for the oil areas that the state is

activities.

putting up for auction.

There may now be exploration in areas with more data

Q: What will be done to accelerate the migration of

available just as there may be exploration that involves

COPFs and CIEPs and what role should this play in

greater risks due to lack of information that would reduce

reversing Mexicoâ&#x20AC;&#x2122;s declining oil production?

those risks. However, it is important to note that this does

A: The migration of the existing exploration and production

not mean that there is no value in other areas but until

service contracts: Financed Public Work Contracts

now we just could not carry out the proper evaluations

(COPFs) and Integral Exploration and Production

with the data we had at hand.

Contracts (CIEPs) to the new modalities of Hydrocarbons Exploration and Production Contracts definitely allows

However, the operations of the new companies in Mexico,

PEMEX to establish more profitable alliances. Moreover,

the new information obtained by exploration companies

they allow PEMEX to establish alliances with those players

and all the new eyes looking at Mexico allow us to glimpse

who normally only act as contractors, allowing it to share

new horizons. This new environment will compel us to turn

risks, technology, skills and knowledge.

to those areas in which new potential is detected based on new information and naturally to take another step: to

The migration of these contracts has entered a stage of

expand exploration into frontier areas.

greater mutual understanding between PEMEX and its contractors. In addition, a number of operational issues

Q: What is the Ministry of Energyâ&#x20AC;&#x2122;s perspective on the

have been addressed that were not originally considered

progress made by PEMEX in its transformation into a

because PEMEX controlled all processes from exploration

productive enterprise of the state?

to commercialization, a situation that is very different

A: The new legal nature that the Energy Reform granted

under the new contractual scheme with a new partner.

to PEMEX laid the foundations of a more modern, competitive and a stronger company. Now, the NOC is

These alliances are focused on allowing PEMEX to

free to choose the business priorities that its directors

counteract the natural decline in field production

feel would have the potential to generate the greatest

and at the same time accelerate the pace of reserves

economic value and to partner with other companies to

replacement. All these contracts are in known, developed

share geological risks, attract capital, human resources

and in some cases even mature areas, where raising the

and state-of-the-art technology to consolidate itself

levels of production and reserves replacement can take

in the international market. PEMEX is efficiently taking

place over a period of months, which is why it is crucial

advantage of all the investment tools and opportunities

to complete these migrations.

EXPERT OPINION

A STEADY HAND ON THE TILLER JOSÉ ANTONIO GONZÁLEZ ANAYA CEO of PEMEX

José Antonio González Anaya is a Harvard graduate who has

the Xanab fields, this has led to a combined

worked in a number of high-profile public and private sector

increase in production of more than 156,000

positions. Before becoming Director General of PEMEX, he was

barrels, excluding Cantarell.

Deputy Minister of Income at the Ministry of Finance and Public Credit and Director General of the Mexican Institute of Social

The Energy Reform is advancing and PEMEX

Security (IMSS) from 2005 to 2016.

is getting stronger.

The key to PEMEX’s transformation is in the implementation

PEMEX’S BUSINESS PLAN

of the 2017-2021 Business Plan, which clearly outlines

The Business Plan, presented at the end of 2016, is a

profitability as the guiding principle of the company across

realistic plan focused on profitability. This plan establishes

all its business lines. This plan meets the dual mandate that

the actions required to enable the company to achieve

President Enrique Peña Nieto gave me by appointing me

financial strength, as well as to stabilize production and

CEO: accelerate the implementation of Energy Reform and

subsequently increase it. It is a plan that includes, as

improve the finances of the company.

a priority, the establishment of alliances and strategic partnerships across the value chain as a mechanism to

In 2016, a great effort was made to implement austerity

increase investments, increase operational efficiency and

and discipline and operational adjustments were made to

share financial and technological risks.

take advantage of the alliances that, thanks to the Energy Reform, we can now participate in. The results are beginning

This plan is already underway and its first results have already

to be seen and today PEMEX has stable — improvable but

been very successful. Last March PEMEX formalized its

stable — finances.

partnership agreements with the US company Chevron and the Japanese company INPEX, with which we jointly won the

Recently, rating agency Moody’s acknowledged the

CNH tender for the exploration of deepwater Block 3 North.

company's financial efforts and its track record in the past

We also signed the contract with Australia’s BHP Billiton,

year and awarded PEMEX an overall PAA3 foreign currency

winner of the first farm-out in PEMEX history. Through this

credit rating. In addition, PEMEX recorded a positive net

partnership, the Trion block will be explored and developed in

financial result for two consecutive quarters, something that

the Cinturón Plegado Perdido in the ultra-deepwaters of the

had not been achieved in six years. This is mainly due to

Gulf of Mexico. These are the first of many partnerships with

the recovery of crude oil prices, the recognition of logistics

which PEMEX will consolidate itself as a major oil company.

costs in the price formula for gasoline and diesel and the decrease in the company’s operating costs.

Three other farm-outs are scheduled for the coming months: in shallow waters, the Ayín and Batsil fields; the Ogarrio

With respect to crude oil production, PEMEX will reach

and Cárdenas-Mora onshore fields; and in deepwater,

its annual target. During the first few months of the

Maximino and Nobilis, also located in the Perdido area.

year, a considerable recovery was achieved in the crude

Recently, PEMEX also completed the first migration to

oil process compared to the end of 2016. Thanks to the

the new production contracts for the Ek Balam field in

strengthening of exploration and extraction processes,

the Campeche Sound. This new scheme will allow us to

it has been possible to maintain an average of around 2

generate greater economic value for the project.

million b/d. Ku-Maloob-Zaap has maintained its production volume of above 860,000b/d, helping to counteract the

MIDSTREAM, DOWNSTREAM AND DISTRIBUTION

natural decline of other fields. Together with the evolution

In terms of refining, PEMEX has initiated the forming of

of assets such as the Litoral de Tabasco, Tsimin-Xux and

alliances in order to increase the profitability of operations.

At the beginning of this year the first partnership for the

certainly constituted an important step in the creation of

supply of hydrogen to the Tula refinery with the French

an efficient and competitive market to efficiently satisfy

company Air Liquide was finalized. This will reduce the

national demand, to the benefit of consumers. Over the next

number of unscheduled shutdowns, as well as increase the

few months, the next steps will be taken to cover the rest of

production of gasoline and generate savings of more than

the country. In addition to promoting the investment of new

30 percent in this service. Air Liquide also plans to invest in

participants in the sector, this scheme will allow PEMEX to

the construction of a second hydrogen plant at the refinery

generate resources for its growth.

in order to meet the total demand from the expansion at the Tula refinery. The plant’s construction is expected to be

FUTURE OUTLOOK

completed by the end of 2019.

In its almost 80 years of activity, PEMEX has accumulated knowledge and experience. It is currently the eighth largest

As part of the efforts to allocate more resources to the central

oil producer in the world and a leader in shallow waters. The

refining processes, we are also forming alliances for the supply

Energy Reform passed by President Enrique Peña Nieto

of auxiliary services and the reconfiguration of the Salina

in 2013 imposed on PEMEX the challenge of transforming

Cruz and Salamanca refineries in Oaxaca and Guanajuato,

itself into a productive state enterprise. In the period that

respectively. The objective is that PEMEX focuses on the

I have been leading the company, since February 2016, I

primary activities that allow it to generate more resources.

have verified the capabilities of our workers to drive the required changes to face the complex challenges of the

In terms of logistics and complying with the norm established

new international environment.

by CRE, PEMEX is carving out its position as a pillar of the new energy environment. In May, the first phase of the Open

The international industry is aware of PEMEX’s new way of

Season was carried out, whereby PEMEX allocated storage

operating and there is a considerable interest in establishing

and pipeline capacity for the states of Baja California and

alliances with us. Mexico and, specifically, PEMEX, represent

Sonora. One hundred percent of the capacity offered was

important investment opportunities across various business

assigned and the winner was the US company Tesoro. The

lines in the hydrocarbons sector. PEMEX is the strategic

interest shown by 22 companies registered in the auction

partner with which to invest in Mexico. I am sure that it will

confirms the confidence of the private sector in both these

continue to be a pillar of the national industry and the flagship

processes, and in PEMEX and its operational capacity. It

company of the country.

VIEW FROM THE TOP

BUILDING ON ROUND ONE TO SPEED UP, SCALE UP JUAN CARLOS ZEPEDA President Commissioner of CNH

Q: How is CNH building on the results from the bidding

opened, and any company could apply to CNH for a permit

rounds and preparing to move forward?

to carry out a survey. In the past two years, US$2 billion has

A: At the moment CNH is right in the middle of the transition

already been spent on acquiring and reprocessing information

from innovation to standardization of its bidding rounds. We

through multiclient seismic studies. We received more than

finished Round One, which was successful, and now we want

50 permit requests and 34 projects have been developed.

to build upon that experience. From what we have learned

This is the biggest indicator of the oil industry’s progress in

through this round and from industry feedback, we believe

Mexico because it is the first step toward the development

we can speed up and scale up the investment process and

of new projects and shows long-term commitment. This was

make it more efficient. So far, CNH has put 55 contracts up

absolutely instrumental for the success of deepwater Round

for bidding and we have awarded 39. We have 49 companies

1.4. We started granting permits at the beginning of 2015

involved, including PEMEX, from 14 countries. CNH is now

but the results of these surveys were available a few months

working on 2017’s shallow-water Round 2.1, to be held on June

before the bidding in December. A wide-azimuth 3D survey

19, 2017. The blocks involved are not all in very shallow waters,

in the Salina Basin was critical for the competitiveness of

with some reaching more than 300m in depth, which requires

Round 1.4.

submersible rigs rather than jackups. There is a lot of interest, with 27 companies already signed up. On July 12 we will hold

Q: What has been learned through Round One regarding the

two onshore bidding rounds and we are also running three

royalty rate and investment plan balance in bids?

farm-outs for PEMEX, one in shallow water and two onshore.

A: It is the Ministry of Finance’s responsibility to define the

PEMEX has already announced another deepwater farm-out,

weighting given to royalty rates and proposed workplan.

which we will also begin working on.

Through the four stages of Round One, the Ministry of Finance has tipped the weight towards weight commitment

Q: What role did multiclient seismic studies play in the

and away from royalties. That was a very smart move because

success of Round One?

the biddings are not for a fixed object but for different future

A: CNH, the Ministry of Finance and the Ministry of Energy

projects. A company may bid a low royalty rate so it can

were on a learning curve through Round One and the industry

develop a huge project, while another could bid a high royalty

itself also developed. One of the key success factors has

rate and just take advantage of the most profitable part of

been the development of the information industry, or the

the field. As the government arm responsible for the state’s

G&G industry. Before any company can decide to bid, they

fields, we want them to be developed fully and to maximize

require information, as in any business project. The oil and gas

the recovery factor. We do not only want the maximum

industry relies especially heavily on technical information in

royalty possible but also the biggest projects. Finding the

the decision-making process. The reform did not just open

correct weighting between these two variables is an ongoing

the market for oil and gas companies but also for information

process but we are heading in the right direction. In Round 1.4

G&G companies. Before that, PEMEX was the only company

more emphasis was on the number of proposed exploration

legally allowed to run seismic surveys in Mexico. More than

wells. The result was successful, ending with four promised

half of the macrobasin of the Gulf of Mexico was closed to

deepwater exploration wells in addition to the Trion farm-out.

the world for more than eight decades. Suddenly, it was Q: What is the industry’s main suggestion for increasing the competitiveness of the bidding rounds? The National Hydrocarbons Commission (CNH) was set up as

A: Through different conferences, seminars and panels, we

a result of the Energy Reform. Its duties include the handling,

have received industry feedback centered on one suggestion:

regulation and oversight of the oil and gas bidding rounds in

that CNH could and should scale-up the bidding process. This

Mexico

means that we should offer more rounds and especially include

more blocks in each round. Our goal now is to implement

Q: How will the standardization for prequalification impact

that advice, mainly through two elements. Firstly, we want to

companies interested in bidding on the licensing rounds?

increase the acreage we offer through the licensing rounds.

A: Another comment we received from the industry and from

Through Round One, CNH offered an acreage amounting

AMEXHI, was that CNH needs to make the prequalification

to 30,000km2. Brazil offered more than four times this in its

process more efficient. Compared to other countries, our

last bidding round, although it is a much larger country than

prequalification process is very thorough. We check financial

Mexico. Colombia, on the other hand, is much smaller and

strength, net worth, balance sheets, technical capabilities,

has less hydrocarbon potential than Mexico but it offered six

contracts held in other countries, safety and environment

times what Mexico did in its last round. Looking at the US,

standards and even ask for a special file to assess the lawful

comparing the Gulf of Mexico on both sides, it is offering more

origin of the resources they intend to invest in Mexico. Up

than nine times the amount we are.

to now, companies have gone through this prequalification process every time they wanted to bid. We are going to

Until 2016 the US divided its side of the Gulf of Mexico

untangle the prequalification from the bidding process itself. At

into three segments. One is closed to the industry but

any point in the year, companies will be able to approach CNH

the other two were open for bidding once a year each.

and request prequalification for one of the four categories:

Now, they have changed this by offering both areas twice

onshore conventional, onshore unconventional, shallow water

a year, doubling the opportunities for private companies.

and deepwater. After prequalifying, the companies will receive

This is a reaction to Mexico’s Energy Reform, due to the

a certification confirming they have certain capabilities, valid

competition it is creating south of the border. This is

for five years. They will only need to update CNH with their

another argument why Mexico should scale-up its bidding

financial statements and any other relevant updates.

processes. In Round Zero, CNH awarded PEMEX over 90 percent of Mexico’s 1P oil reserves but only 22 percent of

We are also standardizing the timing of the biddings. Until

the country’s prospective resources, the majority of which

now, the industry did not know when to expect from the

was kept by the state to be auctioned off through licensing

various licensing rounds. We want to be predictable, so

rounds. The prospective resources represent Mexico’s oil

together with the Ministry of Energy we have announced

and gas future but only 5 percent of the 78 percent the

that we will hold onshore conventional and shallow-water

state kept has been awarded to bidders. It is clear that we

bidding rounds in the first half of the year, with deepwater

can speed up the process.

and unconventionals in the second half.

VIEW FROM THE TOP

FOR REFORM TO WORK, EVERYONE MUST PLAY A ROLE HÉCTOR MOREIRA Commissioner at CNH

Q: What is the biggest challenge for the continued

close to reversing the Energy Reform by using regulatory

implementation of the Energy Reform?

frameworks against it. In general, all the different parties

A: The status quo has lasted for so long it is engraved

have different priorities for the Energy Reform, be it in

in people’s minds, making it extremely hard for them to

local content or investment requirements to name some

change. We need to make them understand that everyone

examples, but they all support it.

has a role to play in the new environment, otherwise it will not work. But some people are not prepared to take on those roles. One example is the discovery of oil. Before, when an owner discovered oil on his or her land it meant the state would use the land at a fixed price. Now it means the owner can negotiate directly with the companies that want to extract the oil. People are not aware of this change and neither are the judges who may be asked to adjudicate cases in which a conflict arises because negotiations fail. Even when talking to private companies they sometimes

The only way to reverse the Energy Reform is if two-thirds of both chambers of Congress and a majority of state legislatures vote in favor

still think the production will be sold directly to PEMEX but that is not the case. The opportunities are far greater.

Q: How would you measure the Energy Reform’s success?

To address this issue, CNH is taking advantage of every

A: The Energy Reform had three main objectives: to attract

opportunity it finds to talk about the Energy Reform and

investment, to attract technology and to create a national

the new rules, conditions and opportunities it brings. It will

industry. With Round One we have attracted much more

take a lot of work and some time to have a proper system

investment than PEMEX could ever secure on its own

running but it will work out.

and allowed for the use of state-of-the-art technology on Mexican soil. In this regard, we can consider Round One a

Q: Do you think a new administration taking office after

success. As for the creation of a national industry, we have

next year's elections could stall or even reverse the reform?

seen the emergence of 28 different Mexican companies,

A: Mexico is a nation with very strong institutions.

which is already a small success. Major success will be

That said, the Energy Reform is now entrenched in the

accomplished by some of those companies when they move

constitution and the only possible way to reverse it is if

to the big leagues and compete against major international

two-thirds of both chambers of Congress and a majority

companies. For that to happen we need time, and a number

of state legislatures vote in favor of doing so. The biggest

of companies will undoubtedly fail along the way.

harm a new administration could inflict would be to make it harder for industry players to follow the regulations.

One of the big problems the Energy Reform is facing is due

Even in such a case, the reform could not be withdrawn.

to the mishandling of long and short-term expectations.

Because of the huge destabilizing impact such a move

Results such as energy prices and jobs creation cannot be

would have on the country, I do not see a possible

measured on a daily basis but must take into consideration

scenario in which a new administration could even get

periods of up to 10 years. If these factors are considered when measuring the success of Round One and the Energy Reform, then the results would be far from good but doing

The National Hydrocarbons Commission (CNH) was set up as

so would also be highly irresponsible. Success must be

a result of the Energy Reform. Its duties include the handling,

measured in proper and objective ways, with short-term

regulation and oversight of the oil and gas bidding rounds in

actions that have long-term implications. When viewed this

Mexico

way, the Energy Reform can be considered a success.

VIEW FROM THE TOP

CONSOLIDATING MEXICOâ&#x20AC;&#x2122;S SAFETY REGULATOR CARLOS DE REGULES Executive Director of ASEA

Q: ASEA is 2 years old and fully up and running. What have

In the past two years we have published close to 30 different

been the milestones of the regulatorâ&#x20AC;&#x2122;s development?

technical regulations that are risk-based and nonprescriptive.

A: Two years ago we were given the challenge of building

At the end of 2016 we published all the regulations for

and designing a new regulator from scratch. We started

upstream operations, including deepwater in the Gulf of

out by defining how to cope with the massive mandate

Mexico, which allowed for an active participation in Round

of regulating, authorizing and supervising all matters

1.4. The rules, mainly inspired by international best practices,

concerning safety and environmental protection for the

were understood and accepted by the market. We have also

whole hydrocarbon value chain. We formed a strong

made good progress concerning risk-based inspections.

philosophy and well-defined mission to guide our decisions, which involved guaranteeing individual safety and

Q: What are the priority areas in for the oil and gas industry

environmental integrity while at the same time providing the

in terms of safety?

industry with long-term certainty about the rules and their

A: Offshore and refineries are the priority areas. We have

enforcement. Around that mission, we designed a model to

deployed aggressive mitigation programs to address the

manage risk. In this industry, risk must be managed to avoid

main risks associated with those operations. After analyzing

accidents and control pollution.

those risks, we came to the conclusion that our current model is working well and effectively. Close to 15,000

We designed this model around five different risk-

projects have crossed our desks and I am glad to share

management pillars. The first was preemptive: the obligation

that none are currently delayed. We successfully avoided

of every operator to work under safety and environmental

this by adopting our initial mission to guarantee safety and

management systems. The second was the obligation

environmental integrity but at the same time being aware

for everybody to have sufficient financial guarantees to

that our role is to provide certainty about the rules. The proof

cope with the consequences of potential accidents. Third,

of our success lies in the almost US$70 billion the industry

we addressed the issuing of nonprescriptive technical

has already committed to Mexico.

regulations that would target goals and performance. The fourth pillar of our model was risk-based inspection. This has

Q: How did ASEA manage the processing of so many

to do with recognizing that although it would be possible

permits?

to verify every piece of the country's 60,000km of pipeline

A: By mid-2016 the Ministry of Finance authorized an increase

we needed to be strategic and actually go where the risks

of 150 people to expand our execution capacity. That was a

are. The final element was a philosophy around enforcement

relief but still not enough. Manpower is only part of the story

aimed at incentivizing better performance as opposed to

as new systems, databases and regulations are also important.

putting people in jail.

A relevant example is how we improved turnaround times for approving gas stations. In April 2016, 40 percent of gas station

Q: What is your proudest achievement of the past two years?

permits were delayed in our system and the environmental

A: One thing I am particularly proud of is the fact that

assessment took 120 days to complete. Now, after we put

we have managed to stay focused on our original risk-

together a brief report regarding the environmental impact

management mission. One of the main milestones was

of a gas station, it takes only 10-20 days to process.

the issuing of our environmental and safety management system regulations and the issuing of regulations concerning financial guarantees. Everyone is starting to

ASEA, Mexicoâ&#x20AC;&#x2122;s National Industrial Safety and Environmental

comply with these rules, which are two cornerstones of our

Protection Agency for the hydrocarbons industry, is in charge

risk-management model. The third is technical regulation

of disseminating regulations and enforcing compliance of

oriented to performance.

public and private-sector companies involved in the industry

VIEW FROM THE TOP

MANAGING THE FLOW OF FUNDS MAURICIO HERRERA Executive and Administrative Coordinator of the Mexican Petroleum Fund (FMP)

Q: How has the FMP’s relationship with authorities and

A: From the start of its operation, the Fund established

regulators evolved in the last year?

three clear objectives: administer the oil income and make

A: It has been excellent. The Energy Reform is something that

the corresponding transfers, handle the financial dealings

happened very fast as the Fund started operations in 2015

of the oil contracts and administer the long-term reserve.

and we already have a full round of oil bidding processes

The latter will take some time to consolidate because with

under our belt. CNH is about to launch Round Two. Because

oil prices at current levels it is difficult to foresee annual

of the speed at which this happened some elements in the

revenues arising from hydrocarbons production activities

law were not very clear or only partially defined.

to surpass the 4.7 percent of GDP threshold that has been set before we can begin accumulating a long-term reserve.

Today, the responsibilities have been assigned to each

Therefore, our efforts have focused on the first two.

authority and coordination is good. This year one of the main elements of the reform is the creation of the new

Immediately after we started operations back in January

market agent for the state and this is bringing the Ministry

2015, we concentrated our efforts on preparing the

of Finance, Ministry of Energy, CNH and FMP together

infrastructure required to receive the oil income from

to make this a reality. Before, PEMEX’s PEP unit handled

PEMEX and transfer it to the different stabilization funds

crude oil marketing duties in Mexico and its PMI Comercio

and the Ministry of Finance.

Internacional unit did it abroad. Now the law allows for one or several companies taking over these duties for all

Another project that was fundamental at the beginning was

hydrocarbons and that is a challenge that demands great

the design and implementation of our IT system, the System

coordination.

for the Payments of Assignments and Contracts (SIPAC), which had to be ready before the contracts came into

Q: What will be FMP’s role in this new state marketer?

force in August and allows us to receive all the information

A: Legally FMP is responsible for requesting that CNH hire

in the contract. In this sense, we have been able to set

the market agent from 2018 through a bidding process.

effective short-term objectives to comply with our two

PMI will act as the market agent throughout 2017. From

main functions. In the near term, we will also be in charge

2018 onward the market agent will be the winner of the

of receiving the funds of the state market agent, including

bidding process that CNH will launch. The most important

the VAT, which has to be transferred to the Mexican Tax

area where the Fund and its technical committee will be

Authorities (SAT).

participating is in establishing the maximum price the market agent can charge for its services. It has to send an

Q: How are you ensuring your stakeholders that operations

opinion for CNH to consider, including pricing schemes like

are transparent?

a fixed quota or a percentage of the sale. This is a work in

A: By law, the Fund has to observe strict transparency

progress right now.

obligations regarding the information about production of the new E&P contracts. In particular, the Fund is obliged

Q: What has been the Fund’s strategy to consolidate its

to publish the volumes produced in each contractual area,

operations in such a short time?

as well as the costs, expenses and investments incurred by the contractor as part of its operations. The Fund receives and processes this information through SIPAC manages

and

and later publishes it on its website. In this way, even if

exploration

and

a third party would like to reproduce the Fund’s figures

production assignments and contracts. The Fund also manages

and calculations it could do so through the information

the financial aspects of such contracts

we make available.

The

Mexican

distributes

Petroleum

revenues

Fund

derived

receives,

from

oil

making this information and costs publicly available has to do with another important objective of the reform, which is generating increased competitivity in the Mexican market. With more operators and participants there is a need for

Stabilization Funds

Resources received in 2016 by the FMP

Transferred to

Transparency is not an end in itself because a large part of

MX$308 billion equivalent to 1.6 percent* of GDP

Sectorial Funds Resources for the oversight of oil income Federal Budget

everyone to guarantee they are operating to the highest and most efficient industry standards. The public has to know

The majority of the resources came from PEMEX

that companies are not generating inefficiencies or incurring costs for the state above the international standards. Specialist will be able to see the cost of drilling a well in Mexico and compare it to similar operations in other parts of the world. Q: How is the FMP structuring its collections mechanisms? A: Ninety percent of the Fund’s income is generated from PEMEX assignments, with the remaining 10 percent coming from the new E&P contracts. Although the share of income from contracts is still small they represent the largest share of workload for the Fund because we are responsible for the administration of the financial aspect of each contract,

In 2017** accumulated transfers to the Treasury reached

MX$122.2 billion

while for PEMEX’s assignments this is not the case. The This was from contributions from

complexity arises because the contracts from a particular bidding process contain a specific economic model, which differs for each bid. There has been a steep learning curve for both the Mexican

465

PEMEX assignments

contracts with private companies

Petroleum Fund and the contractors and with time there has been an improved understanding of the calculation mechanics and the different economic models. This has been complex because each of CNH’s bidding rounds

*Not enough to accumulate a long term savings reserve **From Jan. 1 to Mar. 31, 2017

has introduced tweaks to the contract model. There are adjustment mechanisms, for example, to change royalty

Q: How will the recent recovery of oil prices impact the

payments in view of the price of oil and these terms change

eventual creation of the long-term savings fund?

from contract to contract. On our side, we have to make

A: The 4.7 percent of GDP figure was based on 2013

sure that after every round and with every contract we

numbers. In that year, PEMEX contributed 4.7 percent

incorporate these new economic models into our system.

of GDP to the government's accounts, with a production

The contractors themselves are in charge of making the

level of around 2.4 million b/d at a price of US$100/b.

calculations for their own payments, our system acts as a

If production levels had remained stable, which they

verification tool in case of discrepancies.

did not, we would have to see a price around or above US$100/b before payments to the long-term savings

Q: What effect does the higher relevance of royalty

fund would be made because the country’s GDP has

payments over the additional investment factor have on

increased.

the Fund’s operation? A: The operation of the Fund has not been impacted by

It is important to remember that this is a long-term project

recent changes on bidding design. For instance, in the

and the idea is that the Fund becomes a reality as the

Trion bidding the upfront payment played an important

industry develops and consolidates. Deepwater projects

role in determining the winning bid but once those

will start production eight years from now and as the

resources reached the Fund they basically followed the

country’s production level increases, it will eventually

same treatment as those received from royalties and were

allow us to accumulate funds. This is a project to give

distributed to the stabilization funds and the Federal

Mexico a stabilization fund for its budget so government

Treasury. Upfront payments or royalties only affect the

expenses can be covered in a responsible way. The

timing of the resources’ entry into the FMP, since for

actual investment decisions regarding the reserve are

projects like Trion royalty payments will not start until eight

our responsibility following the technical committee’s

to 10 years from now.

guidelines.

VIEW FROM THE TOP

A MEGAPHONE FOR THE INDUSTRY RAYMUNDO PIÑONES Director of AMEXHI

Q: How did AMEXHI support the development of Round One?

companies find that there is an administrative overload and

A: AMEXHI is an association of 49 companies, each of

we are working together with the government and National

which played a role in Round One, either as operators or

Productivity Committee (CNP) on a set of tools that will

nonoperators. We have the benefit of being supported

make the process a lot easier and faster.

by around 80 specialists who work for AMEXHI’s member companies. The association interacts with almost every

Q: What main advantage does AMEXHI offer its members?

stakeholder in the oil and gas industry as well as with

A: Our biggest strength is that we can make the concern of

the government through our consultancy councils,

a group of companies the concern of the industry. We can

commenting on every single piece of regulation and

act as a megaphone for our members. They can get further

contract that gets published. Most civil associations, the

involved in our activities by ensuring that their workforce

government and AMEXHI are on the same page regarding

takes part in our committees. All committees are open

the way forward and because of that, we can come to

to the member companies and the only requirement

decisions that everyone is comfortable with. If we fail

is that participants must be employees of the member

to do so, we push for changes that benefit the whole

companies. These committees ensure that the companies’

industry.

workforce engages in useful and enriching conversations that deal with their challenges and expectations. We want

Q: How does AMEXHI hope to influence the bidding

AMEXHI to become an internal channel through which

process in Round Two?

companies can share vital information that will help

A: The regulations are strong enough to manage most of

them grow. Having expertise from dozens of companies

the needs of the industry and government but when the

operating in about 90 countries worldwide makes our

government created Round One’s regulations and invited

platform valuable for any member. We are encouraging

everyone to the table to discuss them, there were plenty of

them to use our channels to share their best practices

flaws and gaps that nobody saw. Now that the regulations

and experiences.

are being implemented companies are starting to find both obvious and not so obvious problems. We have to

Q: What are AMEXHI's top goals for the coming year?

keep fighting to ensure the regulations are continuously

A: We want Round Two to be a success and to have the

improving, otherwise we run the risk of having a rigid

concerns of our members considered in the shaping

platform that companies find hard to deal with. Going into

of Round Three. On the regulatory side we also expect

victory mode would be dangerous for everyone.

to have influence on regulation, making it less of an administrative burden and allowing for a better and more

The social licenses required to begin operations are a

efficient connection between government, companies and

concern. Companies that are going to operate fields are

society.

embarking on long-lasting relationships with communities, up to 50 years, so it is necessary to be engaged with both

We want our members to know AMEXHI is a valuable tool for

the local communities and the government. Another

them to get their voices heard. We have one very big ticket,

concern is the administrative cost of the contracts. Most

the National Committee for Competitiveness, a presidential initiative that is handled by the productivity office of the Ministry of Finance. There is also an initiative to create an

Companies

electronic portal for regulatory compliance. It is a massive

(AMEXHI) is a civil, not-for-profit association whose members

undertaking involving around 13 government entities and the

span the entire value chain. It was founded in February 2015

industry and the idea is to reduce the cost of compliance. The

and has 49 members

intent is to have a pilot for the end of this year.

The

Mexican

Association

Hydrocarbon

VIEW FROM THE TOP

ALLIANCES KEY TO MARKET SUCCESS ERNESTO MARCOS Founding Partner at Marcos y Asociados

Q: If you could go back to your role as CFO of PEMEX, what

government’s take and the investment amount promised

is the first thing you would do?

by each bidder through the work program. For AMESPAC’s

A: The first action would be to implement an appropriate

group of service providers, and especially in this “lower

financial strategy to reflect the NOC’s new identity

for longer” price environment, it would be beneficial to

and concentrate on upstream as the company’s main

promote larger investments in the work programs rather

business focus. In the decade before 2015, the royalties

than focus on royalty rates because that would encourage

paid by PEMEX represented 33.9 percent of the federal

companies to commence exploration and drilling activities

government’s total income. In 2012 they represented

sooner. By maximizing the government’s take, the

40 percent. This aggressive fiscal regime prevented

government is sacrificing the initial investment companies

PEMEX from investing. This is especially obvious today in

will offer in the round. When oil prices are depressed, the

Mexico’s midstream sector, which is said to suffer from an

profitability of certain fields is inevitably affected. What is

underinvestment of about US$14 billion.

needed is more commitment and more investment.

Q: What does PEMEX need to do to reverse its production

Q: How can midstream and downstream companies

decline?

cooperate to improve their sector’s development?

A: The only solution for PEMEX to reverse its 13-year

A: Gasoline and diesel imports are being liberalized in

production decline is to seize all the opportunities the

Mexico so Mexican companies supporting PEMEX on fuel

Energy Reform offers. This involves seeking out private

distribution, transport and storage are trying to operate

investment and productive partnerships. While the Trion

on their own. Traders and banks have a lot of interest in

farm-out was a great success, PEMEX has failed to multiply

this process and they are the ones who can finance the

and accelerate the farm-out of other fields. The key lies in

importation of these products. The problem is a lack of

the quantity of farm-outs but PEMEX has not managed

communication between potential investors and service

to establish the necessary parameters and mechanics to

companies. The Mexican Energy Council (COMENER), which

facilitate this. PEMEX needs greater pressure to speed up

brings together around 20 associations and chambers,

its farm-out ambitions.

including chambers of maritime and land transport, distributors, the Association of Gas Station Owners

Q: What is your view of concerns that royalty rates are

(Onexpo), haulers and many more, is a knowledge-sharing

prioritized over work plan increases in selecting winners

initiative to foster interaction between traders, refiners and

of the licensing rounds?

distributors and to encourage financial alliances. Some

A: First, CNH and the Ministry of Energy’s openness to

companies may not understand the long-term financial

listening to the concerns of the industry in the drafting

options for expanding their business, especially taking into

of the contracts for each bidding round is to be praised.

account the daily price adjustments they will have to deal

A comparison of the contracts from Round 1.1 with those

with because of the liberalization. Gas station owners can

from Round 1.4 reveals fundamental changes that reflect

get together to apply for financial backing that they may

proposals made by the industry. The industry was not

not be able to access alone, for example. It is a mutually

only able to propose modifications for contracts but

beneficial process, which is creating a whole new market.

also had an opportunity to nominate which fields will be auctioned and the deadlines of each bidding round and their prequalification periods.

Marcos y Asociados is a financial and business consultancy firm specializing in Mexican energy projects. The company offers

The only topic to be debated is the imbalance between

its clients a complete assessment of potential opportunities to

the two variables of the bidding rounds, namely the

enter and participate in the market

VIEW FROM THE TOP

CREATE INDEPENDENT BODY TO MONITOR OIL AND GAS DAVID ENRÍQUEZ Senior Partner at Goodrich, Riquelme y Asociados

Q: How might corruption in Mexico and its institutions

viewpoint, evaluating the activity of the authorities and their

impact the implementation of the Energy Reform?

relationship with operators. Focusing on the private players

A: Anything related to governance and corruption in

as much as the governmental bodies, it would evaluate

Mexico must be dissected on three levels: federal, state

the social, environmental, governmental and operational

and municipal. On the federal level the roles of authorities

aspects of petroleum activity. Consulting bodies already

like CNH, CRE and the Ministry of Energy are critical and

exist but they deal with a specific aspect of the industry

effective. Corruption is not relevant federally because

rather than all of it, so their perspective is limited to their

of the high level of transparency shown throughout the

own scope of specialization.

processes so far. None of our clients, which are mostly IOCs and first-class independents, have had any complaints

Q: What role have Mexican law firms played in shaping new

related to corruption contrary to the Fair Credit Billing

oil and gas regulations?

Act (FCBA).

A: We are happy with the role Goodrich, Riquelme y Asociados has had in shaping the Energy Reform. We have

State and municipal factors come into play more when

been involved on a regulatory and legislative level and in the

implementing the contracts signed throughout the

contractual projects. A clear example of our participation

licensing rounds and specifically when obtaining production

was during the Trion farm-out, throughout which we made

permits. Concerns center on land access and interaction

presentations and had meetings with relevant industry

with communities, especially when facing corruption and

and governmental players. By voicing the concerns of the

hostility from community leaders, which could include

industry, we influenced the Trion contract, which took into

demanding a certain percentage of oil profits.

account industry worries and had a more improved risk balance. This process showed that the government did not

It is important that companies respect the rules set out by

cover its ears, they listened.

the International Labor Organization (ILO). Past projects, such as an aqueduct in Sonora, have been canceled

Q: What are the consequences of partnering with PEMEX

because they did not comply with social and environmental

for other operators?

regulations.

A: There is a lot of interest in partnering with PEMEX, not just through farm-outs but in any capacity. As well as

Q: What developments are required regarding the roles of

being completely free to form alliances, the NOC offers

the new regulatory bodies?

valuable knowledge of Mexico’s oil and gas industry and its

A: CNH, CRE and ASEA have varying roles. On one hand,

infrastructure. Despite the interest, we believe that PEMEX

they are regulators but CNH is also the counterpart of every

has overestimated its protagonist role in Mexico on certain

new contract, since it signs and processes them. This dual-

occasions. When forming partnerships, the key question

status calls for an independent body to monitor the oil

is what each company brings to the table. It could be

and gas industry, as COFECE does for competitiveness in

technology or money but in a joint venture a company

Mexico. This nonprofit organization would observe what

must have something to offer to gain leverage. When a

is happening in the oil and gas industry from a third-party

company does not offer anything tangible, as is the case with PEMEX, it creates a strange negotiating dynamic.

Goodrich, Riquelme y Asociados is a global law firm providing

Another issue involves miscommunication and misalignment

legal services tailored to the business community worldwide.

of priorities between PEMEX’s top and middle management.

Its clients are medium-size, as well as leading global companies

Top executives at the NOC have an open mind and positive

of numerous nationalities and economic sectors

attitude toward creating associations through farm-outs

and other models. But this sentiment does not sufficiently

to PEMEX’s financial disorder. But the success of a farm-out

permeate middle management.

is not guaranteed simply because it is awarded. Instead, the winning party must be evaluated and any matters of dispute

Q: What were the implications of Round Zero, which saw

resolved. The cash calls initiative could solve many of the

PEMEX select fields without competition?

payment issues between PEMEX and its future partners

A: Round Zero was an expression of PEMEX’s problem

and Trion will be a test of this. The real results will be seen

but we believe that the origin lies in PEMEX’s leadership

after the joint venture materializes and we can analyze it

identity. A disconnect exists between the previous PEMEX,

in real time.

which was part of the government, and the new PEMEX, whose goal is to turn a financial profit like any other

Q: What legal themes will define the Mexican oil and gas

productive company. Higher management has a more

industry in 2017?

international outlook but this is not always translated to

A: We believe project implementation will color the legal

middle management. This disconnect is causing delays

discussion surrounding the Energy Reform in 2017. The

with the monetization of assets and projects, which are

year 2016 was defined by licensing rounds and secondary

stagnating due to internal blockages. The delays are not due

regulations but all of that is now completed. In 2017 we

to a lack of willingness or leadership in senior management

will see the materialization of work plans and discussion

but because their orders are not being implemented further

will center on drilling permits and social and environmental

down the line.

aspects such as land access and negotiation with communities.

A change in middle management’s mindset is urgent or PEMEX risks being unable to fully roll out its oil projects

A relevant legal consideration to take into account in the

and being legally forced to return the fields from Round

coming year is the subject of asymmetrical regulation. In

Zero to the government. In 2017 the first revision of

Mexico, we have the problematic combination of a liberalized

PEMEX’s activity in the fields it won will be carried out and

legal regime but an industry that is still dominated by one

revocation processes will be initiated for the ones where

player. To avoid the inequality between players putting the

no progress has been made. PEMEX is definitely making

brakes on progress, asymmetrical regulation is required.

an effort to counteract this but it hasn’t spread to middle management yet.

We need to see modified regulations that take into account the NOC’s continued dominance in the market. Small steps

Q: What are the potential effects on the market from the

are already being made when it comes to gas stations and

lack of a transitional tax provision for PEMEX?

pipelines to ensure a fair battleground and competition. If

A: The lack of a transitional fiscal regime for PEMEX is a

there is one player that should have a protagonist role

frequently criticized aspect of the reform, especially given

in the Energy Reform at this point, it is COFECE. We are

the orderly fashion with which the wider industry deals with

entering virgin territory when it comes to asymmetrical

finances. To counteract this, the farm-outs should have been

regulation and they need to maintain the conditionality of

processed much earlier, preferably immediately after the

PEMEX’s role until the new players have time to achieve a

conclusion of Round Zero. Farm-outs are indispensable due

level playing field.

VIEW FROM THE TOP

PEMEXâ&#x20AC;&#x2122;S PATH TO PROFITABILITY AND PARTNERSHIPS JORGE LEIS Partner and Lead of Oil and Gas Practice in the Americas for Bain & Company

Q: How must PEMEXâ&#x20AC;&#x2122;s strategy change to ensure its

(OBO) partner. Being an OBO partner does not mean

success as a competitive market player?

it will have limited influence; almost all of the IOCs and

A: PEMEX used to take on many projects for political reasons.

major independents use this model. Companies frequently

Now the government can help PEMEX become a successful

make a discovery but do not have the capital to develop

enterprise by not forcing it to continue with these unprofitable

it, forcing them to bring in partners or to convert the asset

projects. This will allow PEMEX to focus on learning and

into an OBO. The ability to develop an effective OBO

improving the capabilities that really do matter for the

model will allow PEMEX to not only take part in projects

company. At the moment PEMEX cannot produce more

that require capital investments beyond its means but

farm-outs that will allow it to get rid of its most unproductive,

to build important capabilities over time. But doing so

unprofitable areas because there is not an industrial backup

will require optimizing contractual terms and operating

for it to do so. In the US, when major companies hit a tipping

models to maximize learning and influence while not

point in which it is no longer economically viable to keep

interfering too much with the operating partner. To achieve

producing, they farm out or sell the producing assets to

this PEMEX must do more than just change the name of its

smaller companies. That is not possible in Mexico because

institutions. It ultimately must change its decision-making

there are no smaller companies. With the Energy Reform this

processes and reduce red tape. Doing so involves a cultural

will certainly be the environment one day.

change in an institution that has well over one hundred thousand employees.

Q: What challenges will the NOC face as it absorbs knowledge from its new partners?

Q: How are companies dealing with the current low-oil

A: We are not sure if PEMEX actually has the capacity to

price environment and how is this affecting the industry?

learn the lessons it needs from all the different partnerships

A: To deal with the prospect of a low-price environment

it wants to strike. Learning from a smaller number of

and heightened uncertainty, big oil companies have cut

partners would be beneficial because it requires less human

costs, postponed and canceled CAPEX and focused on

capital. Learning requires people and time to run audits,

intrinsically lower cost assets with shorter cycles, looking

exercise control and see how they have influenced the

at their portfolios and projects to find the truly intrinsic

cultural paradigm and the operational outcome, so having

value and where can their assets sit on the supply curve.

fewer people involved would make the process easier both

They are making decisions based on what is required to

for PEMEX and the IOCs. On the other hand, having multiple

achieve a positive mix of geographical locations and types

partners means that PEMEX can learn from a wider range

of hydrocarbons.

of companies while at the same time having access to more human and financial capital.

In the case of the Gulf of Mexico, offshore projects involve plenty of risk but each company weighs the risk

Q: What impact will first-time partnerships with IOCs have

differently and can invest if it believes the risk can be

on PEMEX?

mitigated. If prices go up to US$80/b, companies willing

A: PEMEX will have to look for guidance from its partners

to take on additional risk will generate great value but

and learn how to become an effective operated by others

they also have to take into account the possibility of it falling to US$45/b. The geology, a deep knowledge of the area and an opening market made Mexico attractive

Bain & Company is a global leader in management consulting.

for many international companies that were looking to

With local offices in Mexico City that have served all of North

enter or increase their exposure in the Gulf of Mexico

Latin America since 1996, Bain & Company has wide experience

and believed they could develop reserves at the low end

in all consulting and industrial areas

of the cost curve.

VIEW FROM THE TOP

UPSTREAM BUSINESS TRICKLES DOWN ALEJANDRA LEÓN Director of Latin America Upstream for IHS Markit

Q: How will advisers like IHS benefit from new companies

task to solve deep-rooted issues but a good start would be

entering the upstream and downstream markets?

to evaluate the company, project by project, and determine

A: We are very busy at the moment talking to new players.

which ones are profitable. This not only applies to E&P but

We are advising a lot of companies in both upstream and

also to refining, petrochemicals, transportation and trade.

downstream, trying to evaluate opportunities. Downstream is becoming a popular topic because there is a lot of

The Ministry of Finance’s decision in 2016 to inject money

uncertainty and it is usually a local market. Now that there

into PEMEX so it could pay suppliers was positive but not

are more players in the upstream sector, the interest in our

a definitive solution. It is a positive sign that PEMEX is

geological evaluation and project economics software has

cooperating with the government but we need to see that

increased. Our data services have been welcomed by new

the company is changing and the money will be put to good

players. We are also supporting the government, mostly via

use. It is a matter of how a business evaluates its portfolio

collaborative discussions to understand the international

and decides where to make changes. Trion’s farm-out is

market, new trends and very specific projects. IHS is one of

another good start because it means PEMEX is starting

the companies best positioned for this because we have the

to seize the opportunities resulting from the reform. But it

international experience, specialized people and a strong

is still a single project and we need to start seeing similar

presence in Mexico.

decisive actions. If we continue seeing business as usual, the company will not change no matter how much money

Q: What did the government, PEMEX and private

is injected into PEMEX.

companies learn from Round One and what could be improved?

Q: How could PEMEX benefit from drafting in a younger

A: The government needs to moderate its ambitions and

workforce with a fresh approach?

offer blocks according to the real capability and capacity of

A: There are still many experienced people at PEMEX so it

its institutions. Another point of improvement concerns the

needs to strike a balance between hiring a younger workforce

kind of information provided. Success is not measured by

and retaining experienced people. Corrupt people need to

how many blocks are awarded, nor by a high government

be removed from the company but corruption does not

stake. The success of each round will be seen in the long

depend on age. It is about finding the right people who work

term, when it becomes clear whether the companies are

ethically. You can start changing corrupt views by having

operating appropriately, making discoveries and generating

the right incentives for the right people. A labor policy that

value for the country. Awarding blocks is a good start but

really focuses on evaluation and recognizing good work is

now the challenge is to develop projects on schedule while

the kind of mentality that could reduce unethical practices

adhering to industrial safety standards and operating in an

at PEMEX. Something we criticize are union positions that

environmentally friendly way.

guarantee a job for life, because then there is no incentive to improve. If you look at the average salary for union workers,

Q: What will be PEMEX’s role in the development of the

it is not high but it has the allure of job security. Reforming

Energy Reform in the coming years?

labor policies is necessary and the setting of goals and good

A: This reform cannot be a success if PEMEX is not a strong

management are required to achieve it.

company. One of the motivations for the reform was to improve PEMEX and make it a successful company. The entire existing oil infrastructure in Mexico belongs to

IHS Markit is a world leader in critical information, analytics

PEMEX, so it is also important for new companies that

and expertise, forging solutions for the major industries

PEMEX is efficient and productive. They must cooperate

and markets that drive economies worldwide and offering a

with PEMEX and help it address concerns. It is not an easy

360-degree view of risk, oportunity and financial impact.

VIEW FROM THE TOP

EXPERIENCE A PLUS IN ‘ENERGY REVOLUTION’ RUBÉN CRUZ Partner, Head of Energy and Natural Resources at KPMG Mexico

Q: What role does KPMG play in the Mexican oil and gas

Nevertheless, the number of high-tech jobs performed

market, especially given the Energy Reform?

by expats is nothing compared to the massive capital

A: This is not just an Energy Reform but an Energy

infrastructure investments that these companies are

Revolution. Many companies, both national and

pouring into Mexican fields. Such investment will open up

international, are arriving in a very short period of time. We

opportunities for local companies in the area of platform

can offer our clients experience and knowledge due to our

services, which is not knowledge-intensive but requires

activities around the world and in Mexico. KPMG has been

experience in the region as well as a local workforce.

active with PEMEX for 11 years, so we know it inside and out. We are aware of all the challenges and opportunities it

Q: How can M&As fortify companies as they weather the

faces in its transition from state monopoly to independent

end of the crisis and why should they choose KPMG?

productive entity. Such a combination of knowledge and

A: M&A will take place mainly in upstream, with the

experience is hard to find in Mexico and we are happy to

companies entering the market. KPMG sees special

offer it as an added value to our clients.

potential for these relationships in the services area due to the newcomers’ lack of regional experience. Local

Q: Looking at the winners of Round 1.4, how is KPMG

companies are attractive acquisition targets because they

positioned to work with and help them?

have plenty of experience in servicing PEMEX and its

A: In the context of Round One, KPMG decided to follow

suppliers. These local companies have many opportunities

the strategy of providing services to CNH during the

but they also lack capital.

pre-qualification period, by certifying that the bidding companies complied with all its defined regulations. To

To avoid missing those opportunities, they could play

avoid any conflict of interest and due to CNH regulations,

both traditional and nontraditional debt strategies. Such

we could not provide any other service to the companies

strategies range from acquiring private equity to being

bidding in that round.

acquired in stages or using mezzanine debt to receive capital even if they have already used banking financial

Round 1.1 brought Sierra Oil & Gas, while Rounds 1.2 and

tools. Some local companies have a further challenge

1.3 brought enterprises like Pan American Energy and

because they are family businesses, which tend to lack a

PetroBAL. Since we are no longer working with PEMEX, we

proper structure, and will first need to employ corporate

can offer them our full range of services such as auditing,

strategy tools. KPMG does not see all of the previously

tax compliance, pricing transfer, expat management and

stated as problems but as opportunities that after being

booking, to name a few.

solved will allow local companies to grow.

Q: Regarding local content, what challenges and

Q: What are KPMG’s goals in Mexico and how is it preparing

opportunities do you detect in Mexico?

to achieve them?

A: For the cutting-edge and expertise-intensive areas to

A: KPMG has established a five-year goal of doubling its

be developed in Mexico, such as deepwater, most of the

global size while also doubling the revenue from energy

knowledge and people will have to come from abroad.

sector activities. KPMG has been working in this industry for several years in other regions and now Mexico has opened up an interesting opportunity to offer services

KPMG is one of the world’s largest consultancy firms,

to many new clients. We have worked with PEMEX for

specializing in legal, fiscal, tax and technology. It helps

over a decade and are now committed to acquiring and

companies with regulatory compliance, process optimization

investing in the right talent to serve the growing Mexican

and risk management, among others

energy ecosystem.

INSIGHT

ADDRESS UNDERINVESTMENT TO FOSTER COMPETITIVENESS EDUARDO LÓPEZ Executive Director Oil and Gas of EY

Bridging the transition between the old monopoly and the

fallen over 28 percent since a maximum of 1.3 million b/d in

new, open market created by the Energy Reform will bring

this century, registered in 2004.

a number of challenges and years of underinvestment will need to be addressed to foster a new, competitive

One instrument that could assist cash-strapped PEMEX in

market, says Eduardo López, EY Mexico’s Executive

creating new revenue streams is the Fibra E, a financial

Director Oil and Gas.

instrument designed to allow companies to monetize productive assets, similar to the Master Limited Partnerships

One stage of the solution, he says, will be the construction

(MLPs) of the US. Although Mexico’s NOC could find it an

of all the necessary infrastructure to support increased

uphill challenge to put a value on aging and depreciated

activity in the industry, especially in the distribution

infrastructure, several Fibra Es are expected to be launched.

of refined products. “The majority of distribution and transportation of refined products is done by truck in

López is cautiously optimistic about Mexico’s emerging

Mexico, which is the least efficient way,” López says, adding

deepwater industry cemented by the successful licensing

that the construction of pipelines is complex due to the

round in December 2016. “The Gulf of Mexico is one of the

country’s difficult topography. Despite CENAGAS’ and

last frontiers for deepwater explorers,” he says, “and the

PEMEX Logística’s open seasons providing the opportunity

success of Round 1.4 validates the fact that big players

for private firms to use the country’s existing infrastructure,

believe that.”

third-party storage and distribution infrastructure will be required in the future.

But it is not just about the success of the licensing rounds. Cementing a longer-term view of the industry remains

EY, López says, is there to help its clients as they take their

a challenge because the authorities chose to prioritize

first steps into the Mexican oil and gas industry. “Mexico

royalty rates over investment for the deepwater round.

is fiscally complex, so EY uses its knowledge of local

“The fact that companies won based on royalty rates

conditions to guide our clients.”

shows that the government is trying to maximize revenues. But revenues from the venture will only start to flow once

The country’s oil and gas industry is a critical component

the fields have been fully developed, which will be in 10

in EY’s global portfolio and the sector’s emergence from

years or more.”

its previously monopolistic structure presents a great opportunity. EY’s focus is now on helping clients cross the

According to the oil and gas expert, if CNH had demanded

challenging gap between the monopolistic model and the

higher investment amounts, companies would have been

emerging market-oriented version to take full advantage

forced to develop the fields more quickly to speed up

of all the opportunities stemming from the Energy Reform.

their ROI. After all, the government could conceivably renegotiate royalty rates later, following the lead of

Mexico’s infrastructure problems, López adds, are not limited

countries such as the UK.

to storage and distribution but stretch into the lack of investment in PEMEX’s six refineries. The Cadereyta, Madero,

One clear step forward for the Energy Reform was the Trion

Minatitlán, Salamanca, Salina Cruz and Tula refineries have

farm-out, López says. BHP Billiton is making a significant

fallen into disrepair and will remain in a “sorry state” unless

bet as it partners with PEMEX, a company still haunted by

PEMEX tackles head on their many operational problems

financial constraints and efficiency concerns. “It was a huge

and upgrades their configuration, López says. The refineries’

relief for PEMEX and for Mexico as a country,” he says, adding

crude oil processing output has dropped nearly 24 percent

that Mexico can look forward to a more buoyant energy

since 2013 to 933,062b/d by the end of 2016. It has also

sector and economy despite the roadblocks still ahead.

INSIGHT

TRANSFORMATION CONSULTANTS TAKE THE WIDE VIEW BERNARDO CARDONA 32

Partner – Energy and Resources Industry Leader at Deloitte Consulting Mexico

The changes brought about by the Energy Reform directly

shallow water and conventional onshore fields and seeking

impacted every aspect of Mexico’s oil and gas industry,

alliances to access the capital and technology needed for

both upstream through CNH’s revolutionary licensing

deepwater and unconventional field development, the

rounds and downstream with the competitive opening of

consultant expert says. Additional technology and capital

the distribution market. But even as the shift affects the

is also increasingly required for the continued exploitation

whole industry, different sectors are developing at different

of maturing fields such as Cantarell and Ku-Maloob-Zaap.

rates, says Bernardo Cardona, Partner and Energy and Resources Industry Leader at Deloitte Consulting Mexico.

The company’s approach to consultancy will be particularly

“There is a natural life cycle to the development of any

applicable to the downstream sector in the near future, as

market, including the embryonic, development, maturation

gas station owners get to grips with the implications of

and decline stage,” he says.

the transformation on their businesses. Rather than simply selling fuel at a set price as in the past, fuel station operators

Deloitte’s role in that development cycle focuses on

will have to learn vital new skills in price fluctuation and

offering objective, technical based opinions that its

management while providing a differential value proposition

clients and partners use in their own decision-making

to their customers if they want to remain competitive. On top

processes. The firm’s goal is to aid oil and gas companies

of that, Cardona predicts a complete transformation of the

to form “executable strategies” that translate into real

status of gas stations in Mexico. “Gas stations will no longer

transformation. “We roll up our sleeves and really get down

be primarily focused on buying fuel. As the market becomes

to the nitty-gritty to see what is going to work for our

competitive, they will turn into shopping centers and hubs for

clients in terms of strategy and execution,” Cardona adds.

social interaction.” It is this strategic implementation process that Deloitte can help with, drawing on its knowledge of other

Cardona highlights three key characteristics that define

markets where gasoline stations are already competitive hubs.

the progress of the Energy Reform: the creation of a competitive and open market, access to capital and

Mexico’s new oil and gas regulators bear the responsibility

technology and finally judicial and regulatory transparency

of assisting PEMEX and other new operators as they

to provide certainty to the market. Those three critical

begin developing work plans for the blocks won in Round

success factors have been best showcased in upstream,

One, Cardona continues. Praising the transparency and

Cardona says. “In upstream we are now dealing with solid

consolidation of CNH’s licensing round process, Cardona says

facts, strengthened by a series of historic milestones in the

the regulator’s next challenge is to manage and administrate

past year. They include the international participation in

the contracts resulting from the first four bids of Round

December 2016’s deepwater round, the appearance of new

One and to launch the next rounds. “CNH needs to keep the

Mexican operators like Sierra Oil & Gas and PEMEX’s farm-

contract administration process simple, to avoid creating

out on the Trion block with BHP Billiton.”

an administrative burden.” Its flexibility regarding the adaptation of the contracts was promising, he says, showing

Due to the relevance of upstream activity in terms of capital,

the regulator’s willingness to listen to market concerns.

technology and global reach, forming and implementing the correct strategy is extremely important, says Cardona.

The regulators have been busy drafting up new rulebooks and

“Upstream companies need to focus on their strategic

contractual terms to keep up with the swift implementation

portfolios, which means knowing their strengths and

of the Energy Reform, and in Cardona’s eyes, they have done

focusing on them, then forming partnerships to fill the

well so far. “ASEA released its environmental and safety

gaps where they lack expertise and hence share the risk.” In

regulations before the deepwater round, to give participants

PEMEX’s case, this translates into focusing on its capacity in

the clearest view of regulations before placing bids.”

VIEW FROM THE TOP

BRIDGING THE ACADEMIC AND PRIVATE DIVIDE OSCAR GONZÁLEZ President of ARHIP

Q: What has been ARHIP’s primary goal during the last year?

the automotive sector, focusing on developing automotive

A: ARHIP is building links with educational institutions as

technicians with the support of companies that finance and

a member of and adviser to the committee developing the

create facilities for the students. This is a good time for the

human resources strategic plan for Tamaulipas, Tabasco

oil and gas sector to do the same.

and Campeche. We have also held administrative and information sessions at different educational institutions

Q: What does ARHIP offer new members?

such as Tabasco Technological University (UTT),

A: We offer our members an immediate benefit by

Autonomous University of Carmen (UNACAR) in Ciudad

providing a bird’s-eye view of the labor market in Mexico

del Carmen and both UNAM and IPN in Mexico City. Our

with additional knowledge in labor relations, labor unions

approach is to offer students an overview of the state of

and geographic expertise. This is extremely important

Mexico’s oil and gas sector and future careers in the field,

for new companies coming to Mexico because they lack

such as petroleum and geological engineering.

region-specific awareness. But we also offer added value for companies with experience in the country. Rules

We had two main objectives with the students. One was to

have changed and now they have to bid in line with

be honest with them about the industry crisis and explain

regulations established by several bodies such as ASEA

that many recent graduates have not been able to enter the

and SEMARNAT while CNH and the Ministry of Finance

labor market as a result but also to assure them that the

choose the winners. ARHIP facilitates and paves the way

industry is rebounding. The second was to convey that in a

for companies to be successful. Our members are our

globalized world getting a higher degree was not enough

main driving force and their knowledge, expertise and

and that to increase their opportunities of getting hired

experience is the added value that we offer.

they would need both a specialization in a technical field such as drilling and a set of soft skills such as teamwork,

Q: What has prevented the oil and gas sector from

decision-making and leadership. But students cannot

participating in the dual education system until now?

achieve this alone. Institutes of higher education need to

A: The sector is extremely competitive and until now

help them develop.

lacked a strong alliance of companies to push for the implementation of dual education. Campeche’s

Q: What are the highlights of ARHIP’s project with the

government is asking us to gather allies to create a

governments of Tamaulipas, Tabasco and Campeche?

database of qualifications, certification and skills needed

A: We are developing an analysis of the education field for

for positions in the oil and gas sector so the education

these regional governments, including a study of institutes

system can work on implementing relevant competencies

of higher education, their programs and competencies.

and certifications in their programs. Having PEMEX as a

Comparing this information with the job-posting catalogue

member will be an important milestone for us because it

provided by our members will allow us to identify

has a strong network and 33 training centers. Creating

deficiencies according to what the industrial sector requires.

synergies with the NOC will speed up our plans. Luckily,

Some states, like Campeche, are extremely interested

PEMEX has already reached out to us and is planning its

in developing this study and are considering expanding

involvement with ARHIP.

the implementation of the dual education system, which would see educational institutions work closely together with the industrial sector to offer a 50-50 approach for the

ARHIP is a human resources professional association. Formed

students. Dual education has proven extremely successful in

by field leaders, ARHIP works to promote knowledge exchange

countries like Germany. In Mexico, the Technical Education

between its members and educational institutions for the

Council (CONALEP) has successfully implemented it in

benefit of the Mexican oil and gas industry

VIEW FROM THE TOP

TECHNOLOGY CAN SOLVE PROBLEMS, OFFER INTEGRAL SOLUTIONS ERNESTO RÍOS Director General of Mexican Petroleum Institute (IMP)

Q: How has IMP’s objective changed in the wake of the

Our activities to generate and assimilate new products,

Energy Reform?

techniques, knowledge and methodologies applicable to

A: As a decentralized organism, IMP conducts research,

the petroleum industry offer the greatest added value.

technological development, innovation, scaling of

Our most substantial activities are E&P technologies

processes and products, provision of technological

for unconventional and conventional field development,

services-oriented production, transformation-processes

product handling, refurbishment and transport, biofuels

optimization in E&P, industrial transformation and

and geological, geophysical and geomechanical

national and international commercialization as well as

quantitative handling.

specialized training. Q: What technologies has IMP developed for the oil and Our purpose is to generate the technical capabilities

gas industry?

needed by the petroleum industry. We cover the sector’s

A: In landscape shaped by the Energy Reform, IMP is

entire operational value chain, from E&P to industrial

reinforcing its national institutional character in the

transformation, ensuring the creation of economic value

sense of becoming a hub for participating in E&P and

and solving high-impact technological problems related

resources transformation projects. Our main challenge is

to business goals.

to convert the institute into a self-sustaining creator of national capabilities.

Through applied research, we develop, assimilate and transform technology to solve specific problems and offer

Under those conditions, reinforcing the link between

integral solutions through engineering and technological

research and technological application to turn ideas into

services. Likewise, we provide specialized scientific and

results is of the utmost importance. We are aware the

technological training through postgraduate courses and

institute needs more agility to maximize the economic

professional and technical-level courses.

value of the products and services it creates and for that we will continue working on applications for research and

Since the opening of the petroleum market, we have become

technological development that ensure value is created.

more deeply integrated into the industry’s objectives and

In this way we can help develop the country’s petroleum

main projects to increase the efficiency, productivity and

industry. During the last few years, IMP has developed,

growth of the hydrocarbons sector. Over its 50-year history,

among others, the following 14 innovative technologies:

the institute has contributed to the development of PEMEX

a Venturi-type system for flow pattern enhancement

and the country through training of human resources and

(MPFV®) for control and optimization of a field’s production,

technology creation.

petro-physical inversion of a carbonate field’s records, enhanced recovery of oils via microbial processes (IMP-

Q: How does IMP offer a higher added value to Mexico?

RHVM), transition-metric techniques to prevent organic

A: IMP’s main strength is its human talent. We have 2,500

deposition, chemical products for foaming (IMP-WET-

researchers (131 at the National Research Institute),

FOAM), chemical products to maintain petroleum

specialists and technicians offering Mexico a higher added

production IMP-CDFIM-3000, chemical products to avoid

value. IMP works with the capacity of 1.8 million man hours,

foaling ESIM-1000 and ESIM-2000, electromagnetic

12 laboratories, 11 pilot plants, 21 research centers and the

surface inspection for ducts technology (TIEMS®), leakage

country’s largest petroleum information library. In 2016, we

detection systems, chemical inhibitors for corrosion control

were granted 12 national and 35 international patents and

(IMP-ALICIM), improved processes for crude heavy oils

registered 193 author’s rights and 24 trademarks. We also

and residues (HIDRO-IMP), a monitoring system for real-

developed 160 products and services.

time hydraulic fracturing (Frackmovil), a portable tracers

laboratory (Trazamovil), and development of the deepwater

its scholarship program. During 2012-2016 the doctorate

technologies center that is under construction.

program produced 27 graduates and the master’s program produced 27 graduates. With the support of the Talent

The MPFV has boosted gas-well production up to 20

Training, Recruiting, Evaluation and Selection Programs

percent, with an average production increase of 0.33

(PCTRES), during 2015-2016 nine students who finished

million cf/d in gas wells and 50b/d in oil wells. The petro-

their master’s program abroad were incorporated into IMP in

physical inversion has allowed for better precision in

the areas of field characterization, well drilling, completion

the identification of well production potential. Microbial

and maintenance as well as basins characterization, among

processes for hydrocarbon enhancement have proven

other specialties. In this way, IMP contributes to reducing

effective for increasing oil production in a range of 22 to

the talent gap of specialized national human resources

44 percent. Our hydro-treatment process development

for the petroleum industry while simultaneously training

has been recognized by PEMEX as a success. Finally, in

new professionals who can be directly integrated into the

petrochemicals we are a world leader in the development

national workforce.

and scaling of catalytic processes for ethane oxidation dehydrogenation.

Q: How is IMP planning to use the Hecho en Mexico logo? A: IMP is authorized to use the Hecho en México logo for

Q: What are IMP’s most significant relationships?

its technologies, products and services to distinguish them

A: The Energy Reform has opened up great opportunities

as made in Mexico products. The goal is to reinforce the

for the establishment of alliances, agreements and

internal market, promote the competitiveness of national

contracting of new players in the national petroleum

products and foster their use. Furthermore, the use of

industry. In the public sector we have closer relations with

the logo Hecho en México will facilitate the national and

regulating organisms such as CNH, CRE, CENAGAS, ASEA,

international positioning of the Marca IMP as an innovative,

SEMARNAT and the Ministry of Energy. In the private sector

quality and value-providing brand.

we have worked closely with AMEXHI, an association that groups more than 40 petroleum companies from over 19

Q: What specific activities does IMP expect to have the

countries interested in investing in Mexico. Some of those

biggest impact on the oil and gas sector in 2018?

companies have already visited the institute to identify

A: The Energy Reform has promoted a tighter relationship

areas for collaboration while others have entered into

among the entire range of participants in the national

consulting and technology services contracts.

petroleum industry. New companies in E&P, production and transformation of hydrocarbons require knowledge and

Q: What is IMP doing to help end the human talent gap

experience generated in the country. In this sense, IMP’s

in Mexico?

and PEMEX’s wealth of knowledge will be of great value

A: We train highly specialized human talent for the

and is therefore vital for maintaining and reinforcing the

petroleum industry by following five main principles: recruit,

agreements, alliances and joint activities that have resulted

develop and evaluate human talent as well as generate

from the reform.

actions to retain it, design and implement learning solutions to improve the abilities of personnel and the institute’s

Q: What elements will be crucial for IMP to realize its long-

competitiveness, provide development and management

term goals?

services for petroleum industry talent, manage the

A: In the coming years, the strategic relationship that

institute’s knowledge by protecting intellectual property

IMP has developed with PEMEX will be reinforced to

and facilitate internal information flow and personnel access

generate more synergies that allow for the integration

to state-of-the-art science and technologies.

of new commercial and corporate competitive schemes. This relationship will be beneficial for both institutions and

In 2016 the institute provided training to 3,181 participants

the country. IMP is committed to reinforcing its financial

to develop specialized capabilities in important areas and

autonomy and sustainability through the sale of products

facilitated the participation of 649 IMP members in national

and services that provide high-technological impact,

and international forums, conferences, congresses, seminars

ensuring integral solutions and generating new capacities

and symposiums.

for the Mexican petroleum industry.

Additionally, our scholarship program targets the attraction, development and retention of excelling personnel who

The Mexican Petroleum Institute (IMP) is a national institution

exhibit a service vocation and a winning attitude. In 2016 IMP

that provides solutions for the oil and gas industry through

supported 10 doctorates abroad, four master's candidates,

R&D efforts, human resources training and collaboration with

15 thesis stays, 25 interns and 77 social services through

both the business and education sectors.

ROUNDTABLE

HOW CAN THE INDUSTRY BETTER PROMOTE GENDER EQUALITY?

If you walk into a room of 100 top-level global oil and gas executives, just 11 will be women, according to a 2016 survey carried out by the Peterson Institute for International Economics. The same study, which analyzed results from some 21,980 companies across 91 countries, found that companies with 30 percent female representation on executive boards could add up to 6 percentage points to net margin. In an industry emerging from a crisis and looking to rejuvenate its aging workforce with a generation that considers gender equality a priority, Mexico Oil &

Gas Review turned to women leaders for their opinion on promoting gender equality in the industry.

Unconscious bias is the most significant challenge I have faced. Throughout my career there have been times when managers and leadership have made assumptions about what I would be willing or unwilling to take on. As a leader I have seen many managers make assumptions that disadvantage women who are willing to take on challenges. Whether it is working in the field, taking on an international assignment or going on a golf outing, I would give young women the same advice that I give

LAURA SCHWINN CEO of C&C Reservoirs

young men: focus on results, be persistent and be sure to put your hand up when you want to take on a new challenge, listen to feedback, help your team succeed and find something you are passionate about.

I was the first female manager to work at TenarisTamsa in Mexico, one of the largest global manufacturers of steel pipes for the energy sector. For me, this was an advantage because the rest of the industry in the area had never dealt with a woman before and did not know how to treat me. At that time, human resources was not fully developed in Tamsa, so I had the independence and therefore the chance to prove my abilities. Engineering is seen as a man’s world, which makes it

CARMEN SUÁREZ Director of Stanton Chase

difficult for a woman to decide to go down that path. But everything depends on attitude: if you approach the situation without fear, it can actually be an advantage.

If I attend specialized conferences, like an engineering meeting, sometimes there is just me and nine men. Schools should encourage women to enter technical programs because the issue of a lack of women in leadership positions in oil and gas stems from a lack of education. They should also give women more responsibility earlier on, such as leadership positions at school. The biggest challenge as a woman in this industry is feeling empowered. The first priority is to believe in ourselves. Also, we

ANGÉLICA LINARES Director General/CEO of Corporativo Cemza

have to learn how to balance our work life with other areas such as family and our social life. I would advise them first to believe in themselves. Secondly, I want to highlight the commitment women should have to helping other women. As a leader, we can inspire other women to follow the same path.

At the moment, there are very few females in managerial positions. In the coming years, I hope to see more opportunities for women as a result of the larger number of women that are being educated to participate in this sector. Today, many key decisions are made by men, making it challenging for women to advance to decisionmaking positions. Nevertheless, I think the future of women in those positions is promising. A generational change is taking place. When I studied geophysical engineering, I was the only female in my class. Today, women represent more than 50 percent of the students. This will create the foundation for the development of women in this industry that traditionally has been the domain of men.

ALMA AMÉRICA PORRES Commissioner at CNH

I do not think that being a woman gives you an advantage or a disadvantage in the field. However, it certainly creates challenges that have to be addressed on a daily basis — when conducting critical conversations with men,for example. Women need to know they are capable from a professional viewpoint, be it for their knowledge, experience or background. In the end, it all depends on how you present yourself, how you set yourself goals and focus on achieving them by studying, which in the end leads you to grow along with the company. The first person who must be liberated of stereotype is you. I started my career 25 years ago and had the support of what could be called a mentor, who offered me experience, knowledge and time.

LINA MÁRQUEZ Country Manager Mexico of Enerflex

The industry must promote equality so the same opportunities and conditions exist for men and women to excel in any field of the hydrocarbon industry, based on their talents, skills, knowledge and experience, without gender becoming a limitation. When I entered the oil industry, I did not expect special privileges or advantages because I was a woman but I did not consider the disadvantages either. Therefore, the main challenge that I faced, like any professional in this industry, was keeping up to date and offering a personalized and excellent service. I have always acted with discipline, constancy and enthusiasm, convinced that I could achieve my goals with

GRACIELA ÁLVAREZ CEO of NRGI Broker

effort, dedication, loyalty and professionalism. My route was to win the trust and friendship of each of my clients.

I do not see many challenges in particular for women in the oil and gas industry. It is a sector that truly values knowledge and I see that this quality surpasses gender as a determining factor for getting along in the industry. Perhaps the industry is not popular among women in Mexico because there is not enough information about the opportunities and what the industry is about. In general, the industry should be promoted for how interesting it is in terms of geopolitics, economics and how it makes the world go round. With the Energy Reform it will naturally become a more global topic in Mexico and hopefully encourage men and women alike to enter the industry.

PALMA MENDEZ Director Mexico for Wood Mackenzie

PEMEX platform, Bay of Campeche, PEMEX

LICENSING ROUNDS

Among the recent successes that will help shape the future of the country’s oil and gas sector was CNH’s highly anticipated deepwater auction, which finally came to fruition in 2016, raking in an impressive US$34 billion dollars of projected investment. The positive news wrapped up a productive year for the regulator’s tenders, which included the finalization of Round One and the announcement of the first legs of Round Two in June and July 2017. Participants range from global oil giants BP, Chevron and Total to lesser known but no less ambitious Mexican companies that are looking to take the industry by storm.

This chapter takes a look at the success factors and pitfalls of each licensing round so far from the point of view of authorities, regulators and participants alike, analyzing each round and offering a breakdown of the fields involved, their characteristics and what can be done to improve future processes.

CHAPTER 2: LICENSING ROUNDS 42

ANALYSIS: A Standardized Future for Licensing Rounds

VIEW FROM THE TOP: Héctor Moreira, CNH

MAP: Round One Results

VIEW FROM THE TOP: Gaspar Franco, CNH

ROUNDTABLE: What is Required to Ensure the Continued Success

of the Upstream Market’s Opening?

VIEW FROM THE TOP: Matt McCarroll, Fieldwood Energy

VIEW FROM THE TOP: Carlos Morales, PetroBAL

VIEW FROM THE TOP: Iván Sandrea, Sierra Oil & Gas

VIEW FROM THE TOP: José Uriegas, Grupo IDESA

VIEW FROM THE TOP: Vicente González, Geo Estratos

VIEW FROM THE TOP: Craig Steinke, Renaissance Oil Corp

INSIGHT: Alberto Bessoudo, Emusa

INSIGHT: Javier Zambrano, Jaguar E&P

VIEW FROM THE TOP: Nicolas Melissas, Athena Consulting

INSIGHT: Noé Pascacio, BGBG Abogados

MAP: Round Two

ANALYSIS

A STANDARDIZED FUTURE FOR LICENSING ROUNDS Speed and transparency have characterized the licensing

the rounds so far have been praised for their

rounds, with the industry particularly pleased that regulators

transparency, swiftness and responsiveness to

are listening to their concerns. Expectations are high for the

industry concerns. Mexico’s regulators are now

coming three stages of Round Two.

speeding ahead with the standardization of the process, as announced in the Ministry of Energy’s

In just under three years since the Energy Reform was

updated Five-Year Plan published in March 2017. Following

approved by Mexico’s congress, making amendments and

the original version published in 2015, Mexico’s Ministry of

additions to articles 25, 27 and 28 of the Mexican constitution,

Energy released this latest document outlining modifications

regulator CNH has awarded 38 contractual areas to a range

to the original “Five-Year Plan for Exploration and Production

of participants through Round One. As well as the 13 license

of Oil and Gas 2015 – 2019.” Citing the demands of an evolving

contracts and 25 production sharing agreements involved

industry, the document outlined a number of pivotal additions

in Round One, PEMEX’s first ever farm-out was completed

and adaptations that are set to optimize the way oil and gas

together with deepwater Round 1.4, while a second shallow-

licensing rounds are planned, designed and held in Mexico.

water farm-out is planned for October 2017. Another 41 are up for auction through the first three stages of Round Two

Three main elements were highlighted. First is the goal to

in mid-2017, with a deepwater and unconventional resources

standardize the bidding process, from the size of the blocks

round to be announced shortly.

to the prequalification process and the calendars for each round. Secondly, the industry will now be allowed to nominate the blocks they wish to see appear in future licensing rounds,

ROUND ONE OVERVIEW

subject to sound technical studies and approval by Mexico’s

Round

Areas up for auction

Areas awarded

Success Factor

1.1

14%

will be kept and constantly assessed in a bid to simplify the

1.2

60%

administrative processes.

1.3

100%

1.4

80%

Ministry of Energy. Finally, a record of prequalified bidders

The news that operators can have their say in the blocks chosen for auction is music to the ears of Kevin Smith, Vice President of Business Development at Renaissance Oil Corp,

“I do not know how one cannot admire what has been

winner of three onshore blocks during Round 1.3. “The Five-

happening in Mexico in the last two years. Very few countries

Year Plan clearly reflects feedback given by operators to

have pulled it off in this fashion, at this rate, building this

make the bidding system more flexible. We are the guinea

much momentum,” says Jorge Leis, Partner and Lead at Bain

pigs but we are happy to accept the challenge because we

& Company’s Oil and Gas Practice in the Americas. Indeed,

can see our feedback shaping the industry,” he says.

INDUSTRY PERCEPTION OF ROUND ONE AUCTIONS

ROUND 1.1

Round 1.1 Round 1.1

ROUND 1.2

Round 1.2 Round 1.2

Very Attractive 40%

40%

Very Attractive 40% 40%

30%

20%

Indifferent 20%

20%

10%

Indifferent

Unattractive Source: Ministry of Energy

Attractive

Less Attractive

Unattractive

Attractive

Less Attractive

RESERVAS 2P

RECURSO PROSPECTIVO NACIONAL

17, 792 MMBPCE

112,833 MMBPCE

PROSPECTIVE NATIONAL RESOURCE (million boe)

2P RESERVES (million boe) 273

4,329

112,833

84,044

78% State 22% PEMEX

17,792

2,601

84% PEMEX 16% State

95% Available for auction 5% Awarded (Round One) 78% Estado (88,373)

90% Available for auction 10% Awarded (Round One)

95% Disponible para licitar

Source: CNH and Ministry of Energy

22% Pemex (24,459)

5% Adjudicado (Ronda 1)

84% Pemex (14,919)

90% Disponible para licitar

16% Estado (2,873)

10% Adjudicado (Ronda 1)

CNH CHANGES Source: CNH y SENER

The positive result matched the previous onshore Round

While the Ministry of Energy sets Mexico’s energy policy,

1.3, when 100 percent of the 25 blocks were awarded.

Source: CNH y SENER

industry regulator CNH is editing the contractual terms of each bidding round at every stage of the process. During

The overwhelming success of the final two stages of

the four stages of Round One, the contracts were redrafted

Round One offset its more sobering start. Round 1.1 and

a total of 16 times. This flexible approach extended to the

1.2 respectively, saw just five out of the 19 contractual

Trion farm-out terms, which were gradually loosened as the

areas available awarded. One notable difference between

government took on the suggestions of the private sector.

the first two and the final two stages was a change in

Changes included allowing operators to bid on Trion as

contractual structure. Round 1.1 and 1.2 involved production

individuals rather than groups as previously demanded and

sharing agreements, whereas the final two involved license

cutting PEMEX’s stake in the joint venture to 40 percent

contracts. As well, the industry reacted favorably to the

from the original 45 percent. In the end, BHP Billiton

evolution of CNH’s contractual terms, upping the ante in

snatched the opportunity to partner with PEMEX, beating

terms of participation and competition.

BP, which also bid individually. This shows the importance of the changes CNH implemented just three months before

The 14 blocks offered in Round 1.1 were purely exploratory,

Round 1.4 was due.

increasing the risks faced by potential operators, whose bids were also facing the uncertainty associated with

The success of the Trion farm-out wrapped up Round One

the first bidding round in Mexican history. Round 1.3’s

and came on the back of Mexico’s first deepwater licensing

onshore blocks were viewed as more accessible for

round, during which eight of 10 contractual areas were

first-time operators and less risky than more expensive

awarded to a range of national and international bidders.

offshore ventures. In comparison, Round 1.4 showed

ROUND 1.3

ROUND 1.4

Very Attractive 50%

Round 1.3

Very Attractive 40%

40% Indifferent

30%

30% 20% 10%

Indifferent Attractive

20% 10%

Unattractive

Round 1.4

Attractive

Less Attractive

Unattractive

Less Attractive

operators bravely betting on Mexico’s oil and gas market

blocks on offer come with 90 percent or more 3D seismic

despite the high financial and operational risks involved

coverage.

in deepwater activity.

FARM-OUTS HIGH HOPES

In addition to Round Two, further PEMEX farm-outs lie

Hopes are high for Round One’s positive streak to continue

ahead in 2017 and 2018.

into the first three stages of Round Two. This round comprises one shallow-water and two onshore stages,

which will be held on the same day. No less than 27

Project

Year

Scheme

companies, including a who’s who of the international oil

Trion

2016

Farmout

and gas industry, have started the prequalification process

Ogarrio

2017

Farmout

for the first stage of Round Two. They will be assessing

Cárdenas-Mora

2017

Farmout

15 shallow-water exploration and production blocks to be

Ayín-Batsil

2017

Farmout

auctioned in the stage, with the final results announced

Ayatsil-Tekel-Utsil

2017

Farmout

on June 19, 2017. Ten of the 15 fields, spread out along the

Chicontepec

2017

Farmout

coast of Veracruz, Tabasco and Campeche, contain crude

7 onshore assignments (north and south areas

2017

Farmout

6 shallow water assignments (north area)

2018

Farmout

64 onshore assignments (north and south areas

2018

Farmout

86 non-associated gas assignments (Burgos and Veracruz)

2018

Farmout

oil and gas reserves, while the remaining five contain gas reserves only. They range in area from 466km2 to 972km2, with an average size of 595km . 2

The second leg of Round Two includes 12 onshore exploration and production blocks to be auctioned off on July 12, 2017. Nine of the blocks are located in the

Source: PEMEX

northeast regions of Tamaulipas and Nuevo Leon, known as the Burgos Basin, and contain exclusively gas reserves. The remaining three are in the southeast regions of

Farm-outs were highlighted in PEMEX’s 2017-2021 business

Chiapas and Tabasco and contain superlight and light

plan together with operational efficiency and effectiveness

crude oil reserves. They are all similar in surface area,

and a focus on strategic activities as way in which the

ranging from 360km2 to 479km2, with an average area of

company will seize the historic opportunity created by

396km . “We are definitely interested in the second set

the Energy Reform. The proof is in the pudding; BHP will

of bidding rounds,” says Carlos Morales, Director General

contribute US$1.19 billion on behalf of PEMEX in the Trion

of PetroBAL. “Our final decision will be based on the

farm-out it won in December 2016, says Gustavo Hernández,

conditions of each block and we will come to reasonable

Director of Prospective Resources, Reserves and E&P

offers once we determine how attractive each one is.”

Partnerships of PEMEX.

Nine companies had started the prequalification process by the end of April.

According to Hernández, while December 2016’s Trion farm-out attracted two of the biggest names in oil and

Round 2.3 also has an onshore focus and will take place

gas; winners BHP and second-place BP, onshore farm-

on July 12, 2017, the same day as Round 2.2. According

outs Ogarrio and Cárdenas-Mora are drawing the interest

to CNH, nine companies had started the prequalification

of more mid-sized and Mexican firms.

process for this round by the end of April, which includes 14 onshore exploration and production blocks spanning

“They vary from deepwater farm-outs in the sense that

the Burgos, Tampico-Misantla, Veracruz and Southeast

these fields are currently productive, with an output of

Basin areas. By the end of April, 35 companies had shown

around 7,000 b/d each,” Hernández says. The maturity

interest in this round, including a number of winners from

of the blocks and nearby infrastructure are factors that

Round 1.2 and 1.3, and 22 had started the prequalification

increase certainty for vying companies and thus facilitates

process.

the participation of smaller firms, as well as lower required investment quantities.

The majority of the blocks included in Round 2.3 are smaller in size than the blocks to be auctioned in Round

In addition to the land-based Ogarrio and Cárdenas-Mora

2.1 and 2.2, with the smallest being 72km2 and the average

farm-outs, a share in PEMEX’s shallow-water Ayin-Batsil

standing at 185km . Five contain a combination of light

field will also be up for auction in 2017. The block is located

oil and dry gas, four contain wet gas, four contain light

in the Campeche Sound, 70km from Cantarell and Ku-

oil only and one contains dry gas. Notably, half of the

Maloob-Zaap.

VIEW FROM THE TOP

SLOWER PROCESSES THE COST OF TRANSPARENCY HÉCTOR MOREIRA Commissioner at CNH 45

Q: What did CNH learn from Round One and how has that

used to decide the assignment of blocks, but we have made

translated into changes for future rounds?

this aspect more flexible because it changes as the block

A: We tend to over-regulate. This is normal because humans

develops. The nomination process will bring even more

are afraid of losing control. For that reason, operators have

complications to the bigger regulatory picture because of

been, without a doubt, responsible for the bulk of our

the confidential information from private companies that

learning process because they are the ones contacting us

must be handled while ensuring an equal and fair process.

to say the regulations are too complicated, too expensive

Like everything else, there will always be problems at the

or too hard to meet. When they express a concern, we

start but the learning curve will be followed. Future actions

gather the information and discuss the implications of the

will be geared toward relaxing bureaucracy while ensuring

regulations with the Ministry of Energy and the Ministry

transparency but first the process itself needs to work.

of Finance. These institutions have been receptive to recommendations. CNH meets with them at least once a

Q: What are CNH expectations for Round Two?

week to ensure the constant and quick flow of information.

A: We expect it to be much bigger compared to Round

Having an association such as AMEXHI has also facilitated

One. The whole point of Round One was not just to get

contact with private companies because it is much easier

more companies investing in Mexico but to show the

to have conversations with an organization than it is to talk

rest of the world that there were opportunities here

with every single company present in the market.

and that these opportunities were real and fair. We have accomplished that despite the instability created

One major change for which CNH was responsible is the

by the administrations of US President Donald Trump

nomination process. CNH, the Ministry of Energy and the

and Venezuelan President Nicolas Maduro as well as the

Ministry of Finance had believed that it was enough to

volatility in the Middle East. We are confident that more

look at PEMEX’s information and from there decide which

companies will be arriving next year.

blocks were the best to put up for bid. After long talks with the companies participating in the bidding rounds

Q: What is CNH’s main focus for the coming 12 months?

we concluded that these companies could have different

A: We see a lack of gas production and want to tackle that.

points of view about these and other areas, as well as

During the last decades, much of the attention was on oil

critical information that could alter their decisions. All of

production. Now we want to take advantage of the gas-

this led to the decision to include the nomination process.

oriented focus Mexico now has and boost it. In doing so, we

It is important to state that nomination does not mean

expect to not only decrease imports but likewise increase

assignment, it means that the area might be included in

energy security and national competition. It is not CNH’s

a bidding round.

main role to change policies but we can advise the Ministry of Energy on specific topics. One way we can spur a quick

Q: How does CNH deal with the lack of trust that Mexicans

increase in gas production is by implementing proper tax

may have in their regulatory institutions?

incentives. By implementing the right incentives, we hope

A: We are aware that Mexicans are not particularly confident

the country can produce more gas and create a larger and

in their institutions and for that we have developed a

more connected infrastructure.

completely transparent process that, truth be told, has also made the process slower and less flexible. For example, for the assignment of blocks we have concluded that the

The National Hydrocarbons Commission (CNH) was set up as

royalty component is the most significant for decision-

a result of the Energy Reform. Its duties include the handling,

making, washing aside any possibility for corruption or

regulation and oversight of the oil and gas bidding rounds in

misunderstanding. A proposed working program is also

Mexico

ROUND ONE RESULTS b

7 46 8

9 10

Bid R1.1 R1.2 R1.3 R1.4

Source : CNH

13 12

14 17

16 33 47 32 34

37 38

4 23

19 20

29 28 25

27 26

ROUND ONE RESULTS

Map Point

Round

Block

Basin

Location

Area (km2)

Phase

Contract Type

R1.1

Southeast

Shallow Waters

464.8

Production

Production Sharing

R1.1

Southeast

Shallow Waters

194.5

Production

Production Sharing

R1.2

Amoca, Tecoalli, Miztón

Southeast

Shallow Waters

67.2

Production

Production Sharing

R1.2

Hokchi

Southeast

Shallow Waters

39.6

Production

Production Sharing

R1.2

Ichalkil, Pokoch

Southeast

Shallow Waters

57.9

Production

Production Sharing

R1.3

Barcodón

Burgos

Onshore

10.9

Production

License

R1.3

Pontón

TampicoMisantla

Onshore

11.8

Production

License

R1.3

La Laja

TampicoMisantla

Onshore

10.2

Production

License

R1.3

Tecolutla

TampicoMisantla

Onshore

7.2

Production

License

R1.3

Paso de Oro

TampicoMisantla

Onshore

23.1

Production

License

R1.3

Duna

Burgos

Onshore

36.7

Production

License

R1.3

Mareógrafo

Burgos

Onshore

29.8

Production

License

R1.3

Peña Blanca

Burgos

Onshore

25.9

Production

License

R1.3

Carretas

Burgos

Onshore

89.4

Production

License

R1.3

Calibrador

Burgos

Onshore

16.1

Production

License

R1.3

BenavidesPrimavera

Burgos

Onshore

171.5

Production

License

R1.3

San Bernardo

Burgos

Onshore

28.3

Production

License

R1.3

Ricos

Burgos

Onshore

23.7

Production

License

Additional Royality (%)

Increase in Minimum Work Program (%)

Weighted Value of Economic Proposal

Winning Bidder

Bid Date

Signing Date

Validity (years)

Sierra Oil & Gas, Talos Energy and Premier Oil

July 15, 2015

Sept. 4, 2015

68.99

63.672

Sierra Oil & Gas, Talos Energy and Premier Oil

July 15, 2015

Sept. 4, 2015

55.99

51.972

ENI International

Sept. 30, 2015

Nov. 30, 2015

83.75

78.247

Pan American Energy and E&P Hidrocarburos y Servicios

Sept. 30, 2015

Jan. 7, 2016

100

Fieldwood Energy and PetroBAL

Sept. 30, 2015

Jan. 7, 2016

Diavaz Offshore

Dec. 15, 2015

Oct. 5, 2016

64.5

100

208.174

Renaissance Oil

Dec. 15, 2015

Aug. 25, 2016

21.39

70.909

Desarrolladora Oleum, Ingeniería, Construcciones y Equipos Conequipos, Industrial Consulting, Marat International and Constructora Tzaulan

Dec. 15, 2015

Aug. 25, 2016

29.69

94.019

Tonalli Energía

Dec. 15, 2015

Aug. 25, 2016

31.22

Servicios de Extracción Petrolera Lifting de México

Dec. 15, 2015

Aug. 25, 2016

10.2

33.13

Construcciones y Servicios Industriales Globales

Dec. 15, 2015

Oct. 5, 2016

20.08

67.942

Consorcio Manufacturero Mexicano

Dec. 15, 2015

Oct. 5, 2016

34.25

100

112.882

Strata Campos Maduros

Dec. 15, 2015

Oct. 5, 2016

50.86

100

165.208

Strata Campos Maduros

Dec. 15, 2015

Oct. 5, 2016

50.86

100

165.208

Consorcio Manufacturero Mexicano

Dec. 15, 2015

Oct. 5, 2016

41.77

100

136.57

Nuvoil, Sistemas Integrales de Compresión and Constructora Marusa

Dec. 15, 2015

Oct. 5, 2016

40.07

130.546

Strata Campos Maduros

Dec. 15, 2015

Aug. 25, 2016

36.231

Steel Serv, Constructora Hostotipaquillo, Desarrollo de Tecnología y Servicios Integrales and Mercado de Arenas Sílicas

Dec. 15, 2015

Aug. 25, 2016

12.36

40.87

66.6

98.343

ROUND ONE RESULTS

Map Point

Bid

Block

Basin

Location

Area (km2)

Phase

Contract Type

R1.3

Moloacán

Southeast

Onshore

46.3

Production

License

R1.3

CuichapaPoniente

Southeast

Onshore

41.5

Production

License

R1.3

Calicanto

Southeast

Onshore

10.6

Production

License

R1.3

Mayacaste

Southeast

Onshore

21.9

Production

License

R1.3

Tajón

Southeast

Onshore

27.5

Production

License

R1.3

Paraíso

Southeast

Onshore

17.0

Production

License

R1.3

Catedral

Southeast

Onshore

57.9

Production

License

R1.3

Malva

Southeast

Onshore

21.2

Production

License

R1.3

Secadero

Southeast

Onshore

9.8

Production

License

R1.3

Topén

Southeast

Onshore

25.3

Production

License

R1.3

Mundo Nuevo

Southeast

Onshore

27.7

Production

License

R1.3

Fortuna Nacional

Southeast

Onshore

21.9

Production

License

R1.4

Perdido

Deepwater

1,678

Exploration and Production

License

R1.4

Perdido

Deepwater

2,976.6

Exploration and Production

License

R1.4

Perdido

Deepwater

1,686.9

Exploration and Production

License

R1.4

Perdido

Deepwater

1,876.7

Exploration and Production

License

R1.4

Salina

Deepwater

2,381

Exploration and Production

License

R1.4

Salina

Deepwater

3,287

Exploration and Production

License

R1.4

Salina

Deepwater

2,358.7

Exploration and Production

License

R1.4

Salina

Deepwater

2,573.2

Exploration and Production

License

Validity

Additional Royality (%)

Increase in Minimum Work Program (%)

Weighted Value of Economic Proposal

Winning Bidder

Bid Date

Signing Date

Perfolat de México, Canamex Dutch and American Oil Tools

Dec. 15, 2015

Oct. 5, 2016

85.69

Servicios de Extracción Petrolera Lifting de México

Dec. 15, 2015

Oct. 5, 2016

60.82

196.557

Grupo Diarqco

Dec. 15, 2015

Oct. 5, 2016

81.36

258.405

Grupo Diarqco

Dec. 15, 2015

Oct. 5, 2016

60.36

Compañía Petrolera Perseus

Dec. 15, 2015

Oct. 5, 2016

60.88

100

196.771

Tubular Technology, GX Geoscience Corporation and Roma Energy

Dec. 15, 2015

Oct. 5, 2016

35.99

100

118.363

Diavaz Offshore

Dec. 15, 2015

Oct. 5, 2016

63.9

Renaissance Oil

Dec. 15, 2015

Oct. 5, 2016

57.39

100

185.773

Grupo R Exploración y Producción and Constructora y Arrendadora México

Dec. 15, 2015

Oct. 5, 2016

60.74

100

196.33

Renaissance Oil

Dec. 15, 2015

Oct. 5, 2016

78.79

250.684

Renaissance Oil

Dec. 15, 2015

Oct. 5, 2016

80.69

256.669

Compañía Petrolera Perseus

Dec. 15, 2015

Oct. 5, 2016

36.88

100

121.171

China Offshore Oil Corporation

Mar. 10, 2017

Oct. 3, 2017

17.01

1.5

100.476

Total and ExxonMobil

May 12, 2016

Oct. 3, 2017

1.5

44.15

Chevron, PEMEX and INPEX

May 12, 2016

Feb. 28, 2017

7.44

China Offshore Oil Corporation

May 12, 2016

Oct. 3, 2017

15.01

80.744

Statoil, BP and Total

May 12, 2016

Oct. 3, 2017

58.4

Statoil, BP and Total

May 12, 2016

Oct. 3, 2017

58.4

PC Carigali and Sierra

May 12, 2016

Oct. 3, 2017

22.99

Murphy, Ophir, PC Carigali and Sierra

May 12, 2016

Oct. 3, 2017

26.91

269.919

190.134

201.285

29.76

91.96

133.818

VIEW FROM THE TOP

BIDDING PROCESS IMPROVED, CONTRACTS TO FOLLOW GASPAR FRANCO Commissioner at CNH 52

Q: What were the most important lessons CNH learned

the winner will have to meet. If a winner does not fulfill

during Round One?

those requirements, it gets penalized.

A: The main lesson was the importance of publishing a minimum for the bids. Once the bidding process of Round

Q: How is CNH handling the regulatory process for the

1.1 and 1.2 finished and the blocks were assigned, several

bidding rounds and contracts?

companies approached us to say that had they known the

A: When a company signs a contract, it enters into an

minimum values for the bids, they would have participated.

exploration period to understand the conditions of the

That is an important change that will be implemented for

contractual area from a geological, environmental, social

future bidding rounds.

and infrastructure point of view. If discoveries are made during this period, those have to be announced, evaluated

On the administrative side, we have made some of the

and declared to be of commercial interest or not. Only

bidding processes more flexible to ensure companies are

then can the development program start. On its own, the

incentivized to take part in the rounds. For example, we

development program may include a number of factors

now accept some documents in English such as financial

such as abandonment, change of guarantees or insurance,

statements and 10-K and 20-F, decreasing the burden of

area reduction and so on. CNH must identify each and every

paperwork for companies. Also, we do not use physical

possible process related to each step, from the exploration

hard drives or schedule visits to data rooms but employ

period to the end of the program development.

licenses instead. Finally, one of the biggest burdens we have eliminated is the need to pre-qualify for every round. We

So far, we have identified 12 macroprocesses, 51 processes

issue a pre-qualifying permit that lasts for a designated

and 200 subordinate processes related to the main activities

period of time. CNH wants to eliminate all room for any

that are necessary when an operator signs a contract with

misinterpretation or under-regulation so we are using

CNH. The fact that some of the processes are not governed

internatiional best practices and procedures to create our

by the contract but by regulations to be published has made

regulations from scratch. Some countries do not even use

it all even harder and more complex. Considering that each

pre-qualifications because they publish the requirements

of these processes must be transcribed, filled out with the

INFORMATION OF ALL THE CONTRACTUAL AREAS TO AUCTION

MX$5.3 million

Bid 1

MX$2.5 million

Bid 2

MX$38.5 million

Bid 4

Bid 3

Scheduled visits to the Data Rooms Virtual access through the website Hard disk

Data Package • 2D and 3D Seismic • Wells • Reference infrastructure and installations

At least Scheduled visits to the Data Rooms Hard disk

Data Package • 2D and 3D Seismic • Wells • Reference infrastructure and installations Confidentiality agreement Each database

Source: CNH

Complete study licenses for use (keys)

current information of each contractor, archived and managed

or the government. There is no doubt that we can be more

means that digital and automated resources are a must. That

flexible and improve. In the private sector some operators

is why CNH decided to map each process, systematize and

are just beginning to understand the guidelines so we also

publish it in an open database where the contractors will be

have to provide training to help them understand why we

publishing information related to the project’s advancements.

are implementing these regulations and processes. We

This will allow each and every one of the interested parties to

want them to start drilling and producing but we have to

have direct access to the information, completely eliminating

make sure they proceed in a safe way. We are not afraid of

any room for corruption, while also providing a transparent

change, we are simply being cautious and trying to ensure

system the public can access.

that all activities are done safely and that all parties receive the benefits.

Although we have improved the bidding processes, not much has been done around the contracts. As our people

Q: What will be CNH’s role in the nomination process by

are mapping the contracts, they are also becoming experts

private companies?

in each of their areas and starting to find problems, which

A: Under the normal process the Ministry of Energy asks

will be extremely useful to improve contracts. Just as in the

CNH for technological advice about the areas that will be

case of the bidding rounds, it is not enough to have experts

included in licensing rounds. As part of those technical

in the area; coordination between all the institutions is vital.

support activities we are allowed to propose areas for

We are under constant communication with the Ministry of

the rounds, which we did for Round 2.4. With the new

Energy, the Ministry of Finance, the Ministry of Economy,

nomination process, the Ministry of Energy provides us

The Mexican Petroleum Fund (FMP), ASEA and the Mexican

with information from operator nominations, which we use

Tax Authority (SAT) to improve the contracts. It will take

to refine or even increase the areas that we are looking

time and plenty of work to make it happen. Our goal for

at. All the information we manage is highly technical and

the second half of 2017 is to finish mapping the contracts

confidential; we never know the name of the operator that

and from there start the systematization. In doing so, we

nominated an area or supplied the information. The idea is

expect to achieve two things: ensure that all the activities

to gather more technical information based on points of

in the contract are being followed and that all of society

view that we did not consider before.

is aware of it. Q: What are your expectations for Round Two? These projects are multimillion-dollar high-risk investments.

A: We are expecting a higher number of blocks with

The regulations we create are done by looking at international

more unconventional and deepwater fields. Areas from

best practices. When a regulation is written it goes through

Round 2.1 are 1.6 times bigger than those from Round 1.1

a consulting board specialized in the field of regulation and

and 1.2, while areas from Round 2.2 are 14 times bigger

after approval it is sent to COFEMER, which decides whether

than those in Round 1.3. We are aware that measuring

additional costs for the regulated parties are required. This is

success with allocation percentages is the easiest and most

a process that is not widely known but which involves a lot

understandable way to do so but it would also be tricky and

of work and communication to make it fair for everyone and

misleading because it leads to stagnation and the public

to match the interests of each party, be it private companies

having a wrong perception of the process.

Round 2, Bid 1

At least MX$8 million

The fear of having the bids considered a failure has led to small rounds in which we have not followed the market's lead. We were doing that because we were afraid that

Licenses for use (keys)

if more blocks were part of the bid, more would be left without assignment and therefore the bid would be considered a failure. If success is measured with the

• 3-D Seismic • Wells (Reference infrastructure and installations

Bidding Areas (North and South Zones)

proper numbers we will stop being afraid of the bids being perceived a failure, allowing us to have more blocks in the

Wells

Complete seismic studies

2-D Seismic

bids and ultimately truly allowing the market to select the most attractive ones.

3-D Seismic Selected versions

The National Hydrocarbons Commission (CNH) was set up as 25 years DOF guidelines Sept. 22, 2015

a result of the Energy Reform. Its duties include the handling, regulation and oversight of the oil and gas bidding rounds in Mexico

ROUNDTABLE

WHAT IS REQUIRED TO ENSURE THE CONTINUED SUCCESS OF THE UPSTREAM MARKET’S OPENING?

Since Mexico’s Energy Reform was passed in 2013, CNH’s upstream licensing rounds have taken center stage as the most talked-about developments in the whole process. In 2016, Round 1.4 saw the entrance of some of the world’s largest international oil companies into the market. As well as national operator Sierra Oil & Gas venturing into deepwater for the first time, 2016 also spelled the completion of onshore Round 1.3’s 25 contracts, won by predominantly Mexican companies. Mexico Oil & Gas Review asked several industry players to share their view on the Energy Reform’s upstream progress so far and the

possible areas for improvement.

We need to scale up and speed up the bidding process for Mexico to have continued success in upstream. The standardization of the process put forward by the Ministry of Energy’s Five-Year Plan will contribute us succeed. Prequalification is being streamlined, making participation easier. The industry will also be allowed to nominate blocks itself, which will increase the total acreage Mexico offers and therefore increase competitiveness. The timing of the rounds will also be standardized, giving

JUAN CARLOS ZEPEDA President Commissioner of the National Hydrocarbons Commission (CNH)

the industry certainty that shallow-water and onshore bidding will happen in the first half of the year, while deepwater and unconventional rounds will happen in the second half of the year. Additionally, the Ministry of Finance is already heading in the right direction in terms of tipping the weighting toward work commitment and away from royalty rates during bidding, encouraging larger projects.

At the beginning of the process we were worried about regulatory confusion or bottlenecks especially in the case of permits but none of this has happened. We believe the Mexican government, in collaboration with the industry, has been able to deliver and make it work. Mostly we would like to see a simplification of paperwork. We have seen improvements in the prequalification and now potential bidders can get approved for a number of years instead of having to go through the same

IVÁN SANDREA CEO of Sierra Oil & Gas

paperwork every time. Another potential point of improvement is in the coordination across different institutions, not only in logistics but also in style and content. If this is achieved, it will be a major accomplishment for the government.

There were two main moments of putting meat on the bones for the Reform, firstly the Trion farm-out and secondly Round 1.4. These activities, and PEMEX sticking to its conditions, have given PEMEX an important credibility that could be easily taken away if political situations affect it. Mexico is inside a perfect storm with an industry in constant turmoil at every step of its value chain, an evolving NOC with a new leadership role and finally a reform that is sending shockwaves throughout the

JORGE LEIS Partner and Lead of Oil and Gas Practice in the Americas for Bain & Company

whole industry. These factors create choppy waters that are hard to navigate but as long as the government stays steady the country will be seen by the industry as an attractive opportunity for long-term investment.

The legal and regulatory progress of the Energy Reform has been impressive so far, with every governmental agency collectively producing tens of regulatory documents in a limited period of time. The number of participants and winners in each round is one way to measure the success of the Energy Reform but the government tends to focus too much on this factor. Instead, there are many ways to evaluate its success and the Energy Reform will gradually reveal itself through an orderly, efficient and practical administrative process. The question remains whether the Mexican government will be effective as a contract regulator and administrator. The fact that one of the laws forming part of the Energy Reform is

DAVID ENRÍQUEZ Senior Partner at Goodrich, Riquelme y Asociados

titled Law of Coordination between Regulators is concerning because it shows the

government is worried about coordination.

There are two significant changes taking place throughout the industry. The first is within PEMEX, which essentially was a monopoly since 1938 but now has competition and is looking forward to working with the rest of the industry. Its farm-out approach aims to bring both capital investment and other methodologies into PEMEX’s development activities. The second is the state changing the way it regulates the oil and gas industry. CNH, the Ministry of Finance and other regulatory and governmental organizations will now have to learn how the industry works and how to cope with the market opening. It is a time when rapid changes are taking place. People around the globe are looking to do business in Mexico and the state

RANDY STEWART President of Alpha Deepwater Services

needs to learn how to regulate and make it work in the best interest of the country.

The Energy Reform has been a success and the bidding process was well run and transparent. People are still learning as the process moves forward, which is absolutely normal for a process that just started. Mexico is a land of great opportunities but also of challenges. One of the main challenges is working with a fluid set of regulations that will remain so for some years as the reform progresses and all the players learn their roles and the roads they must follow. Each operator that comes in for an evaluation or development plan approval has its own needs and worries about the data and materials provided by CNH, so Round One provided an overwhelming amount of work for CNH. CNH has handled this pretty well but it has been a bigger

STEVE MEHEEN CEO of Compañía Petrolera Perseus

amount of work than anticipated.

The whole Energy Reform has gone from being an innovative and disruptive process to a process of standardization. The government certainly managed to stay focused on creating the right framework to provide certainty while listening to the industry, academia and society at large to create all the regulations that are now in place. They have to keep improving but until now the balance has been positive. A milestone was reached during Round One with about US$49 billion in investments directed to the Mexican industry. The investments are dependent on the success of the projects but it will surely end up being close to expectations. Round One also helped initiate and speed up the process of regulatory improvement, leading to regulation being shaped by the players affected by it.

RAYMUNDO PIÑONES Director General of AMEXHI

VIEW FROM THE TOP

ASSESSING RISK IN A NEW MARKET MATT MCCARROLL President and CEO of Fieldwood Energy 56

Q: What aspects of the licensing round process still require

the Mexican government needs to be proactive to ensure

improvement?

the proper procedures are in place.

A: The major issues the government must resolve are national content and cost-recovery procedures. At the moment we

Q: How do you gauge the progress of the Energy Reform

are asking our contractors to quantify the national content

so far?

of their goods and services. They cannot produce the

A: The Energy Reform stated that thousands of jobs would

documentation because they are not accustomed to the

be created, which is clearly not going to happen in the short

paperwork. Unfortunately, this prevents us from hiring them.

run. Indeed, we are creating jobs with our project but most

We need the paperwork before we can pay them. and this is

of those originate with their operations base, which is the

turning into a very big administrative challenge.

US. Workers’ unions are calling us and saying they want to work with us but we have to tell them that for the moment

I also worry about the commercial terms of the contracts

there are no jobs. Once we get development, production

and the possibility they might become so unreasonable that

and maintenance started there will be more opportunities,

they are not economically attractive. In the US, events such

but that will take time.

as an increase in oil prices or a field with double the amount of oil than was expected lead companies to a clear economic

For now we are in the drilling phase and will begin testing

benefit after paying royalties and bonuses. Mexico is indeed

thereafter. After those phases we will take some time to

more interesting geologically and development-wise but

produce our development strategy. I am concerned that

contracts are written in such a way that if an event like that

in two years Mexico will look back and ask itself where the

takes place, we end up with almost the same returns. The

new jobs and revenues are and not find them because it

resulting benefits all go to the government.

certainly takes longer to achieve those results.

Q: What are the political risks for the Mexican market?

Promises were extremely optimistic, stating that by 2017

A: We are concerned about the upcoming political situation

production would increase by 500,000b/d and create

in Mexico. The new president will bring in new political

thousands of jobs but that is just not possible. Mexico’s

appointees and we are not sure how long it will take us to

Energy Reform is going faster and better compared with

get to know them and establish relationships or even how

Colombia’s and Brazil’s but goals need to be realistic.

the new administration will view current contracts.

Results will come, we are working on that but people need to be patient.

Also, the audit for cost recovery will happen in two or three years when we finally start having revenues. What

Q: What are your short and long-term goals for Mexico?

will happen if, at that time, the government says this bill

A: The more we work on our fields, the more we like them. We

is not auditable because of the lack of a certain permit?

see plenty of potential. We expect the first well to be drilled

We cannot go back in time and solve that but we also do

by the summer of 2017. It will take a while to drill because we

not have the proper information now to ensure that such a

have to go deeper than 18,000 feet. We have talked about

scenario will not happen. That is certainly concerning and

eventually drilling 15 to 25 wells but to do that access to infrastructure will be crucial because we are 60 miles offshore. PEMEX has an existing pipeline system running underneath

Fieldwood Energy is the largest operator on the US side of the

our block and if we get access to it at good terms, that could

Gulf of Mexico, with interest in 500 offshore blocks in the area,

decrease time to first production. Our long-term goal is to

principally in depths of less than 1,000 feet. It is now expanding

become the second largest producer in Mexico and we do

its portfolio into Mexican waters

believe that it is achievable.

VIEW FROM THE TOP

DUO VENTURES INTO SHALLOW WATERS CARLOS MORALES CEO of PetroBAL 57

Q: What was the significance of PetroBAL’s success in

to the procurement process since we know the market

winning the Ichalkil and Pokoch blocks with Fieldwood

conditions and suppliers very well.

in Round 1.2? A: In our view Round 1.2 was the best round so far, from

Q: Are you planning to participate in Round Two?

every angle. In fact, both Round 1.1 and 1.2 saw high-level

A: We are definitely interested in the second phase

bids from experienced companies such as Statoil, Sierra

of Round Two. Our final decision will be based on the

Oil & Gas, Talos Energy, Premier Oil, Eni and Renaissance.

conditions of each block and we will come to reasonable

Looking at the bids, we were all more or less in the same

offers once we determine how attractive each one is. We

range. Winning a block was a very exciting experience

must consider not only what the government asks of us but

for us and the transparency with which CNH conducted

also what the market demands. PetroBAL’s strategy is to

the rounds made us feel secure about bidding. Some may

diversify its portfolio. Round 1.2 included proven reserves

think we should have submitted a lower bid in hindsight

but Round 2.1 will be completely exploration based. We

but the market set the bidding levels at the time. That was

must assess the blocks in light of this information because

especially evident in Round 1.3, when the government bids

the exploratory nature of the blocks will add more time

were set at a much lower level than what the market offered

to the project. There is no doubt that PetroBAL would be

in the end. Basically, we think the market is setting the bar

interested in partnering with PEMEX in a farm-out and we

for the bidding rounds.

would most probably bid together with Fieldwood again.

Q: What made Fieldwood the right partner for PetroBAL?

Q: How can the authorities improve terms in the coming

A: Fieldwood is the largest private operator in the US Gulf

rounds and make things easier for interested companies?

of Mexico, with more than 600 production platforms. The

A: We recognize that the government has to be careful

Fieldwood management team has a long track record

when selecting the companies it allows to participate in each

of operating for several companies so they bring a lot

bidding round. From our point of view financial credentials

of experience to the table. Although PetroBAL has

are important. A company cannot invest US$50 million in a

many experienced individuals, we lack the operational

well without the proper knowledge and financial backing.

experience required by CNH for participation in the bidding rounds. Fieldwood has this experience, while

Q: What conditions should be set for possible partners with

PetroBAL has extensive geological knowledge of Mexico’s

PEMEX to make a partnership more attractive?

basins. These factors made our synergy with Fieldwood

A: There are three requisites for the successful development of

an excellent option.

any project: access to reserves, financial capabilities and the right people. A partnership between PEMEX and PetroBAL

Q: What surprised you the most about working with a

would be complementary, especially given our synergy with

private partner?

Fieldwood. The government’s stake could be an issue but it

A: It did not surprise us because we view it like any other

is the market that will decide this. The government does not

relationship. Our motto is: “we have to live with others.”

act unilaterally when making decisions, instead it reacts to

We must endeavor to understand others and be prepared

market demands.

to compromise. Our relationship with Fieldwood has gone very well so far. We have talked out any differences and have come to an agreement every time. PetroBAL

PetroBAL, founded in March 2015, focuses on hydrocarbon

undoubtedly has more responsibilities and participation

exploration and production. It forms part of Grupo BAL, a

in geological and geophysical activities as well as

group of Mexican companies active in various industries

evaluation and analysis plans. We also contribute a lot

including mining, insurance, financial services and retail

VIEW FROM THE TOP

HORIZONS EXPANDING IN OFFSHORE LICENSING ROUNDS IVÁN SANDREA CEO of Sierra Oil & Gas 58

Q: What are the highlights of Sierra Oil & Gas' upstream

A: Everybody in the partnership contributed but Sierra’s

activities in the past year?

strengths focused on commercial, technical and legal

A: Sierra has become an important player in the offshore

expertise. Specifically, Sierra offered an important source

area. We consider it to be a major achievement because we

of regional knowledge to the group thanks to our dataset

have managed to become number one in terms of blocks

covering over 60,000km2 of 3D seismic, which we believe

assigned and net acreage. This has given us a level of

was one of the decisive factors that allowed us to win

maturity and recognition in Mexico and across the industry.

Block Five. Sierra also had the advantage of knowing how the regulatory processes and economics work in

Q: What were your initial concerns after winning two

Mexico, therefore having the ability to offer our partners

blocks in the shallow-water Round 1.1?

insight into how to work on their own processes. We

A: After winning blocks two and seven in Round 1.1 Sierra

see ourselves as an early stage developer, screener

immediately started performing environmental baseline

and technical partner and now that operations are

work, seismic reprocessing and overall preparations to

about to start, Sierra can have a more supportive role,

drill. Now we expect to start drilling the first exploration

helping partners get established in Mexico by providing

well in the country, which is an important step for Sierra,

experience and assistance.

its partners and Mexico. Q: What are your thoughts about local content in the oil Sierra bid on Block Seven because it saw several strong

and gas industry?

prospects with the right quality. These prospects have

A: It is hard to talk about local content in the exploration

even been categorized by consulting companies such

sector. Having only one shot to drill a well, investors want

as Wood Mackenzie as being among the top 10 global

to make sure they have the security of working with the

prospects in the oil and gas industry and I believe among

very best international and local companies using the

the top five for oil alone. We will start drilling Block Seven

latest technology and equipment.

in May 2017 with a semi-submergible rig that worked the US side of the Gulf of Mexico. We will start drilling

Local content is easier to implement in the production

a vertical well to hit two targets. First results should be

phase than the exploration phase, where activities are

available by July or August.

more repetitive. Having said this, we will exceed the local content required by the contracts by 15 percent.

Block 2 is also pretty exciting. Although all our efforts and energy are focused momentarily on Block Seven, we

Sierra is aware of the harsh conditions local companies

will finish the Authority for Expenditure (AFE) for Block

have been exposed to because of PEMEX’s budget. At

2 by the third quarter, with the hope of being ready to

the same time Mexico has become a very competitive

start operations six months later.

environment. Sierra Oil & Gas and its partners ran a tender for environmental studies for Block 7 and 2, inviting local

Q: What is Sierra’s role in the consortium with Murphy

and international players but sadly, prices from local

and Petronas that won a deepwater block in Round 1.4?

companies were three times higher than those from international companies. To solve this issue local content needs to be more proactive, ensuring it can compete both

Sierra Oil & Gas is focused on opportunities arising from

in quality and price against international companies and

Mexico’s Energy Reform. Its activities cover upstream and

most importantly, make sure to promote itself because

midstream with a team averaging 25 years of experience in the

most companies are not aware of the multitude of service

Mexican oil industry

companies that are present in Mexico.

VIEW FROM THE TOP

SKILL AND A STROKE OF LUCK IN ROUND 1.3 JOSÉ URIEGAS CEO of Grupo IDESA 59

Q: What advantages did IDESA offer International Frontier

by the authorities. This will be repeated after a few years of

Resources (IFR) that helped secure a win in Round 1.3?

production, to check how pollution levels have changed. We

A: Originally we were assessing how to enter Round 1.3 but

are also studying how the production will be transferred from

were not sure of the process. Fortunately, and thanks to our

the field to the distribution centers where the petroleum will

knowledge of doing business in Mexico, Canada’s IFR reached

be sold. At first it will be sold to PEMEX, then further down

out to us and we ended up in a partnership. We were then

the line third-party companies will become involved.

lucky enough to secure a block under our E&P company Tonalli Energía. We originally came in second place in the

Q: Will IDESA participate in CNH’s upcoming onshore

bidding round but the winner decided to pull out and we

Round 2.3?

subsequently won the onshore Tecolutla block. Our goal is

A: IDESA has already obtained access to CNH’s data room as

to complete all the permitting processes by the middle of

part of onshore Round 2.3. As in Round 1.3, we do not want

2017 and to begin production by the second half of the year.

to take on a very large project so we will focus our attention on the smaller blocks. We have the great advantage of a

Q: Why did IDESA decide to enter the round with a partner

partnership with IFR. It is a small firm but it has experience

rather than going it alone?

with similar ventures in Calgary and other parts of the world.

A: We could have approached some of these projects alone but it would have taken a lot more time. From our

The Tecolutla block already has wells that were drilled

three partnerships (Braskem IDESA, Cyplus IDESA and

by PEMEX but which were eventually closed due to low

Tonalli Energía), IDESA has learned a lot and not only

productivity. Now, with our partners’ modern drilling

in a technical sense but also about the culture of doing

technologies — especially horizontal methods — we have

business. For example, on the petrochemicals side of

high expectations for these wells. In Round 2.3 we will be

our business we are partnered with German chemical

focusing on fields that share synergies with Tecolutla and

company Evonik Industries Mexico. Its business culture is

which are similar in nature.

very different to ours. Latin Americans sometimes think they can jump from step one to step four of a process but

Q: What are your expectations for IDESA in the coming years?

the German culture does not function this way. This has

A: Our short-term vision is to consolidate our three recent

been an interesting learning process for IDESA and we are

projects: Etileno XXI with Braskem, Tecolutla with IFR

a different company than we were 10 years ago.

and the two plants in Coatzacoalcos. The dream for the mid to long term is to keep growing in petrochemicals

Q: What steps do IDESA and IFR need to take before

and to continue taking advantage of the Energy Reform.

production begins at Tecolutla?

As well as participating in the bidding rounds we are

A: We are studying how to make the most of the block from a

looking at the midstream market. We have a port terminal

technical standpoint, taking into consideration the wells that

in Veracruz and we believe there are opportunities to

already exist and the possibility of drilling future wells. Then

manage gasoline there. The terminal manages liquid

there is the question of obtaining all the necessary paperwork

chemicals but it could be modified to handle fuel storage

and permits from CNH and ASEA.

and distribution.

The environmental regulations are particularly rigorous. One example is the ground study we must submit to record the

Grupo IDESA, founded in 1956, is one of the largest groups in

environmental conditions of the block when we received it.

Mexico and has an international reach. Its established business

Before producing anything we have to determine pollution

areas are petrochemistry, distribution, logistics and business

levels and their exact location, which then has to be verified

applications.

VIEW FROM THE TOP

A LESSON IN TRUST VICENTE GONZÁLEZ Director General of Geo Estratos 60

Q: What went wrong in Round 1.3 and what did you learn

what these projects will contribute to our know-how, by

from this experience?

managing about a thousand times more volume than

A: It is of capital importance to know full well who you

what we initially observed, was far greater than what

are going to bed with in this type of project. We made a

we anticipated. Although we played to win, covering our

mistake in selecting our partner, convinced that since the

costs and generating some income, it was a project of

company was listed on the London Stock Exchange the

significantly higher importance. We did not just see the

agreements would be upheld. We decided not to proceed

10km2 we bid on but the surrounding 12,000km2 area.

legally because we want to move ahead more than we want to look for trouble. We are not interested in making

Q: What are your Round Two ambitions?

money in that manner.

A: We see this differently than oil businessmen outside our value chain would view it. We consider oil fields as

Amex Oil was the British partner in the consortium. It

selling points, managed as a boutique where we can put

asked to borrow our name to have greater impact in the

our technologies to work and generate additional know-

Mexican market. We allowed them to use our name next

how. This is why we are more interested in participating in

to its company name, without charging the royalties or

the Round Two areas in which the exploratory components

having any other gratification. The contract stated that if

can contribute to verifying our processes. We can absorb

one partner failed to sign, that would be enough for the

the investment risk to acquire that knowledge. This is

contract to be null and void. Given that our consortium

part of our business formula because there is no better

formula placed Amex Oil as a financial partner, it had

way of scaling a process in major contractual areas than

more weight and responsibility during the process

understanding in exhaustive detail if your approach and

because the technical partner has more impact after

hypothesis are correct.

the signing. Amex Oil did not present the required due diligence bonds and it did not sign the contracts. But we

The other important element is to be close to regional

have moved on from this incident.

markets that have a considerable appetite for energy and the derivatives of wet gas. Geo Estratos’ opportunity

For Round 2.2 and 2.3 Geo Estratos is exhaustively analyzing 15 blocks and channeling investments of over US$3 million per block to determine feasibility

portfolio within the more than 25 total blocks in Rounds 2.2 and 2.3 is quite considerable. We are analyzing our possibilities, so much so that we are channeling investments just to determine if we are going in or not. We are exhaustively analyzing 15 blocks. Q: What philosophy underpins Geo Estratos' activities? A: Geo Estratos’ constant is its innovative spirit. Betting on Mexico is our main objective even though we are working in other Latin American countries and in Indonesia. We

Q: Your offer was significantly higher than the second-

want to carve our own path as an operator and learn from

highest bidder. What was the motivation behind this

global companies. We have allies in Norway and Mexico

strategy?

that are associated with us in the oil rounds.

A: If you go into the ring and get a knockout in 10 seconds or 12 rounds, the end result is the same. I do not mind

Our strategy is to transfer best practices to Mexico and

that we prepared the fight for two years and only needed

try to emulate the most advanced countries’ technological

10 seconds. The balance between what we offered and

bases. This gives us important upward potential because

more developed industries have already dealt with the

production because of mechanical bottlenecks for water

problems Mexico is facing. We are backed by 20 years of

control. We are unable to discern this decrease factor

experience in understanding these problems so we can

because the data does not reflect it. As a result, oil fields

easily adapt successful technologies. We have pushed

are being closed because of the increased water or gas

innovation as far as obtaining patents in processes that

content. Second, we are developing technologies aimed at

were deadlocked.

heavy crude oil because Mexico’s reserves are comprised of 60 to 70 percent of this type of hydrocarbon. Third,

Q: How is shifting from being a supplier to an operator

we are using technologies to position oil wells with a

changing your business?

significantly higher success rate. This allows us to combine

A: Being an operator will allow us to demonstrate that risk

our subsoil expertise with our exploratory capacity and oil

management in exploration and production, backed by

well positioning know-how.

technology, is a definitive improvement. When you involve someone else’s money and you lack certainty about the

Q: How can more Mexican players be encouraged to

rate of return, it is difficult to sell. The only way to do so is

participate in the licensing rounds?

through scaling and in such a way that tomorrow we can

A: From our standpoint the combination of the rounds’

develop applications where we share our risk with particular

inherent high risk and the demanding prequalifying conditions

users that have limited resources but are certain about ROI

justifies the low level of participation. There are alternative

by working with us. We envision an industry where our

ways in which other sectors can pull together and achieve the

success rate and economic results allow us to promote a

same result, parallel to the bid. Perhaps Round 2.3 will better

new way of understanding risk in the oil business.

motivate higher participation. We are already working on it, focusing 30 percent of our assets in the Southeast Basin and

Q: What are the most important technologies in your

70 percent toward the Tampico-Misantla Basin.

portfolio? A: One of our top priorities is water management. That segment represents a potentially strong market. Surface

Geo Estratos is a Mexican services company with 20 years of

hydrocarbon management is one of our greatest challenges.

experience in providing technology solutions and research to

PEMEX knows this because a substantial number of fields

optimize oil operations. It is expanding into upstream through

it obtained in Round Zero are experiencing declining

CNH’s licensing rounds

VIEW FROM THE TOP

DIRECT INVOLVEMENT REQUIRED FOR SUCCESS CRAIG STEINKE CEO of Renaissance Oil Corp 62

Q: What have been the year’s highlights for Renaissance?

Q: How do alliances with associations like AMEXHI help to

A: Renaissance’s goal was to establish itself in two different

strengthen Renaissance’s presence and reputation?

onshore plays: unconventionals and mature fields. This is

A: The unconventional opportunities in Mexico are significant

where our expertise lies and where we see the biggest

and to date untapped. We are willing to enthusiastically

onshore opportunities in Mexico. In keeping with that

share our thoughts with the government on how to best

strategy, we were delighted to be successful bidders in

commercialize these opportunities. We want to help shape

Round 1.3, winning our three prioritized blocks in the state

a proper platform for sharing this knowledge. Furthermore,

of Chiapas. In February 2017, we announced our partnership

we believe the Mexican government is working diligently

with Lukoil on the Amatitlán property located in the

with the Alberta government, as advisers, with the objective

Tampico-Misantla Basin. We hold a 25 percent interest in

of incorporating some of Alberta’s already well-established

this contract with an option to increase the interest to 62.5

unconventional regulations. The timing is perfect for the

percent based on successful development of the property.

upcoming unconventional auction.

For Amatitlán, we see the biggest opportunities in the Upper Jurassic shale.

Q: What are Renaissance’s plans for onshore Round 2.2 and 2.3, scheduled for mid-2017?

Those two key events are consistent with our goals to

A: We are encouraged to see the government’s recent

establish the company in these two play types. We were

changes, where industry can now nominate areas for each

very aggressive bidders in Round 1.3 because it was an

round. This is extremely important because we can now

aggressive auction. Our objective was to establish ourselves

bid on areas we have already evaluated and chosen. For

as a international oil-producing company in Mexico. We

Round 2.2 and 2.3 the state has made a unilateral decision

realized we had to pay high royalty rates to succeed. We

on which blocks will be auctioned. For this reason, we are

were willing to do so because we want to be a leading

more enthusiastic about Round 2.4.

operator in Mexico and we knew we could not learn much by staying on the sidelines. If a company wants to succeed

We bid aggressively in Round 1.3 to establish ourselves.

in a country that is reforming its industry with a new set

These areas are more of a learning ground for Renaissance

of regulations, it must be directly involved in operations.

to become a competent and efficient operator in Mexico.

Active involvement means we can take part in interpreting

We are an aggressive and progressive company, so we will

the hydrocarbons law and in developing new oil and gas

be bidding in the future rounds. Importantly, we anticipate

regulations. That is exactly what Renaissance is doing.

seeing a bidding formula that places more emphasis on the workplan than royalties. We are happy to be an aggressive

Renaissance has a unique expertise in shale development and

bidder.

we have been asked by AMEXHI to head its unconventional technical committee. This allows Renaissance to liaise with

Q: Do you believe there will be continued focus on royalty

the Ministry of Energy and the Ministry of Finance. Our

rates?

status as a bonafide operator led us down this path.

A: It has been proven around the world that a heavy focus on royalty rates is not a sustainable formula. It is basically a short-term formula that leaves a lot of resources in the ground. We understand the industry has voiced that

Renaissance Oil Corporation is an E&P company with extensive

concern and we anticipate the Ministry of Energy and the

knowledge in shale resource development. It was established

Ministry of Finance will listen and will come up with a new

in 2013 with corporate headquarters in Vancouver and offices

formula. If we see that new formula we will be bidding

in Mexico City

aggressively.

Q: Along with learning the ropes in an evolving market, how does Renaissance mitigate the operational challenges? A: We recognize that every country is different and even communities in the same country can have different sensitivities. In the areas where we operate, we are doing our best to learn about the unique sensitivities of each community. Our goal is to educate ourselves on the environmental impact and various engagement issues and to deal with them in a professional and sensitive manner. The goal is to create a good working relationship with the stakeholders in the communities where we operate. We plan on being one of those companies that improves relationships and has a positive impact on the environment. We are in discussions with various national Mexican corporations to create alliances. We know that Mexicoâ&#x20AC;&#x2122;s national corporations are well acquainted with the culture and understand the local sensitivities that a Canadian company may not be initially aware of. These alliances help us on our learning curve. Q: If you could ask CNH or the Ministry of Energy to improve the process, what would you request they change? A. One of the things that will have to happen is a streamlining of the well permitting process. It is administratively onerous and inflexible. It needs serious surgery. There are enough challenges in this low oil-price environment so the state has to revisit the well permitting process. Right now, it takes three to six months to obtain a drilling permit. This is far too long. In Canada, which has a well-established oil and gas regime, with the proper notification to the government, a permit can be obtained within one to two weeks. Q: How does an international company assess the risk of a different government coming to power in 2018 in Mexico? A: Since it is something completely out of our control, it is a difficult risk to manage. We will focus on being a professional and efficient operator and look forward to working productively with whichever party is running the government. There may be some adjustments to the Energy Reform but it will be hard to roll it back completely. For important reasons, the state and PEMEX need the Energy Reform. They need capital and expertise, otherwise they will revert back to pre-reform days -- but in those days oil was priced around double what it is worth today. Therefore, in the current environment, the reform is especially important. Q: What is your goal for Renaissance in the next few years? A: Our goal is to establish Renaissance as a major operator in Mexico. Importantly, we are here for the long term. We are willing to do what it takes to establish ourselves for the long term in a responsible manner. Renaissance will concentrate on growing reserves and production in its two play types while becoming a respected operator in Mexicoâ&#x20AC;&#x2122;s industry and communities.

INSIGHT

LEARNING THE ROPES OF A NEW MARKET ALBERTO BESSOUDO Business Development Director of Emusa

Of the 40 participants to place bids in December 2015’s

One has been a hot topic in the industry, drawing criticism

onshore Round 1.3, 14 walked away from the competition with

from those who claimed it drew attention away from

one or more blocks. But that does not mean the remaining

investment and therefore potentially decelerated activity

26 companies left completely empty handed. According to

in the industry. But Bessoudo has praise for the authorities

Alberto Bessoudo, General Director of Emusa, the round was

carrying out the Energy Reform. “The government is doing

a chance for aspiring E&P companies like his to learn vital

a great job of opening the market and making Mexico an

lessons for similar future ventures. “Round 1.3 was a learning

attractive investment destination.”

process for us,” he says. “We took very positive things from it that we will implement in future rounds for a more effective

Emusa’s learning process is not limited to Mexico. The group

strategy.” Emusa, which has represented a group of Mexican

also holds stakes in US-based blocks where it participates

investors since 2013, bid on four blocks during the round

as a nonoperator. “Our aim is to gain valuable experience in

together with Houston-based operator Triple Five Energy.

the US in blocks that already have production, then transfer this experience to Mexico.” Bessoudo is convinced Emusa

Topén, Malva, Pontón and Secadero were the four blocks

makes for an attractive nonoperating partner for onshore

Emusa bid on but those were awarded to a range of

bidding rounds.

other companies after Emusa’s bids fell short. In a round characterized by the high-royalty rates offered, companies

“Our partnership with T5 has been key to building

offering a leaner future government take in their proposals

our presence in Mexico,” he says. Citing T5’s extensive

trailed behind. In the case of the Malva block, for example,

experience operating blocks in the US, he says Emusa’s

Renaissance Oil won after bidding an additional royalty rate

experience in building businesses from scratch in other

of 57.39 percent, while Emusa’s consortium offered 5.01

sectors in Mexico made for a highly compatible relationship

percent.

between the two companies. But most important was their shared long-term vision. In a dynamic market where

“Emusa’s strategy was not focused on offering high

opportunities are based on years rather than months,

royalties,” Bessoudo says, “but that is the way Round

Bessoudo is convinced Emusa is sowing the seeds that will

1.3 allowed companies to learn and make subsequent

lead to an enduring business in the country. “We want to

changes.” CNH’s prioritization of royalty rates during Round

become leaders in any business we get into.”

INSIGHT

‘QUANTUM LEAP’ IN COLLABORATION NEEDED JAVIER ZAMBRANO Executive Director of Jaguar E&P 65

As Mexico’s new oil and gas regulator CNH moves forward

next tenders, which he hopes will result in fewer “irrational”

to optimize the terms of each bidding round and learning

bids hindering the process.

from past successes and experiences, Javier Zambrano, Executive Director of Jaguar E&P, believes collaboration

Zambrano does give credit to CNH for the transparency of

with participating E&P companies is vital to ensure its efforts

Round 1.3. “If I had to rate the process on transparency, I

are successful.

would give them a 10/10,” he says. His protests do not center on the way the process was conducted but on specific

His company, an independent Mexican exploration and

regulations set out in the bidding contracts, where he calls

production firm, was one of 40 that submitted bids for the

for more cooperation. “We all have to be more collaborative

onshore blocks up for grabs in Round 1.3 in December 2015.

and more proactive with feedback to CNH,” he says.

Despite failing to secure a block, many lessons were learned in what Zambrano describes as “an insightful process.”

Zambrano remains positive that the authorities are moving

Although he is keen to highlight areas of improvement to

in the right direction by listening to players and modifying

maximize the rounds’ success, he emphasizes that Jaguar

the terms based on their comments, albeit slowly. “Instead

E&P remains dedicated to growth in the Mexican oil and

of the baby steps we are observing, we need a quantum

gas market, predicting 2017 will be “the tipping point for the industry’s development.” The first issue Zambrano points out is the high royalty rates offered for the blocks in Round 1.3. “Jaguar’s target is to be a long-term player in the Mexican market but that is not possible if you are paying 80 percent royalty rates to the government because it leaves no room for future investment,” he says. Jaguar E&P’s obligations to its stakeholders mean it must take the profitability and sustainability of any venture very seriously, he adds. For this very reason the company has been forced to explore and

“ leap,” he says.

We all have to be more collaborative and more proactive with feedback to CNH”

Despite the problems, the company remains focused on succeeding in the Mexican oil and gas industry. Jaguar E&P,

deploy capital in Latin America and the Caribbean despite

he says, is working with the government and universities

being created specifically to capitalize on the promising

in Nuevo Leon to provide training and certifications for

potential of Mexico’s Energy Reform, a reminder of the

students wishing to enter the oil and gas industry. The

central role that bidding terms play in attracting investment

majority of its staff actively offer undergraduate and

into the country’s oil and gas market.

graduate level courses in institutions such as UNAM, which makes him worry less about a talent gap in the country.

“Round 1.3 saw ultra-high bids from different players who were likely taking advantage of the low walk-away costs and

“We built Jaguar from the ground up, and we are here for the

investment commitments just to learn more about bidding

long run,” Zambrano assures. Jaguar E&P is a relatively new

processes,” Zambrano says. He worries that, in terms of the

company, founded in 2013. It belongs to private equity fund

awarding variables, the limited weight given to the work

Grupo Topaz and is therefore financially secure. The promise

programs of awarded blocks threatens to derail the Energy

of Mexico’s oil and gas industry in 2017 makes Zambrano

Reform’s goal, which is ultimately to maximize the potential

optimistic about the year ahead. As Jaguar E&P looks for

of Mexico’s hydrocarbon resources. The company is pleased

partners who reflect its values of technology, talent and new

to see higher pre-qualification standards CNH set for the

ideas, he is convinced that the best is yet to come.

VIEW FROM THE TOP

MATHEMATICAL SOLUTIONS FOR OPTIMAL BIDS NICOLAS MELISSAS Founder and CEO of Athena Consulting

Q: What is your main take Mexico's licensing rounds?

that there was oil there. The geological risk was lower and

A: In R1.1, the Mexican government did not disclose the reserve

companies knew the necessary reserves were present to make

price to potential bidders, which was a huge mistake. In my

extraction economically viable. The same situation arose with

opinion, the best auction design so far was R1.2. Bear in mind

the Trion farm-out. The only issue with Trion is the high cost

though that sufficient oil and gas reserves had already been

of deepwater drilling and development.

found in all the blocks offered for sale in R1.2. This explains why bids were so high in that round. In R1.3, 25 different blocks

Q: What programs are you developing that could eventually

were offered for sale. Bidders had to submit all their bids

be applied to the oil and gas industry?

before the first block was awarded and, after the auction,

A: Athena could help oil and gas companies compute their

many firms regretted their bidding strategy.

optimal bids. One could use available seismic data to compute the implicit ROI present in each firmâ&#x20AC;&#x2122;s bid. Next, one could

Q: What are the main challenges in the bidding processes?

regress those implicit returns on different firm characteristics.

A: The main risks companies face when bidding in oil and gas

This allows us to classify different firms in different clusters.

auctions is the lack of certainty regarding the extent of the oil

IOCs have many global options for investments and this

reserves in any given block. The name of the game is to avoid

should be reflected in their bids. Mexican firms or service

paying too much by accurately assessing the hydrocarbons

providers, on the other hand, may face a lower opportunity

potential and risks involved. Round 1.2, for example, saw higher

cost, which should also be reflected in their bids. One would

bids from companies because it was already ascertained

thus expect both types of firms to end up in different clusters.

INSIGHT

DRAMATIC EVOLUTION FOR LEGAL FIRMS NOÉ PASCACIO Partner, Head of Energy and Infrastructure at BGBG Abogados 67

Law firms were not spared from the far-reaching impact

to emulate them,” Pascacio says, adding that CNH’s

of 2013’s historic institutional change in the country’s

employees are being headhunted by other governmental

energy policy. Noé Pascacio, Partner and Head of Energy

bodies seeking to increase their image of transparency.

and Infrastructure at BGBG Abogados, says the way legal agencies deal with energy cases has evolved dramatically.

The wide range of companies involved in Round One gives the sector a glimpse into how Mexico’s future oil and gas

“Five years ago, the top 10 law firms in Mexico did not

market will look. “Throughout Round One, we have seen

have a specific energy practice,” Pascasio says. Now they

oil heavyweights such as Chevron and BHP Billiton enter

all have specialists in these laws and regulations and are

the market, particularly through the deepwater rounds,”

working side by side with new players to keep up with

he says. "On the other hand, there are the small, Mexican

the rapidly changing landscape of Mexico’s energy sector.

companies that are developing experience and will likely

While other participants wait on the sidelines for the

invest in onshore exploration."

market opening to affect their operations in real terms, law firms have taken an early role during the development

Regardless of the size and scope of the company,

of a new regulatory and legal framework for Mexico’s oil

many challenges lie ahead, Pascacio says. “In particular,

and gas industry.

facility, ownership, land access and community relations will require great attention from newcomers,” Pascacio

This has not been an easy task, given industry difficulties

says. He explains that although Mexico has relevant

such as low oil prices and the subsequent downturn that

governmental institutions such as the Urban, Agrarian

accompanied the market opening until 2016. But Pascacio

and Territorial Development Ministry (SEDATU), the Social

sees the bright side because the lack of activity was in fact

Development Ministry (SEDESOL) and the Ministry of

a benefit for firms like BGBG. “The Energy Reform actually

Agriculture, Livestock, Rural Development, Fishing and

came at the perfect time for us because it gave us time to

Food (SAGARPA), these responsibilities usually fell on

work through all the regulatory procedures and the legal

PEMEX’s shoulders, which has more local experience and

framework,” he says.

influence to deal with them. “But when you take PEMEX out of the equation, these institutions need to step in and

As a boutique law firm, BGBG specializes in offering

do the job they are supposed to,” says Pascacio. Private

judicial services in a variety of sectors from energy and

companies will deal with social issues such as land access,

infrastructure, telecommunications, finance, intellectual

taking into consideration not only Mexican but also

property and more. With its international specialists in

international regulations such as the UK’s Anti-Bribery Act.

hydrocarbon E&P, BGBG helps its clients as they participate in licensing rounds, obtaining public and private project

“Fortunately for new private companies, the E&P contracts

financing and resolving technical disputes. The firm is also

they sign with CNH state that the Mexican government

active in the natural gas sector, assisting its clients as they

must support them in dealing with such issues,” he says.

take on pipeline construction projects, for example.

The Mexican government’s ability to abide by these promises will be a test for a country seen as facing

Pascasio praises developments on the government’s

corruption challenges, although Pascacio does not believe

side, specifically the transparency of CNH’s first phase

that negative image reflects the reality of the country.

of bidding rounds, which saw a variety of offshore and

“Mexicans are not corrupt by nature,” he says. “CNH’s

onshore oil fields auctioned to IOCs, NOCs, independents

successful efforts to make the bidding processes 100

and smaller, private players. “CNH’s bidding procedures

percent transparent have really helped to improve Mexico’s

are state-of-the-art and other industries are striving

image already.”

ROUND 2 28 29 20 16 30

17 31 18 68 19

24 1

9 6 36 38

27 39

Bid R2.1 R2.2 R2.3

Source: CNH

26 40

Map

Round

Block/ Field

Contract Type

Call Date

Bid Date

Location

Area (km2)

Basin

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

544.4

Tampico-Misantla

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

548.7

Tampico-Misantla

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

546.4

Tampico-Misantla

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

556.8

Tampico-Misantla

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

824.5

Veracruz

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

559.3

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

590.8

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

586.0

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

562.4

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

532.6

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

532.9

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

521.2

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

564.6

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

466.5

Southeast

R2.1

Production Sharing

Jul. 20, 2016

Jun. 19, 2017

Shallow Waters

971.6

Southeast

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

360.3

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

374.6

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

447.9

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

440.3

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

444.6

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

479.0

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

445.0

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

416.1

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

463.9

Burgos

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

426.1

Southeast

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

418.8

Southeast

R2.2

License

Aug. 24, 2016

Jul. 12, 2017

Onshore

348.9

Southeast

R2.3

BG-01

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

99.3

Burgos

R2.3

BG-02

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

162.9

Burgos

R2.3

BG-03

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

199.6

Burgos

R2.3

BG-04

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

199.3

Burgos

R2.3

TM-01

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

72.4

Tampico-Misantla

R2.3

VC-01

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

193.3

Veracruz

R2.3

VC-02

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

251.4

Veracruz

R2.3

VC-03

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

231.7

Veracruz

R2.3

CS-01

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

95.2

Southeast

R2.3

CS-02

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

247.9

Southeast

R2.3

CS-03

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

215.1

Southeast

R2.3

CS-04

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

244.8

Southeast

R2.3

CS-05

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

233.6

Southeast

R2.3

CS-06

License

Nov. 15, 2016

Jul. 12, 2017

Onshore

148.2

Southeast

Maintenance of wells and drilling equipment, COSL

EXPLORATION & DRILLING

The success of Mexicoâ&#x20AC;&#x2122;s oil and gas licensing rounds since 2016 points to a simple truth: the Latin American country is soon going to need a lot of rigs to explore, drill and turn the promise of the nationâ&#x20AC;&#x2122;s reserves both on and offshore into a flow of real and profitable oil production. The resulting challenges are not to be underestimated, as the recovery in oil prices and profitability-related concerns are expected to press the countryâ&#x20AC;&#x2122;s industry regarding both equipment and human resources availability. Thus, national industry will have to come together and bridge the learning gap faster to deliver quality results in a pinch.

Here, the business opportunities popping up for exploration and drilling companies in the wake of past and future licensing rounds are examined, as well as the needs of developers and the technological advances that are changing the face of the hydrocarbons industry.

CHAPTER 3: EXPLORATION & DRILLING 74 ANALYSIS: PEMEX 3P Reserves Replacement Rate Up Y/Y But Reserves Drop Again 73

76 INSIGHT: Multiclient Seismic Market Aids Industry Transformation 78

VIEW FROM THE TOP: Alma América Porres, CNH

VIEW FROM THE TOP: José Antonio Escalera, PEMEX E&P

VIEW FROM THE TOP: Richie Miller, Spectrum Geo

VIEW FROM THE TOP: Karim Lassel, CGG

84 INSIGHT: Lularyde Moreno, Rock Solid Images 85

VIEW FROM THE TOP: Petter Lindhom, EMGS

VIEW FROM THE TOP: Javier Rubio, Geoprocesados

VIEW FROM THE TOP: David Pring, PGS

VIEW FROM THE TOP: Rossy Pérez, Beicip-Franlab Mexico

VIEW FROM THE TOP: Kurt Machnizh, Paradigm

VIEW FROM THE TOP: Raúl Cullingford, Control Flow

VIEW FROM THE TOP: David González, Net Brains

92 INSIGHT: Lai Xuanchao, COSL Mexico 93

VIEW FROM THE TOP: Guido Rivas, QMax

VIEW FROM THE TOP: Tony Solis, TSC Offshore Group

VIEW FROM THE TOP: John Lawrence, Petricore

ANALYSIS

PEMEX 3P RESERVES REPLACEMENT RATE UP Y/Y BUT RESERVES DROP AGAIN Since the oil price drop, exploration and drilling activity was the

Light crude was discovered in the Teca 1 well,

first area to suffer as PEMEX reduced its exploration activity.

located 30km offshore between Veracruz and

After a modest oil price recovery and with the entry of new

Tabasco, and with a water depth of 44m. Its 3P

players, all signs indicate the beginning of a drilling upturn.

reserves are estimated to lie between 50 and 60 million. It reaches depths between 2,750m

During 2016 PEMEX added 684 million barrels of crude oil 74

and 3,400m and could produce around 7,000b/d.

equivalent in 3P reserves through exploratory activity, 5 percent more than the 651 million barrels it added in 2015

In the first quarter of 2017, PEMEX made two shallow-

but leaving the reserves replacement rate at no more than

water discoveries with the completion of the Teekit 1001

62 percent.

and Koban 1 wells. Both were drilled in PEMEX’s Litoral de Tabasco asset in a water depth of 30m and 12m respectively.

Of the 21 exploratory wells completed in Mexico during

Teekit 1001 contains oil and gas and has an initial production

2016, six were commercial producers and 15 were either

of 2,472b/d, while Koban 1 contains gas and condensates

noncommercial producers or nonproductive. This means

and initially produced 3,276b/d.

the exploration success rate for 2016 was 29 percent, down from the previous year’s 50 percent. The unsuccessful

DEEPWATER

wells were split almost evenly between uncommercially

PEMEX’s 2016 exploration successes in deepwater are the

productive wells and unproductive, at 33 percent and 38

Nobilis-1, Doctus-1 and Exploratus-1DL wells; the latter

percent respectively. In the first three months of 2017, five

two of which are in ultra-deepwaters. The Nobilis-1 and

more wells were completed, resulting in two commercial

Doctus-1 wells contain over 300 million barrels of crude oil

producers and three nonproductive wells.

equivalent and contain light crude oil. The Nobilis field is to be farmed out together with Maximino in PEMEX’s second

In PEMEX's ideal scenario, reserve incorporation would rise to 1.5 billion boe by 2021, with additional resources

deepwater farm-out following 2016’s success, when BHP Billiton entered into a joint venture with PEMEX for the Trion field. Nobilis-1, located around 220km from the coast of Tamaulipas, was drilled in a water depth of 3,000m and a total depth of 6,115m. The drilling resulted in the discovery of two crude oil deposits, with a gravity of over 40 API. According to PEMEX, the well’s productive capacity could reach 15,000b/d and contains an estimated 140 to 160 million barrels of 3P reserves.

Three of PEMEX’s six successful exploratory wells that were

RESERVE INCORPORATION

completed in 2016 were located in shallow waters. Two others

PEMEX’s investment in 3P reserve incorporation declined

were in ultra-deepwaters and one was found in deepwater.

dramatically in 2012-16 but the NOC has plans to reverse this drop. In its ideal scenario, reserve incorporation would

At the beginning of 2017, two more shallow-water

rise to 1.5 billion boe by 2021, with additional resources.

exploratory wells were completed by PEMEX, as well

PEMEX would need an investment of around MX$60 billion

as Eni’s Amoca-2 well in late March 2017. This made the

to reach this level.

Italian oil Major the first IOC in Mexico to strike oil since the Energy Reform was passed.

PEMEX defines its base reserve incorporation goal as 1.1 billion boe at 3P level from 2017 to 2021. CNH Commissioner

SHALLOW WATER

Alma America Porres believes this is an ambitious goal. “This

The three commercially productive shallow-water

scenario that assumes that PEMEX will incorporate over 1

exploratory wells PEMEX completed in 2016 were the

billion barrels of oil equivalent, based on the fields and areas

Pokche-1, Uchbal-1 and Teca-1 wells. The Pokche-1 well,

assigned to PEMEX during Round One, is optimistic and

off the coast of Tabasco, reached total depths of 6,518m

will need strong support from farm-outs,” she says, adding

and produced superlight oil and gas. Uchbal-1 was 2,670m

that based on the first four months of 2017, PEMEX is not

deep and produced heavy crude and gas.

on track to achieve it.

POZOS TERMINADOS COMPLETED WELLS

80 70

Teca-1

50 40

27 10

Tabasco

Veracruz Wells

Field

1Q16

2Q16

Development Salt

Normal Fault

3Q16

4Q16

5 75

1Q17

Exploration

DESARROLLO

Source: PEMEX

EXPLORACIÓN

Source: PEMEX

The company plans to drill 30 exploratory wells in 2017,

than exploratory ones, which actually increased from 1Q16

a goal that if reached will result in a total 1 billion boe,

to 2Q16. The average number of active development rigs

in line with the “improved scenario” outlined in PEMEX’s

for each quarter of 2016 was 19.25, 70 percent less than

business plan, according to Director of Exploration José

the quarterly average of 64.75 in 2015.

Escalera. “With prices of around US$43/b for the Mexican mix, it is a challenge but we know that we can make a go

FUTURE

of it,” he says. Short-term exploratory success depends

PEMEX plans to drill 30 exploratory wells in 2017. Ten

on the NOC’s ability to take advantage of its Round Zero

will be onshore, 12 will be in shallow waters, four will be

assignments, while new areas won through licensing

in deepwater and the remaining four will be drilled in

rounds will help mid to long-term exploration success,

unconventional fields.

Escalera says.

EQUIPOS DE PERFORACIÓN PROMEDIO POR TIPO AVERAGE DRILLING UNITS BY TYPE (1Q17)

DRILLING ACTIVITY Overall, the number of wells in operation in the final

Development

Exploration

quarter of 2016 was 8,351, 9.8 percent less than the same period in 2015. In total, PEMEX completed 171 wells in 2016 and the first quarter of 2017, 26 of which were exploratory and 145 of which were development wells. There was a

6% Onshore 94% Offshore

sharp drop in the number of completed development wells from the beginning of 2016 in comparison to the final three quarters, when they fell from 64 in 1Q16 to a quarterly average of 20.25 for the rest of 2016 and the first quarter of 2017, down 68 percent. PROMEDIO POR TIPO EQUIPOS DE PERFORACIÓN This was due to less activity than planned in the Poza Development

En tierra 0.5 (6%)

En tierra 3.7 (32%)

Rica-Altamira, Acete Terciario del Golfo, Cinco Presidentes,

Marinos 8.1 (94%)

Marina 8.1 (68%)

Exploration

Samaria-Luna and Litoral de Tabasco assets, which Source: PEMEX

PEMEX attributes to the budget adjustments made at the beginning of 2016.

32% Onshore 68% Offshore

DRILLING UNITS There also was a sharp drop in active drilling units after the first quarter of 2016, when the 41 active rigs almost halved, falling to 23 for 2Q16 then reducing quarterly by one for the rest of the year, and again for the first quarter of 2017. This was wholly due to a decrease in development rigs rather En tierra 0.5 (6%) Marinos 8.1 (94%)

Source: PEMEX

En tierra 3.7 (32%) Marina 8.1 (68%)

INSIGHT

MULTICLIENT SEISMIC MARKET AIDS INDUSTRY TRANSFORMATION The Energy Reform has already had a far-reaching impact

“Some people might say the exploration market

across segments, creating new opportunities as the market's

is depressed but Mexico clearly shows that this

opening widens. Seismic survey companies are among those

is not the case,” says CNH Commissioner Alma

that see a clear entry point.

América Porres. “In the past two to three years, the total volume of 2D data collected equals an impressive 65 percent of all seismic data historically acquired

exploration segment through the creation of a multiclient

by PEMEX. In addition, wide azimuth 3D data collection over

seismic market that is able to cater to the needs of both

the same period represents 2.5 times the volume historically

PEMEX and new operators entering the market. Seismic

collected by PEMEX. And the efforts continue, with 24 seismic

survey companies are entering the country through Surface

studies underway and another 10 about to start.” Despite all

Recognition and Exploration Authorizations (ARES) issued

this activity, onshore developments are still moving slowly

by CNH, which allow them to offer these services in Mexico.

amid challenges related to population, geography and

The boom in seismic activity has been a catalyst of the

protected areas. According to Porres, the risks and expenses

success of Round One and is a vital cog in the ongoing

involved in onshore seismic studies have stunted onshore

development of a competitive oil and gas market.

multiclient seismic projects, which mostly involve processing

With data acquisition2 To start

WITH RESULTS ACQUISITION1

2D seismic, Grav and Magn

Under development

Multiuse Geochemical Aeromagnetic 3D WAZ seismic 2D seismic, Grav and Magn 2D seismic 0

16 Under development

1 To start

Without data acquisition3

WITHOUT RESULTS ACQUISITION2

To start

2D seismic, 3D seismic, petrology

Under development

The Energy Reform transformed Mexico’s oil and gas

3D seismic 2D seismic Electromagnetic 3D WAZ seismic 3D seismic 2D seismic 0

9 Under development 9 To start Notes: 1 Exploratory studies that include the collection of data by direct or indirect methods. 2 Exploratory studies that include the reprocessing of already acquired data.

and reprocessing of existing data. "Onshore data acquisition faces many hurdles, such as population, geography and protected areas, that are not present offshore," says Porres. "The next round to be announced will be focused on unconventional resources, which will create demand for this type of information, providing the necessary incentives for data acquisition. Making more and larger onshore blocks available in the upcoming licensing rounds is essential to accelerate onshore data acquisition."

“

In the past two to three years, the total volume of 2D data collected equals an impressive 65 percent of all seismic data historically acquired by PEMEX” Alma América Porres, Commisioner at CNH

Offshore is a different story. The entirety of the Gulf of Mexico

“The new seismic data and the opportunity to nominate

now boasts 2D seismic coverage, after various companies

areas changes the industry’s dynamics and opens up areas

carried out regional studies using a range of data-acquisition

that previously would not be considered,” Porres says.

technologies. A second wave of more targeted 3D wide azimuth is being acquired with a focus on areas such as the

Either way, the CNH Commissioner assures that abundant

Perdido Fold Belt, Cordilleras Mexicanas and Salina Basin. A

information is already available, with extensive 2D seismic

development in this area concerns the Ministry of Energy’s

and high-quality, multicomponent 3D data available

decision to allow bidders to nominate blocks for the licensing

on certain areas. “Seismic data gathered by PEMEX on

rounds, when previously PEMEX’s historical seismic data was

conventional wells could also serve as analogs for companies

used to determine which blocks were put up for auction.

planning unconventional wells,” she says.

Current studies by company4 CURRENT STUDIES BY COMPANY 4

3D WAZ seismic

3D seismic

2D 3D petrology

Dolphin

GXT

Searcher

Seitel

Spectrum

TGS

Seitel

Global

Dowell-Slb

Magna Operating

Searcher

GXG Geoscience

CGG

PEMEX

Dowell-Slb

ARES granted by CNH5

AREAS GRANTED BY CNH

Source: CNH

Geochemical

TGS

Multiuse

TGS

EICS Mexico

MCG

2-D seismic, Grav and Magn

TGS

PGS

Aeromagnetic

CGG

EMGS

Electromagnetic

24 Under development 10 To start

VIEW FROM THE TOP

MEXICO'S JOURNEY TO STRONGER EXPLORATION DATA ALMA AMÉRICA PORRES Commissioner at CNH

Q: How has the Energy Reform impacted PEMEX’s

After the Energy Reform PEMEX shifted its focus from its

exploration activity and how will reduced reserves

area of most expertise, the shallow waters of the Southeast

influence its upstream strategy?

Basin, to deepwater areas. Over one-third of the wells drilled

A: PEMEX’s 1P, 2P and 3P reserves have been declining

over the past three years were in deepwater. These are

consistently over the past two decades, with a temporary

more expensive wells that take longer to drill. PEMEX had

plateau around eight years ago. Over the past 15 years,

planned to drill many more wells to meet its commitments

Mexico’s 1P reserves declined by 67 percent while 2P and 3P

for the 108 exploration areas it was assigned in Round Zero,

reserves declined 59 percent and 51 percent, respectively.

but refocused its exploration strategy toward deepwater.

Although the decline in reserves has accelerated since the

At the same time, PEMEX adjusted its strategy by drilling

Energy Reform we have to recognize that this is a much

its first exploration well in a new area outside the center of

longer-term trend.

the target to accelerate the exploration process.

The integrated reserves replacement rate, the reserves

Q: How do the farm-outs affect PEMEX’s reserves?

volume added as a result of discoveries, developments,

A: The incorporation of reserves depends on the oil price

delineations and revisions divided by the total production

and the time frame within which the reserves can be put

of hydrocarbons for that period, dropped substantially in

into production. In the case of Trion, and all deepwater

the last two years, reaching 23.4 percent for crude oil in

discoveries, PEMEX incorporated 1P reserves in the

2016. Similarly, the 1P reserves replacement rate from new

immediate area of the well while the majority of reserves

discoveries experienced a strong drop between 2010 and

that will be certified are 3P reserves quantified based on

2016, reaching only 5.6 percent in 2016. This means that

the oil price. The fact that PEMEX does not have the proven

not enough exploration activity has taken place in Mexico.

capability to develop deepwater fields led reserves certifiers to assume that PEMEX would not be able to develop its

Why has PEMEX drilled fewer wells? The main difference

deepwater discoveries in the coming years. As a result,

between the wells drilled in 2010-2013 and 2014-2016 is that

it cannot certify these resources as reserves and instead

PEMEX changed its exploration strategy. In the period before

registers them as contingent resources. In case of a farm-

2010, PEMEX had a strong focus on the naturally fractured

out with an experienced partner that has the technological

cretaceous formations of the Southeast Basin, including

capabilities to develop the field, such as BHP Billiton in case

onshore areas, where PEMEX is most experienced. Between

of Trion, these contingent resources can immediately be

2010-2013, PEMEX followed various exploration strategies

reclassified as 3P reserves. Therefore, Trion was presented

in parallel. One was to explore the extension of known fields,

as a field with 3P reserves of 485 million barrels of oil

resulting in a very high probability of success. At the same

equivalent. The same will happen with the farm-out of the

time, PEMEX successfully started deepwater exploration,

deepwater Nobilis-Maximino block.

although it also drilled unsuccessful high-pressure or hightemperature wells. According to international standards,

Q: What is your perspective on the base and incremental

PEMEX achieved excellent exploration results in deepwater

scenario that PEMEX has presented for exploration

during this period.

investment and reserves incorporation? A: This scenario that assumes that PEMEX will incorporate over 1 billion barrels of oil equivalent, based on the fields

The National Hydrocarbons Commission (CNH) was set up as

and areas assigned to PEMEX during Round One, is

a result of the Energy Reform. Its duties include the handling,

optimistic and will need strong support from farm-outs.

regulation and oversight of the oil and gas bidding rounds in

Based on the first four months of 2017, PEMEX is not on

Mexico

track to achieve this ambitious target. The total volume of

PEMEX EXPORATION INVESTMENT 1990-2015 AND 2016-2021 OUTLOOK 1,800

Incorporation (million boe)

Investment (MX$ billion)

1,600

70 60

1,400

1,200 1,000

800

600

400

200 0

1990

1995

Incorporation

Base

2000

2005

2010

2015

2020

Investment

Increment

——Base

——Increment

Source: PEMEX

1P crude oil reserves on January 2016 stood at 7.640 barrels

A: We have tried to operate as a “single window” for all

and dropped to 7.037 billion barrels on January 1, 2017, a

permits but we also should be careful to not interfere in the

drop of 7.9 percent.

ASEA’s processes. A lot of the information that is provided to us by the operators is passed on to ASEA. We do invite

Q: How might the different exploration philosophies

ASEA to our work meetings with the operators to avoid

employed by private operators influence PEMEX’s

duplication. We work independently but in parallel since

strategy?

operators cannot move forward without authorization from

A: The differentiation between the private operators is

CNH and a favorable opinion from ASEA.

based on their know-how, philosophy and exploration and development strategy but they all have to follow the general

Q: What are your expectations for exploration results and

industry logic of evaluating opportunities, incorporating

what roles will the different players have?

reserves and delimiting fields. Every operator pursues

A: There are areas of opportunity based on the lessons

its objectives differently, meaning that they use different

learned by CNH in recent years. One of the great exploration

interpretation and drilling approaches and technologies.

challenges is evaluating Mexico’s hydrocarbon potential,

Another differentiator is how fast these companies want

which is CNH’s responsibility. Another priority is ensuring

to advance to the production stage. The main objective of

that the new operators are optimizing their exploration

certain operators is to gain an optimal understanding of the

plans through the implementation of regulations. We have

subsurface and reservoir to optimally develop and manage

to take advantage of the new information that is available.

the reservoir over time, which will maximize the value of the reservoir. Other operators will have the objective of putting

In August, PEMEX will reach the end of the initial three-month

discoveries into production as fast as possible to recover

exploration period for the 109 areas it was assigned during

their investments.

Round Zero. Our responsibility will be to verify if PEMEX has complied with the minimum work requirements for the

Q: How has CNH’s responsibility for approving wells

remaining 108 areas after the Trion farm-out. This is a great

changed?

challenge for both PEMEX and CNH because this assessment

A: There has been a change in the drilling guidelines. In the

will decide areas receive a two-year extension. If we want

past, the Ministry of Energy was in charge of authorizing

PEMEX to be producing hydrocarbons in the future, it will

wells. After the Energy Reform, CNH started authorizing all

need exploration areas both as assignments and farm-outs.

types of wells. The law distinguishes three types of wells: exploratory, deepwater and what are called pozos tipo

The new operators have only recently started their

(well types). From a technical point of view, pozos tipo are

exploration activities and are starting to comply with their

unconventional wells and development wells whose design

minimum work requirements. The main challenge for the

can be replicated after approval of the pozo tipo. CNH

operators is to ensure that they are compliant, meaning

publishes all authorized wells at the end of every quarter.

that they will start to contribute to the development of the exploration in Mexico and are starting to incorporate

Q: How are CNH and ASEA interacting in the well

reserves. This will be the main indicator of the success of

authorization process and in performance monitoring?

the Energy Reform in the short term.

VIEW FROM THE TOP

LOOKING TO THE LONG TERM FOR MEXICO’S OIL INDUSTRY JOSÉ ANTONIO ESCALERA Director of Exploration at PEMEX E&P

Q: How has the boom in available multiclient seismic data

a success. Both projects, Trion and Nobilis-Maximino, may

impacted PEMEX’s exploration strategy?

create synergies to make prospects and the region more

A: PEMEX made important investments acquiring 2D and

attractive for international companies.

3D seismic data, which was of course bound to the capital approved by the government. One of the most important

Q: How is PEMEX working to increase the amount of

activities was represented by the seismic campaign from

reserves in Mexican territory?

2010 to 2015 in which PEMEX got around 100,000km2

A: Last year PEMEX discovered more than 1 billion boe

of 3D seismic, out of which 30 percent is wide azimuth,

in resources but of that only around 680 million boe

allowing PEMEX to understand the zones with high-salt

could be considered possible reserves, leaving the rest as

complexity in the Perdido area. Those 30,000km led

contingent resources because they contain a lot of gas and

to the Trion discovery in 2012, turning it into the first oil

are currently uneconomic. Even though they cannot be

reservoir in ultradeep Mexican waters ever discovered. But

considered reserves, we know the resources are there and,

that was not the only discovery brought by that 3D seismic

by applying proper technology, processes and increasing

survey because the gathered information was also used for

efficiency, those resources may in the future turn into

the bidding of Blocks 1, 3 and 4 in Round 1.4. A more in-

reserves. It is a slow process but we see those possible

depth study of the data also led us to discover the Doctus

reserves discovered turning into probable and eventually

reservoir last year.

into proven reserves in the future.

In the north, we are acquiring a new 3D survey to turn the

Trion and Nobilis-Maximino are both exploration and

wide azimuth seismic we already have into a multi azimuth,

appraisal projects that could turn relatively fast into

therefore improving the images under the salt. So far all of

development projects. Doing a farm-out of an exploration

these studies have been acquired by PEMEX, but we are

area or a discovery has the advantage of sharing the risk

also entering the multiclient scheme with an eye on evolving

with another company, as well as accelerating activities

together. Through these actions, PEMEX expects to offer a

by joining forces to move the project to appraisal and/or

higher value in those areas.

development. In deepwaters, we only have possible reserves

and it may take several years to appraise the discovery and The 3D wide azimuth allowed us to see the Doctus

then sanction a development project in order to get probable

opportunity last year, which has around 150 million boe.

and proven reserves. To ensure the integration of more

Nobilis is another extremely attractive discovery as it has

probable and proven reserves in the short-term, PEMEX is

the thickest pay we have ever found in deepwater and

focusing onshore and in shallow water, where the process

contains 43° API oil. We are also drilling the Nobilis-101 to

usually faster and takes between two and four years.

test and adjacent structure to the north. It is a challenging project because these discoveries are located in a water

Q: What ambitions does PEMEX E&P have for next year?

depth of around 3,000m, but following the results we had

A: If we drill the 30 wells we have in mind for 2017 we can

with Trion and considering that Nobilis contains super light

reach 1 billion boe, meaning that PEMEX will be aligned to

oil, we are confident the Nobilis-Maximino farm-out will be

its Business Plan in which the base scenario is around 1.1 billion boe with an investment of MX$33 billion. Our work is focused on capturing the value of the Round Zero acreage

Petróleos Mexicanos (PEMEX) is the most important company

to meet this goal in the short term and accessing new areas

in Mexico, an international reference in the field of hydrocarbons.

in bidding rounds to replace reserves in the medium and

Its activities involve the entire production chain, from exploration,

long terms. PEMEX is looking to take full advantage of all

production, industrial transformation, logistics and marketing

the opportunities resulting from the Energy Reform.

VIEW FROM THE TOP

GEOLOGICAL POTENTIAL IN THE GULF OF MEXICO RICHIE MILLER President of Spectrum Geo

Q: What drove Spectrum to embark on its project with

Q: What potential do you see in the Gulf of Mexico?

Schlumberger and PGS in Mexico?

A: The Mexican side of the Gulf of Mexico has many pre-salt

A: We are a pure play multiclient company focused on

areas that have never been tested but have the potential

developing frontier regions. We carry out geologic studies

to be world class. We have identified and confirmed they

and planning of areas that are strategic and show potential.

are located in ultradeep waters, a fact that will encourage

Spectrum focuses its design methodology on gathering

technological development in Mexico. The Mexican market

available data, whether in the public domain or through an

is definitely allowing the entrance of many companies even

E&P company, to understand the geology before we begin

though oil prices have dropped. Due to this fall in oil prices

the design process.

many companies have reduced their activities but thanks to the Mexican opening, they have found an opportunity

With this information we can create a proper design that

to keep working and exploring new opportunities. They are

tailors the data to the area. We have a large dataset of

also aware that once oil prices improve, the economics will

the US-side of the Eastern Gulf of Mexico, an area which

improve together but they will have the tactical advantage

is geologically similar to the Yucatan peninsula. That is

of having operated for a longer time in Mexico.

what drove us to work in that region. We are working closely with the Ministry of Energy and CNH to promote

Q: When would you consider Spectrumâ&#x20AC;&#x2122;s activities a

the development of new geological plays to be included in

success in Mexico?

the coming licensing rounds for this area. That is the core

A: We believe that our operations have already been a success

project we have with Schlumberger and PGS in Mexico.

in Mexico. We are holding positive business discussions with

Schlumberger brought its extensive Mexican geologic

both the government and IOCs. In our industry, the rule of

knowledge to this partnership, it being a long-term player

thumb is that success comes when your return of investment

in Mexico, and PGS brought the vessels and processing

reaches a factor of 2.5, which we expect to achieve in the

expertise while Spectrum brought the permitting and

next three to four years. We also have the rights to sell the

design expertise.

data for the next 12 years so we believe we are in a position to capitalize on the activity during that time period, which

We know that frontier regions are an underdeveloped area

will greatly benefit our revenues and our business. It is hard

in Mexico, which may make it challenging at first to convince

to state the number of blocks that need to be awarded so we

the government to include these areas in licensing rounds.

can claim success because it greatly depends on their size

Fortunately, we have talked with several E&P players and

and attractiveness to the industry. In the meantime, because

have received positive input from them because they are

this industry takes time to develop, we are looking for new

all looking to develop such areas in Mexico. We knew it

opportunities from the next rounds. We expect Mexico to

was risky and that the areas would not be offered within

have a continuous growth in our portfolio as it has world-class

the first couple of rounds but with a clear desire from the

basins, so whether we will keep partnering or go it alone but

industry to have data there, the government would have

either way we are going to continue growing in Mexico. Since

to take it into account. That was our reasoning. We will

our company is frontier-based and Mexico is a really under-

have to work with PGS and Schlumberger to push and

explored country in this area, this is a great location for us.

educate the government on the opportunities that exist but having the industryâ&#x20AC;&#x2122;s support will make everything easier. We are working on a petroleum modeling system

Spectrum provides innovative multiclient seismic surveys and

with Schlumberger and PGS that will be available to the

high-quality seismic imaging services to the global oil and gas

industry by the end of 2017, offering a fully tied petroleum

industry from offices in the US, Norway, UK, Brazil, Australia,

systems model to the eastern part of the Gulf of Mexico.

Indonesia and Singapore

VIEW FROM THE TOP

TRACKING A COMPLEX GEOLOGY KARIM LASSEL Vice President and Geomarket Director Mexico of CGG

Q: What technologies has CGG developed to answer the

Q: What role will alliances and partnerships play in CGG’s

needs of operators in Mexico?

strategy in Mexico?

A: The biggest challenge for offshore exploration in

A: CGG has a longstanding tradition of partnership

Mexico is understanding the very complex geology

in our different global business locations. We are not

that characterizes the potential hydrocarbon-bearing

contemplating forming nor actively looking for any

formations underneath salt canopies. After working in

partnerships in Mexico. We already have global alliances

other countries with similar challenges and with PEMEX

that complement our service offering, including with Wood

for decades, CGG has expanded its acquisition expertise

Mackenzie and Halliburton, and that can be activated in

and technologies and can image these geological

Mexico should there be an opportunity to do so. Still, our

formations despite the shield created by the salt layers.

doors are always open for a new alliance and we will not

These proven technologies include broadband, wide-

hesitate to enter into a joint venture if it makes sense

azimuth and long or ultralong offset acquisition designs

businesswise.

that make it possible to illuminate the targeted areas. Q: How has the Energy Reform impacted the exploration To process and interpret this field data, CGG has over

sector?

the years developed specific algorithms and processing

A: There is no doubt the Energy Reform has accelerated

sequences that fully capitalize on all the information

exploration in Mexico and we believe this trend will

contained in these data sets. The next anticipated challenge

continue. Round One brought the prospect of an

in Mexico will be exploring and exploiting unconventional

additional million barrels a year of oil production within

resources onshore. Here too we have developed strong

the next decade, 45,000 jobs and billions of dollars

expertise in both acquisition needs and processing and

in investment. The reform brought a new, multiclient

interpretation sequences. We are committed to using our

business model that did not exist before, because there

expertise to fully contribute to the development of these

was only one client. In the future, exploration can only

resources in Mexico.

accelerate as there are many companies committed to developing shallow and deepwater blocks. We believe

Q: Who are CGG’s clients in Mexico and how is the market

the service sector will be asked to achieve at least part

split between PEMEX, private and governmental players?

of this work, so there will be a new dynamic generating

A: Being such a large service company, CGG naturally

yet another set of opportunities.

interacts with CNH on a consultancy basis but it is not our client. PEMEX is our largest client in Mexico and we have

Many companies in the oil and gas industry are eager

a long history of serving the NOC. Now we are starting to

to see faster developments but regardless of this

see large international companies and smaller Mexican firms

understandable impatience, if we stand back to take a

entering the oil and gas market for the first time.

wider view of the Energy Reform in Mexico, its progress shows that it has evolved very quickly. It may not have

CGG already works with IOCs such as ExxonMobil, Shell

been perfect in every way but the speed and intelligence

and Chevron. Midsize companies are also familiar with our

of its implementation make up for this and the authorities’

services, whether in Mexico or elsewhere. It is interesting

rapid reaction to change is also worth commending. Of

to note that CGG is in the same position as everyone

course, we would all like to see deepwater drilling start

else when it comes to serving the new companies that

tomorrow but the oil and gas industry does not work that

have been created in Mexico over the last couple of years

way. It is emerging from a crisis and Mexico is a bright

specifically to take advantage of the Energy Reform’s

spot among other markets that may not necessarily be

opportunities.

developing so well.

GeoSI Seismic Study, CGG

Q: What are the main opportunities for the company in the

Q: How do you expect the future of seismic data storage

country’s oil and gas market?

and access to develop in Mexico?

A: CGG is in a unique position to support the opening

A: In Mexico all the data belongs to the nation and CNH

of the Mexican market. After almost three decades of

is its custodian. CNH has gone to tremendous efforts

continuous activity in the country we have acquired an in-

to collect that data. What comes next is to make the

depth understanding of the country’s various basins and

best use of it and turn the data into valuable information.

geological settings, both offshore and onshore. Thanks to

Companies will have access to that data by paying a fee.

that long exposure CGG has developed specific expertise,

They can then convert it into added-value information

technologies and processes designed to overcome the

and will have the right to use the new product for six

types of E&P challenges faced in Mexico. With this in

years, or 12 years if acquisition is also involved. CNH

mind, our opportunities in Mexico lie in continuing to serve

is also interested in capitalizing on onshore data. It is

the NOC as one of its partners of choice in our areas of

interesting to note that all the investment so far has

expertise and at the same time accompanying newcomers,

gone into offshore data acquisition and processing and

regardless of their size, during the initial phases of their

CNH is now looking at how to take advantage of the

business development in the local market.

onshore data it has and incentivize investment in onshore development.

Q: What contributions does CGG make to CNH’s activity? A: Looking back over the last few years, the first companies

Q: What are CGG’s goals in Mexico’s oil and gas market?

to invest in Mexico in the context of the Energy Reform were

A: CGG’s plan is to be in Mexico for at least another 30

not the IOCs but the large service companies that began to

years, so we take a long-term view of the country. We have

increase their presence here in 2015. The service sector has

offices in Mexico City and Villahermosa and there is only

invested US$2 billion over the past two years and acquired

one expat in our office, which happens to be me.

and processed a significant amount of 2D data and some 3D data. CNH expects CGG and other industry players to

Mexico is a priority and will continue to be important for

continue contributing in a similar way, which is exactly what

the company in the coming years. We will keep investing

CGG will do through its various projects in Mexico. These

in our people and technology in Mexico and are committed

include a large ongoing multiclient airborne acquisition

to the country. As well as interacting with CNH, we are

and processing project and our large Encontrado 3D data

involved with ASEA to ensure our activities are completely

reprocessing project that involves a unique merger of over

in line with Mexico’s environmental, social impact and safety

38,000km of wide-azimuth data from over nine previously

regulations.

acquired and processed surveys. This covers some of the most prospective areas of the Gulf of Mexico, including the Great White and Trion discovery to the north and Corfu and

CGG

Ixcuta further south. At the end of 2016 we delivered the

geophysical and reservoir capabilities to customers primarily

Fast-Trax data from this project. Some of the participants

in the global oil and gas industry, bringing value across all

in Round 1.4 used this data to inform their bids.

aspects of natural resource exploration and exploitation

geoscience

company

providing

geological,

INSIGHT

HIGH-RESOLUTION DATA FOR BETTER DRILLING DECISIONS LULARYDE MORENO Mexico Commercial Representative of Rock Solid Images

Although reservoir characterization company Rock Solid

The importance of a high-quality reservoir characterization

Images has been cutting costs across the board due to a

study before commencing operations cannot be overstated.

lack of exploration activity in Mexico, its General Manager

“Operators need the most crystal-clear idea possible of what

for LatAm is positive that it will come back stronger than

is in a reservoir,” to plan profitable drilling activity, she says.

ever when the downturn is behind us. “We are taking

The importance of the product goes beyond the stringent

advantage of this downtime to improve the technologies

budget cuts many operators are facing due to recent low oil

we offer,” Lularyde Moreno says. Rock Solid’s priority is to

prices and market volatility. “Every operator needs to drill to

optimize its capabilities in analyzing seismic, electromagnetic

make money but the cost of drilling is a million times more

and well-log data to provide clients with the clearest possible

than the cost of reservoir characterization,” Moreno says, so

image of a reservoir before they begin drilling.

investing in high quality imaging services is more than worth it. Without adequate investment in services like those provided

The promise of new, automated features that have been

by Rock Solid Images, companies “risk going in blind,” she

added to the company’s software, together with the host

warns. Reservoir characterization should be a priority for any

of opportunities arising from the opening of Mexico’s

E&P company, regardless of budget, she states.

deepwater makes Moreno confident. “We are developing software that can carry out the automatic integration

Rock Solid Images also brings a combination of international

of different types of reservoir categorization data,”

and Mexican experience to the table. Besides having worked

Moreno says. Its “joint inversion” technology allows Rock

on more than 3,700 wells across six continents, the company

Solid to combine datasets, whether its 3D seismic or

began a project providing reservoir characterization to PEMEX

electromagnetic data, facilitating more in-depth studies of

in 2015. “Our global reach, which includes projects in the

complex geophysical terrains. This advancement, she says,

UK and Norway, gives Rock Solid Images a wider spectrum

will save companies time and money, giving operators a

and deeper understanding of different types of geological

clearer view of what is underground. Rock Solid will launch

structures and resistance,” Moreno says. “But it is our proven

the technology on a Virtual Desktop Infrastructure (VDI)

track record with Mexico’s NOC that will show new players

system, allowing users to have online access.

that we know the local challenges.”

VIEW FROM THE TOP

ELECTROMAGNETIC SOLUTION BOOSTS EFFICIENCY PETTER LINDHOM President North and South America of EMGS

Q: How does EMGS convince companies that won blocks

As well as helping identify and prioritize the best wells,

to buy its data?

EMGS minimizes the number of dry wells that companies

A: Even after 15 years, our Controlled Source Electro

drill. It is challenging to quantify the extent of the use of

Magnetic (CSEM) technology is still considered “new,” so

our technology by companies participating in Mexico’s

a lot of our efforts go into educating clients about how it

Round 1.4. We struggled a bit with the marketing of this

should be used. It is a complementary tool to seismic, not

data because CNH did not allow work units for data to be

something to replace it. Oil companies’ exploration workflow

bought prior to the licensing rounds. We think the main

and processes have been designed with 2D seismic and 3D

interest in our data is going to come after the licensing

seismic. The technology we offer is disruptive so it is not

round.

included in most companies’ workflows. Q: What effect have lower oil prices and reduced When EMGS started, we were a typical geophysical

exploration and investment had on EMGS’ performance?

company. We acquired data, processed it and then delivered

A: If we had a choice between high or low oil prices we

it to the client. We hoped they would find a way to make

would take the high-price option but that comes with

sense of it by themselves. That failed. For data to become

different challenges and opportunities. For a company like

valuable it must be processed into information and then

EMGS there are two processes that are important. One is

interpreted to improve understanding. If data is not used to

adoption, which has been steadily increasing, and second

boost understanding, it is at best a confidence builder and

is a company’s budget and the market environment. When

at worst useless. To make sure our data is used correctly

there are low prices companies focus more on money

and adds value we hired several people with oil company

and are not necessarily willing to take the same risks as

experience. Our initial focus was to acquire the best data

when there are high oil prices, so avoiding dry wells is

but that changed to processing to get more reliable results.

a clear driver. We had a discussion with an important oil company and they were telling us that when a barrel

The software basically increases a company’s chance of

was over US$100 they would not care and drill the wells

success. If done systematically it allows clients to better

anyway. Now they are using our technology to test the

understand and select the biggest prospects that have the

wells before drilling.

highest chance of success. That is one of its main values. We started working for PEMEX in 2008, our second contract

Q: What does EMGS’ future in Mexico looks like?

with them was in 2010 and the last renewal was in 2013.

A: EMGS is going to get to a place, both in Mexico and

Most of the data we acquired for PEMEX had to be handed

internationally, where no well will be drilled without CSEM

over to CNH. We have now bought the right to reprocess

if CSEM is sensitive to what that company is looking for. It

and market this data from CNH.

will be standard procedure before drilling a well to conduct a sensitivity study and if that is positive, it is followed by a

Q: How does EMGS’ technology align with the operations

value of information study. If that is positive you do CSEM

and strategies of oil companies?

before drilling. We are definitely getting there. We should

A: We were focusing more on technology, physics and drilling

be there certainly in the next 10 years.

operations five years ago but now we focus on making better decisions based on the data we gather, a method that has a cost-saving impact. The technology also creates efficiency

EMGS acquires and processes high-quality marine controlled-

gains since it guides operators to drill the best wells first. It

source electromagnetic (CSEM) data to help its clients increase

can also highlight new prospects that have been overlooked

their exploration success through modeling, integrating and

or seem to be too risky with a conventional approach.

interpreting the data

VIEW FROM THE TOP

EXPLORATION TECHNOLOGY EVOLVES JAVIER RUBIO General Manager of Geoprocesados

Q: How did the industry slowdown lead Geoprocesados

techniques can be applied to production areas to improve

to adapt its products to help clients boost productivity?

output in a very short amount of time. One of our divisions

A: The difficult times we endured in the past two and half

is focused completely on developing workflows to boost

years helped us improve our cost structure. Now we are more

production using Geological and Geophysical (G&G)

efficient and we believe that when the industry picks up

studies. This helps us build a more robust geological

again our new strategy will be beneficial. When it comes to

model. We can even discover completely new opportunities.

the services we offer, we have learned that the times when

Mexico’s geology is so rich and complex that opportunities

we managed huge processing volumes are over. Today we

can be found throughout the country. For many years, the

have a more standardized international market so the areas

industry focused on only one geological layer, missing

are smaller than the projects we used to do, which were

others. PEMEX is now changing this approach. Using G&G

sometimes 5,000km2 or 10,000km2. We now do smaller

studies during the production phase is a very fast way to

projects based on the blocks our clients have been assigned.

incorporate reserves and even increase production within a shorter time frame than traditional methods.

Q: How does the company's new Geoprocesados Multiclient strategy translate into value for its clients?

Q: To what extent will Geoprocesados get involved in the

A: Geoprocesados Multiclient is on standby because of

new deepwater segment?

the staggered way the government is releasing multiclient

A: We are one of the few companies in Mexico with

regulation. We want to wait until we have a clearer idea

deepwater experience. We have worked over five years

of who the main players are in the market. In offshore, for

doing not just seismic processing but also imaging and

example, it is clear who the companies will be. Very large

reservoir characterization. We have worked very closely

companies are doing seismic studies offshore and there is

with PEMEX on an area of thousands of square kilometers

not much room for other players. Onshore, the panorama

of deepwater. We do not know if the companies that won

is wide open for multiclient projects, which no company

blocks in Round 1.4 will be looking to local companies for

is yet doing. The reason for this is logical. Economically

these types of services. I am afraid they have their own

it is not easy to make a multiclient project profitable. The

service groups because they are huge corporations that do

government, including CNH and the Ministry of Energy, is

a lot of things in-house. This could be a potential risk for us.

working very hard to find an adequate model to convince companies that they can invest in multiclient profitably.

Q: What innovations will you be introducing to the oil and gas industry?

Q: Which of Geoprocesados’ products could help the

A: We are focused on new scientific algorithms and new

winners of Round 1.3 boost production?

software developments. We strive to capture more accurate

A: Our services can help Round 1.3’s winners increase their

imaging in seismic and to do it more quickly. There are

production. This is something we are already seeing every

many interesting technologies that can be used to speed

day with PEMEX. Companies traditionally split their projects

up the process. Our focus is on technology based on

into an exploratory phase and a production phase. There

azimuthal data. This can provide a lot of information that

is no real logic behind that approach because exploratory

has not been used in the past, not just in imaging but also in reservoir characterization. The new technologies in seismic acquisition, especially offshore, are allowing companies to

wide

acquire full azimuth seismic data. As these technologies

processing,

mature we want to create a whole new world in terms of

interpretation and characterization studies, as well as in the

data in deepwater, which will allow for better imaging. This

management of E&P information databases

will be a game-changer for the industry.

Geoprocesados

experience

land

geoscientific and

marine

company seismic

with

VIEW FROM THE TOP

CHANGING TIMES REQUIRE ADAPTABILITY DAVID PRING Country Manager Mexico of PGS

Q: How has PGS evolved amid the changes in the industry?

Energy to allow us to promote our data and establish rules

A: Even though there are many new companies coming to

for a process that allows nominations that do not affect the

Mexico they are generally not yet incorporating new seismic

companies’ longer range planning.

exploration into their activities. At PGS we are aware that we have to evolve to match the requirements of the times and

Q: Why did PGS choose Schlumberger and Spectrum as

this includes a deep analysis of our business model because

partners?

these new conditions could well demand changes in our

A: Our main goal for the alliance with Spectrum and

Mexico-based operations. We are fortunate, however, to be an

Schlumberger was to gain a strategic advantage against

international company, which allows us to make adjustments

our competitors. We did not require equipment or the

to meet our overall global business requirements.

know-how to carry out this data acquisition project but the alliance certainly helped us to handle the risk better.

Q: How will the nominating process change the way players

After talking with Spectrum and Schlumberger, we came

interact?

to an agreement on how to best “de-risk” the investment.

A: The nomination of blocks will certainly open some

Technologically speaking, the program was rewarding as

possibilities across the industry but there is still little clarity

we worked to extend zones around pre-existing data held

about how this will impact the seismic business. If PGS finds

by CNH and complemented areas that lacked information

an interesting area outside the current planned blocks for the

with our own studies, with excellent results.

coming bidding rounds then oil companies will get involved in the process to nominate new blocks there. If the process

Q: How will technology shape PGS’ business in Mexico?

is not clear, companies might not be interested in nominating

A: With the advancement in computer technologies it

an area if it could result in existing blocks being removed

is completely feasible to run a processing operation in a

from the planned rounds. Some of the new areas where

flexible and remote way. These advancements will help us

blocks may be proposed may have more potential reserves

avoid investing heavily in static infrastructure and have a

than the blocks already established but without investment

more flexible business model in which we can adapt to a

to develop seismic studies they will remain mere possibilities.

client’s needs. PGS is strongly focused on creating better and more powerful technologies to improve data processing.

Seismic processing and interpretation is not immediate. It

Our R&D department has created algorithms and processing

is complex, technical work that could take oil companies

flows that allow for more precise and detailed analysis of the

two to three years. If clients do not have the assurance that

subsurface while decreasing human error. We have published

nominations will be heard and that blocks will not change

papers on techniques such as Full Wave-field Inversion (FWI)

in the future they will not accept the risk associated with

that allow the use of computer algorithms without the need

committing to a program. We believe the best approach for

for interpretation to refine subsurface models. In the future,

Mexican institutions is to set a core of areas to which the

it is possible that by using only computer power to run

bidding rounds will stick and from there include additional

complex iterative processes we can come up with reliable

blocks based on the nominating results.

subsurface models in complex geological areas that at the moment can be difficult to image correctly.

The idea of CNH and the Ministry of Energy trying to be flexible and work with the oil companies is positive but they have to understand that companies also need the certainty

Petroleum Geo-Services (PGS) is a marine geophysical

that the foundation of the bidding rounds or the assigned

company offering technology-driven services and products

blocks for future bidding rounds will not be affected by any

spanning seismic, electromagnetic and reservoir services and

nomination. We will certainly push CNH andthe Ministry of

acquisition, imaging, interpretation and field evaluation

VIEW FROM THE TOP

COMPLETE TECH WORKFLOW SPURS OPTIMAL DECISION-MAKING ROSSY PÉREZ General Manager of Beicip-Franlab Mexico

Q. What is Beicip-Franlab Mexico doing to remain competitive

to develop and validate innovative technologies along a new

during the downturn in the oil and gas industry?

workflow focusing on the understanding and modeling

A: Beicip-Franlab was impacted by the drop in oil prices, so

of the impact of hydraulic fracturing on the production of

our focus this year has been on planning ahead, cutting costs

hydrocarbons in unconventional plays. The other components

and retaining our best talent. We are also interacting with new

of the suite, such as TemisFlow, DionisosFlow, FracaFlow,

companies entering the Mexican market. PEMEX and IMP are

Pumaflow and Cougarflow, have also been updated to the

still our main clients in Mexico, and we are supporting them

new platform.

on various ongoing projects. We are also working with CNH to prepare for the upcoming rounds. This year we are focused

Beicip-Franlab also can assist operators throughout all the

on improving our client support and maintaining our business

steps of an EOR project. Beicip-Franlab is a member of the

in Mexico.

EOR Alliance, with IFPEN and Solvay, which aims at covering the full range of services from pre-feasibility to pilot design

We are in the process of negotiating a new contract with

and implementation.

PEMEX for 2017. This involves identifying the projects that offer the most scope for productivity and production improvement,

Q. What specific projects are you involved in at the moment

which are PEMEX’s main priorities at the moment.

in Mexico? A: Beicip-Franlab works on integrated studies to analyze

Q. What specific technological solutions do you offer to your

different areas. Many companies that are investing in

clients?

exploration are working on reprocessing seismic data with

A: We provide a complete workflow, from exploration to

CNH’s multiclient project. We are working to be involved

production, including technology designed for EOR projects.

in this process and our role will focus on analyzing the new

We use leading-edge Petroleum System Analysis/Basin

seismic data, which would include 2D basin modeling, that

Modeling techniques to make optimal decisions in exploration,

could include a regional study, as well as possibly prospective

field development and production optimization, from marginal

resources assessment, to promote areas that will be opened in

fields to supergiant fields and nonconventional reserves.

the upcoming bidding rounds. A benefit of CNH’s multiclient

We are also working on economic analyses, which involves

approach is that companies will not only end up with the

determining the profitability of future fields.

seismic data from the fields but also with a study of the strategic areas that provide potential investors with a more

OpenFlow Suite 2016 is the latest edition of our software

in-depth view. We are working to create new alliances with

release. Each year we improve and build upon OpenFlow’s

companies that have multiclient contracts with CNH.

capabilities, adding additional features to enhance our clients’ experience. KronosFlow is one of the latest elements of the

Q. Why should a company entering the Mexican oil and gas

suite, designed for the analysis of more complex areas during

market for the first time choose Beicip-Franlab?

exploration. Also, we have a new technical solution that was

A: Our specialty lies in reservoir, production and exploration

incorporated into our platform under the name TightFlow.

services. In the area of exploration, we can assist companies

This is three-year consortium led by IFPEN and Beicip-Franlab

in Petroleum System Analysis/Basin Modeling and the analysis of the value of fields and risks analysis from an economic point of view. In the area of reservoirs, we can

Beicip-Franlab is a leading independent petroleum consultancy

analyze how much a field is producing, how to optimize

firm and geoscience software editor with over 45 years of

their current production and its future production potential.

experience assisting companies with exploration, reservoir and

Looking at the long term, the next step would be to offer

field development

specific EOR solutions and projects.

VIEW FROM THE TOP

PACKAGE PROCESSING OPENS OPPORTUNITY KURT MACHNIZH North Country Manager LATAM of Paradigm

Q: What opportunities exist for the seismic data made

azimuth acquisitions are highly suitable for Paradigm’s

available in the National Hydrocarbon Information Center

patented, award-winning EarthStudy 360® technology,

and the data rooms for the licensing rounds?

which recovers information related to low-energy faults,

A: Even though Paradigm is not a direct client of CNH

natural fractures and stresses that are not easily or

data, from what we have heard and observed, we believe

accurately covered by traditional methods. Both methods

improvements can be made to the system to enhance its

fit naturally with the imaging and characterization of

effectiveness and usefulness. We have experienced difficulty

fractured reservoirs.

in uploading data when our clients provide us access to it for reprocessing. In some cases the well data is incomplete,

Q: Which of the Round One licensing rounds offers the

requiring the recipient to perform extensive Quality Control

most significant opportunities for Paradigm?

(QC) and rectification procedures. It would be best if it were

A: We started by selling software to companies that have

done once by CNH to avoid having the receiving company

one year of evaluation to determine if they stay or not. We

perform QC. Data currency is another issue because most of

are now leasing our solutions for shorter periods of time so

the data available is not of recent vintage, and recent vintage

that companies can spend less on analysis, with no obligation

data is often exclusive. There is plenty of room for improving

to purchase the product if they decide not to stay. We also

the packaging, to make the process more efficient.

provide software to consulting companies that study the fields prior to the rounds. Some of the companies in the third

The present packaging of the data presents an opportunity

leg of Round One, such as investment, manufacturing and

for companies like Paradigm, which has been present during

services firms, lack knowledge about reservoir data. Finally,

market liberalizations in Brazil and Colombia. If the data is not

we reprocess legacy data for some companies. R01-L04 is

packaged correctly from the beginning, companies will not

more focused on international companies such as Chevron

have enough time to explore and analyze it before making

and Repsol, which are already our clients, that conduct their

decisions. This causes delays and wastes valuable time. If CNH

pre-round studies at their headquarters outside Mexico.

were to employ better technology, it could make the process more efficient.

Q: How has Paradigm positioned itself to benefit from the Energy Reform?

Q: Which specific product would best fit CNH’s needs?

A: Technology can drive the change needed in the

A: Two product offerings from Paradigm fit CNH’s

Mexican oil and gas market, especially in helping PEMEX

needs. The first, Paradigm Epos®, is a multi-user data

streamline its decision-making process and seizing the

management infrastructure for storing and accessing all

opportunities that new fields and discoveries will provide.

types of interpretation data and well data. This solution

PEMEX can become a more technology-oriented company.

can address the packaging issue. Additionally, the solution

Paradigm is suited to enable this because of our focus

includes easy-to-use data connectors to Schlumberger and

on using advanced science and software technology to

Halliburton data stores.

solve challenging subsurface problems. Ten percent of our workforce has PhDs and over a third of the company

The second offering is Paradigm’s leading seismic data

belongs to our research and development group.

processing and imaging solution for multi-component seismic acquisitions and rich-azimuth seismic acquisitions. Multicomponent seismic acquisitions record both

Paradigm, based in the US, is the world’s largest multinational

compressional and converted wave shear components.

software company focused on analytical and information

The latter can contribute to a better understanding of

management solutions and providing software solutions for

the presence and orientations of reservoir fractures. Rich-

every stage in the oil and gas E&P process

VIEW FROM THE TOP

TACTICAL ADVANTAGES STRENGTHEN BID PROSPECTS RAÚL CULLINGFORD General Manager of Control Flow

Q. Why does PEMEX need Control Flow’s services?

percent with PEMEX. This change has been mainly driven by

A: Since the Energy Reform, PEMEX has embarked on a

our ever-increasing efforts and investment in sales. Before,

process of following best practices, transforming itself into

working with PEMEX meant complying with a contract that

another industry player that needs to worry about efficiency

stipulated all the information about the project without input

and avoid downtime. By following guidelines and international

from a sales department. Working with the private sector

regulations, mainly American Petroleum Institute (API)

involves investing time in sales relations, which includes

standards, it will become a reference for other companies

traveling to and visiting the new companies that have just

coming to work in Mexico. According to these standards,

arrived in the market.

everything related to the pressure of critical equipment, such as BOPs, needs to be certified every five years.

Q. Considering that reversal, what new strategies has Control Flow adopted?

Control Flow has the advantage of being able to

A: Control Flow in Mexico is adopting the philosophy of our

remanufacture and repair not just our own BOPs but also

Houston headquarters, where the executive sales crew visits

those made by other manufacturers, provided they are out

potential customers and takes part in a normal sales process

of warranty and their patents are expired. This is because

with them. This new philosophy involved an investment in our

we produce, manufacture and build using the same raw

sales department as well as setting more aggressive goals

materials as our competitors. Herein lies our unique service

in private sector sales. Furthermore, we are going to be Q2

offering to PEMEX, because it purchases BOPs from the

certified by the API. In contrast with the Q1 certification that

four main manufacturers in the US: Cameron, Hydril, Shaffer

certifies the quality of the systems and can therefore be

and us. Having this tactical advantage makes us a stronger

compared to a common ISO certification, a Q2 certification

candidate in the bidding process for BOP repair contracts.

audits the services and procedures delivered to oil industry

PEMEX asked us to renew one contract for a full year and we

customers. The Q2 certification process will begin with an API

gladly complied and prepared by investing US$12 million in

audit visit to our facilities.

a brand-new, fully equipped facility in Cunduacan, Tabasco, which is a major asset for us because it will be offering service

Control Flow’s strategy is also backed by our resilience, fast

not only to PEMEX but also to all the new players that are

work pace and excellence-driven service. Our resilience is

entering the market.

based on the fact that we have a practical management that makes sure every cell of the organization knows the processes

Q. How is your portfolio split between PEMEX and the

followed by its peers, enabling it to keep working even if a

private sector?

cell is missing. Second, Control Flow’s size allows us to have a

A: Until recently our portfolio consisted of what we like to

more efficient and flexible project development process due

call an 80-20 relation, as 80 percent of our time for sales,

to shorter decision times. Third and finally, Control Flow has

manufacturing and service was assigned to PEMEX and

the same qualifications, certificates and experience as any

the other 20 percent to the private sector. At the end of

other competitor in the industry.

2016 this ratio was flipped. We spent 80 percent of our time working with the private sector and the remaining 20

Q: How is Control Flow's global presence impacting the future of the company in the Mexican market? A: We see our global presence as a major tactical advantage,

Control Flow, based in Houston, is an engineering company

as the main companies in the oil and gas industry are reaching

with over a century of experience producing and providing

out to us, citing their global contracts with our Houston office.

service to pipeline products in the oil and gas industry, such

Indeed, multinational companies see competitive advantages

as manifolds, Christmas trees, Blow Out Preventers and valves

in having a partner right next door.

VIEW FROM THE TOP

OLD DATA AN IMPORTANT COG IN NEW MARKET DAVID GONZÁLEZ Managing Partner at Net Brains

Q: How is Net Brains showcasing its products and services

store data so that companies can refer back to it and use it

to the new operators entering the market?

as knowledge to improve future operations.

A: There are two ways in which Net Brains offers its services to new operators in the Mexican market. First,

Q: What is the company’s strategy to differentiate itself when

our consulting services consist of visiting the prospective

it steps into an operators’ decision-making process?

client, demonstrating our technologies and helping them

A: Our strategy differs depending on the nature of each project

decide which one best suits their needs. Second, we offer

but what makes Net Brains stand out from our competitors

our knowledge base, which we showcase by presenting how

is our culture of going above and beyond simply making an

our methodologies have been bought and implemented

interpretation or building a model. We also help our clients

by PEMEX with successful results. With the combination of

form a hierarchy of their reservoirs so as to predict the initial

these two approaches, the client can benchmark the optimal

investment amount and return rate before they drill. This is

technology and learn what results to expect.

an advantage because it assists companies as they build their portfolio. This characteristic of Net Brains’ methodology has

Q: What opportunities exist with PEMEX’s historical data and

helped PEMEX transform its own processes over the years.

how can Net Brains help companies exploit those? A: The usage of PEMEX’s historical data by new players will be

Q: Since Mexico’s oil and gas data passed from PEMEX to

two-sided. PEMEX used to own all the raw and processed data

CNH, how has Net Brains been interacting with the regulator?

but this has now been passed to CNH. In the new law, there

A: CNH’s evaluation for Rounds 1.1, 1.2 and 1.3 was carried

is a clause that allows companies to approach the regulator

out using technology provided by Net Brains. CNH adopted

to offer acquisition, processing and interpretation of data,

part of our methodology to sort and arrange the information

then share the revenues with CNH by selling that data as a

provided by PEMEX to come to a logical economic factor for

multiclient. Net Brains is interested in reprocessing data, so we

each reservoir. As with PEMEX, CNH still has to decide on its

are carefully studying the regulations regarding this activity.

direction, so this posed a challenge while working with the commission.

We have been in discussions with around 20 of the new operators in Mexico and the common theme is that the data

Q: What are Net Brains’ ambitions in Mexico’s future

provided by PEMEX is not sufficient for them to make strategic

deepwater sector?

decisions about the continuation of reservoir exploitation.

A: Before the reform we helped PEMEX carry out exploration

They need a better way to understand the reservoir, whether

work on some deepwater blocks but we are not heavily

that means acquiring new data or reprocessing existing data.

involved in the current deepwater work in Mexico. Net Brains believes that future deepwater work will be done by the

Q: How will Net Brains face the challenge of working with

IOCs, which have the most experience and highest quality

each client’s different processes for data management?

technology to carry it out. Just like PEMEX, Net Brains is

A: This factor certainly presents a challenge for us because

new to deepwater so we need to understand it more before

every company has its own way of managing data. We have to

competing with the big guys. Shallow-water work is more

show them that an established process is required for effective

interesting for us because we want to stick to our strengths.

data management rather than simply having a few competent people who decide how it is done. Net Brains helps companies identify data management problems, but also helps them

Net Brains is a specialized consultancy firm focused on

look for better future processes by documenting findings

optimization of corporate investment through the acquisition

and collating best practices. Net Brains obtained ISO:9000

of hi-tech solutions, ensuring the quality of the selection,

certification eight years ago, which requires us to collect and

implementation and start-up processes of new technologies

INSIGHT

DRILLER SURVIVES WITH COSTEFFICIENCY, COLLABORATION LAI XUANCHAO President of COSL Mexico

Put a lid on costs, use great equipment and exhibit an

for,” Xuanchao says. As Mexico opens its oil and gas market

enviable safety record. Throw in a dollop of determination

to private foreign investors for the first time, the stakes are

and the result is the recipe for success behind oilfield

high when it comes to avoiding high-profile accidents and the

services provider COSL, one of the largest companies in a

company benefits from an integrated management system

field dominated by well-known names like Schlumberger

designed to increase safety standards, he adds.

and Petrofac, among others. The executive points to COSL’s efforts regarding costThe Chinese company, active in Mexico since 2007, used

efficiency as another factor for its success in securing the

those ingredients to not only survive but to thrive during

Hokchi contract. “In a low oil price environment, cost is a

an industry downturn that thwarted drilling activity and

priority for operators,” he explains, “and COSL was born

squeezed its main clients’ budgets. Its efforts paid off in

with that mentality.”

2016 when it found itself among the early success stories of the Energy Reform, winning one of Mexico’s first privately

Watching every penny is certainly not new for the Chinese

tendered rig and logistics services contracts. COSL President

company, which weathered several industry downturns in

Lai Xuanchao says it came down to the company’s cost-

the 1990s and early 2000s. Xuanchao puts the company’s

efficiency and impressive performance on safety.

ability to survive down to its birth in a struggling Chinese economy. “In the 1970s, China’s economic status was

The global market pinch did not, however, leave COSL

weak. For that reason, COSL instilled the mindset of cost-

unscathed. By the first half of 2016, its revenues had fallen

efficiency into every employee, manager and stakeholder

by over 42 percent year on year to RMB6.9 billion (US$1

from day one,” he says. Considering the fundamental role

billion) as oil companies lowered their investments in the

cost-efficiency already played in COSL’s business approach,

wake of last year’s low crude prices.

the firm is not surprised it found success in the Mexican market, where PEMEX frequently came under criticism in

In August 2016, COSL won a contract with Hokchi Energy, a

the past for inefficient spending.

subsidiary of Pan American Energy, to provide rig and logistics services for the its operations in the shallow-water block it

Cost-efficiency allows COSL to prosper in difficult times

won in Round 1.2 in 2015. With operations now well underway,

and its competitor-friendly mindset also helps the company

Xuanchao says three factors brought the contract home: “the

because it considers its rivals potential collaborators.

quality of our equipment, our excellent operational and safety

Difficult times call for more collaboration to bolster the

standards and our focus on cost control.”

industry’s competitiveness, Xuanchao says. Instead of competing, COSL is more interested in the benefits to be

The company designated their COSL Hunter jack-up rig for

gained from actively sharing knowledge and integrating

operations in the Tabasco-based field. A sixth-generation rig,

capabilities between different industry players. Paraphrasing

the COSL Hunter boasts intelligent protection mechanisms

a well-known quote, he says, “there are no eternal friends or

and automated operating systems, Xuanchao says. These

eternal enemies, only eternal interests.”

features raise safety and efficiency standards. In use since the beginning of 2014, the rig is virtually new, a factor that

COSL’s biggest achievement in 2016 was gaining more

helped COSL secure the contract.

knowledge of the Mexican oil and gas market. It may seem modest when considering the company’s success

The company’s effort to achieve a blemish-free safety record

in the Hokchi block but the long-term benefits of such

also played an integral role in its winning bid. “In 2016 we had a

local experience could go a long way in making COSL an

zero-accident success rate, which is always the target we aim

attractive partner for newcomers.

VIEW FROM THE TOP

TACKLING MEXICO’S DRILLING CHALLENGES GUIDO RIVAS Vice President of Latam of QMax

Q: What are the main factors behind QMax’s success?

As we move toward developing more fields, there will

A: We have the largest drilling fluid infrastructure in Mexico

likely be a strong focus on lowering lifting costs. Offshore

and a mud plant near every district PEMEX operates in. We

operations will bring different challenges but ultimately,

have more capacity than the top global service companies

cost control and the best technological applications will

in Mexico. We have facilities with the ability to both store

become more important. Drilling operations have evolved

and mix drilling fluids in Ciudad del Carmen, Villahermosa,

tremendously and the more specialized drilling becomes,

Veracruz, Poza Rica and Reynosa. The capacity of each

the more specialized drilling fluids need to be. QMax can

one varies and the largest is located in Villahermosa, from

help operators overcome these challenges.

where we often support operations in many locations, including offshore.

Q: What added value can QMax provide to the new players entering the market?

As oil field activity evolves, we might need to restructure

A: One of QMax’s strengths is that we try to fully

that presence. However, at the peak of activity in 2014,

understand our customers’ needs so we can provide

QMax was able to deliver drilling fluids services to 83

solutions that are specific to those needs. We are a quick

rigs simultaneously across the country using that same

decision-making company. We can provide answers,

infrastructure.

whether positive or negative, to any customer in a matter of hours. That is an incredible amount of added value

Q: How does QMax differentiate itself from its competitors

compared with some of our competitors that must follow

and what added value does it provide clients?

a more complicated decision-making process. We quickly

A: At QMax we believe in technological differentiation. Our

tell our customers whether we can help them. If we do

investment and commitment to research and development

not have the ability to do so, they can quickly move on

and a deep understanding of our customers’ needs are the

and talk to somebody who can. But if we can, then we

key differentiators.

do. We really deliver, no excuses. That is our motto. That level of trust summarizes the added value we can provide

A common drilling problem in Mexico is lost circulation.

to our customers.

Through the application of innovative solutions we have minimized the impact by using sea water and liquid

Q: Which process creates the most costs for operators?

chemicals that significantly reduce the cost of the fluid lost,

A: The majority of the cost overruns in drilling operations

the time to mix the fluid and the cost of the associated

are a result of unplanned events. Several drilling problems

logistics. In addition, customers can drill more quickly

occur without major notice and the ability of a fluid services

through loss circulation zones, providing significant savings

company to help operators reduce those overruns depends

to the overall drilling operation.

on how quickly we can react to prevent or stop those events. This is one of QMax’s strengths. We use predictive

Q: What challenges can new operators expect when

software to evaluate where we are in the drilling operation

planning to start operations in Mexico?

to prevent or correct problems such as lost circulation or

A: New operators will face numerous challenges, including

differential sticking, among others.

political, social, economic and regulatory. However, technical challenges will depend greatly on the field and where their operations are located. For example, shale

QMax provides local solutions for drilling needs in drilling

drilling is expected to become more active but it requires

and completion fluids, solids control and waste management,

a completely different approach because traditional

wellbore cleanup, transportation services and technical testing

systems might not work or deliver the desired results.

and analysis services

VIEW FROM THE TOP

PERSISTENCE PROVIDES A MEXICAN FOOTHOLD TONY SOLIS Vice President International Sales and Operations of TSC Offshore Group

Q: What have been the highlights for TSC since its entry

three rigs. It was a long process involving several trips

into the Mexican market four years ago?

to Mexico City to reach a conciliation agreement. The

A: TSC began operations in Mexico in 2013, looking to

importance of the project for us was the chance to get

become a major player for the various drilling contractors

TSC’s brand recognized by PEMEX.

in the country, with the long-term goal of forming a partnership with PEMEX. After years of negotiating with

Q: What challenges will new players entering the Mexican

the Mexican NOC from our Houston offices, we finally won

market face?

a contract with the company to refurbish, modernize and

A: Players will face several challenges as they enter the

automate four land drilling rigs. In 2015, this project was

Mexican oil and gas market for the first time. A major one

put on hold due to the market downturn. Fortunately, we

will be PEMEX’s unfamiliarity with their brand and obtaining

took its budget restrictions into account and secured the

acceptance from the NOC. From the very beginning, TSC

continuation of the contract, which has been reduced to

faced an uphill battle. TSC is a US company but apart from

three drilling rigs with a narrower scope as a base but with

a small fraction that is done in Houston, the UK and the

the opportunity to expand the scope in the future. We are

Middle East, the vast majority of our manufacturing is

in the procurement stage now, which involves purchasing

done in China. We knew that years ago PEMEX had bad

the necessary equipment for replacements. Now we want

experiences with Chinese-manufactured equipment. To

to increase our market share in Mexico.

convince the NOC of the quality of TSC’s products we invited PEMEX to visit our Chinese shipyard. It saw first-

Q: What does your project with PEMEX specifically involve?

hand our quality-control processes.

A: It involves the execution of four main stages. During the first stage we are responsible for a full evaluation and

Another factor that helped us was that indirectly it was

diagnosis of the rigs on-site. As a result we delivered a

already using our products. TSC provided products to

document showing the details of each rig, providing a

service companies with PEMEX maintenance contracts, so

recommended action plan to refurbish, modernize and

it was using our equipment without realizing it. When we

automate the rig, taking current technologies into account.

made the company aware of this, our brand gained approval

The second stage is when procurement and manufacturing

more quickly. Unless PEMEX knows a company, it is very

of the recommended equipment takes place. The third

tough to begin working with it. One factor that will play a

stage concerns installation and testing of the selected

major role in PEMEX’s success in the new-look market is its

equipment and finally the fourth stage refers to all after-

ability to be flexible and open with new brands, equipment

delivery services such as training, technical services and

and technology. If it does not meet these requirements, the

maintenance services. Ultimately PEMEX decides what to

company will end up in last place because new players will

repair or replace, taking into account TSC’s proposal. In the

take advantage of all the innovative solutions.

end it will receive updated, near-new rigs with automated components that increase efficiency and safety standards.

Q: What percentage of your activity in Mexico in the past year centered on the project with PEMEX?

Q: How did you convince PEMEX to continue with the

A: TSC’s main source of revenue in Mexico comes from non-

project?

PEMEX drilling contractors. We fulfill orders for customers

A: When PEMEX began to cut spending, its intent was

like Seadrill, Perforadora Mexico, Central and CP Latina on

to cancel the entire project. The problem was that it was

a weekly, if not daily, basis. 2017 will be a different story,

contractually bound to pay TSC a certain minimum amount

as most of our revenue will come from the project with

even if the work did not go ahead. Rather than having the

PEMEX, due to its size. As new operators enter the market,

company pay us for nothing we renegotiated the deal to

we hope to see more avenues to generate new revenue.

TSC deck cranes on Semisub Rigs in Brazil that helped TSC win contracts in Mexico with PEMEX and others, TSC Offshore Group

Now that we have opened the door with PEMEX, we are

A: Mexico is definitely in the top two on our global growth

considering participating in other bids for larger projects,

priority list. We are seeing a lot of growth in Venezuela

perhaps offshore jack-ups or modular rigs.

too, but due to our recent success with PEMEX we expect the most growth to happen in Mexico over the next three

Q: How did TSC confront the drilling slowdown in 2016?

to five years.

A: We had to cut back to deal with the lack of drilling activity in the industry. This included letting go of five of the

Q: How will TSC’s previous experience with large IOCs

six employees in Villahermosa, leaving us with one person

benefit you in the new-look market?

who is overlooking the PEMEX project. As a manufacturer

A: Once other customers know that we have had success in

we use our distributors as our ears and eyes in the market,

dealing with Mexico’s state-owned oil company, I think they

so we don’t need a large workforce.

will begin taking TSC much more seriously as an option. Although we are a small player, as far as capabilities go

Q: What benefits does TSC’s Total Solutions approach

we can provide the same services as NOV or Cameron.

provide to your clients?

In fact, our small size is a huge benefit because there is

A: TSC stands for Total Solutions Company and this is the

less red tape involved in our processes. This makes TSC an

promise we make to our customers. Whatever their needs

attractive alternative.

are, we try to find a solution by tailoring our service to the situation at hand, offering flexibility on a case by case basis.

Q: How will TSC Mexico look in a year?

Since the market is stagnant and there is an abundance of

A: We have very high expectations that 2017 will be a

used rigs available it is virtually impossible to sell a new rig

turning point for the oil and gas market in Mexico. This

in Mexico. Instead our goal is to offer value-added solutions.

is one of the reasons we opened operations here. Behind our offices in Ciudad del Carmen, we have reserved

Q: What innovations is TSC Group working on?

another building for possible future use as a repair facility.

A: TSC Group is considering introducing completely new

We will be able to do repairs on mud pumps, top drives

products to the market on a global scale. Rather than simply

and draw works, for example. We will either open the

providing drilling products, we will also supply pressure

facility in Ciudad del Carmen or Dos Bocas. The latter

pumps. We started developing the models two years ago

would be more focused on the offshore sector, covering

but weren’t able to get them out to the customer because

major repairs for jack-up rigs. Our CEO is really betting

of the market slowdown. Now the timing is almost perfect

on Mexico.

to add them to our product line. We expect to see the first sales in 2017 and they can be used for a variety of tasks such as salt water injection and fracturing.

TSC

Offshore

Group

provides

high-end

equipment

manufacturing, covering offshore integrated solutions, rig

Q: How important is Mexico in TSC’s global growth

services, offshore plug and abandonment and decommissioning

strategy?

work, as well as E&P oil block development

VIEW FROM THE TOP

LOCAL PRESENCE MAKES FOR QUICK TURNAROUND JOHN LAWRENCE Director of Petricore

Q: What differentiates your value proposition from

protect the samples under its care but at the same time

competing firms?

it has to make them adequately available to the industry.

A: We believe we can become the preferred company in

Petricore is developing technological solutions to address

our line of business because we are present in Mexico and

this challenge. Among those are high-resolution images

we have a lot of experience in the country. We also strive to

and CT scanning, which can provide digital versions of

work locally and avoid sending samples abroad for analysis

whichever sample a client may need to analyze. These

as other companies tend to do. Our major competitors have

technologies will be rolled out as demand arises but they

their labs in Houston, whereas Petricore’s main lab is in

are ready to go.

Villahermosa. One of the biggest advantages to choosing Petricore is the quick turnaround we offer clients thanks

Q: What challenges do new operators entering the

to the strategic location of our labs in Villahermosa. This

market face?

means our clients receive data back very quickly, allowing

A: Operating in Mexico is challenging due to various cultural

them to use the information to make important decisions

factors. Mexico’s business culture will not pose as much

when time is of the essence. Petricore is the only company

of a hurdle as certain social aspects will. The main issues

in the Mexican market which offers this.

incoming companies face are questions surrounding safety and security. Operations in rural locations could be held up

Q: What types of new technology is Petricore investing in

by roadblocks by local communities, which has historically

to improve its service offering?

been a problem for PEMEX, particularly in places like

A: We are looking at new technologies that provide

Tabasco. International companies will have to deal with this

information when sample availability is limited, such as

because the government does not seem to be making any

when samples exist but may not be available to take

major effort to mitigate this risk.

away and analyze physically. This is the case with the many samples owned by CNH, which companies can view

Q: How does Petricore’s presence in Houston enhance the

but not remove. CNH has an obligation to maintain and

service it offers to new players?

A: Our presence in the US positions us to help companies that operate in Mexico but have their base in Houston. Petricore has employees in Houston and in Mexico, with strong cooperation between the two teams. This means we can attend to our client on both ends. Q: How has your relationship with PEMEX changed over the past year? A: Our relationship with PEMEX has not changed significantly over the past year. PEMEXâ&#x20AC;&#x2122;s work is still extremely scarce with very little activity happening. The only palpable difference is its lower level of activity and its changing payment schemes. PEMEXâ&#x20AC;&#x2122;s payment slowdown has improved but it remains complicated. The payment terms were increased from 20 days to 180 days. This meant we had to find a way to finance Petricore in the meantime, so we turned to the NAFINSA invoicing system, through

Petricore has employees in Houston and in Mexico, with strong cooperation between the two teams

which we now collect all our invoices. Although we have to fund this new financial system, we are relieved that

Q: What will Petricore look like in five years?

PEMEXâ&#x20AC;&#x2122;s payments are now more regular and stable. We

A: In five years we hope to be more focused on providing

had to adjust our strategy to fit in the changes but the most

interpretation services using the data we produce, instead

important factor is the stability of payments now.

of simply producing it. In that sense, we should be able to grow our business. We also hope to provide services

We have the national core analysis contract with PEMEX,

for the National Sample Storage facility due to be built

which involves providing lab services for core and fluid

in the coming years. We expect it to be a source of work

analysis. We also hold the national contract for onshore

for Petricore because operators will be using it as a kind

mud logging. Still, we believe that over the next few years

of library of samples. They will need companies like us to

PEMEX will no longer be our main client.

carry out analyses for them, using specific techniques to evaluate and capture samples that can be accessed and

We will soon begin carrying out work for two of the new

photographed but not taken away.

operators and we have been doing work for other companies like Schlumberger and Halliburton on integrated projects for some time. We have also done work for Petrofac and

Petricore is a multinational company that provides core and

Grupo Diavaz and some other smaller operators. As more

fluid analyses, mud logging services and geological support

players enter the market, we expect the services we offer

services and products to the oil and gas industry, helping

to private firms to become increasingly significant.

prospectors gain complete knowledge of their fields

Ayatsil-C Sailaway, Tampico, Tamaulipas, McDermott

SHALLOW WATER & FIELD DEVELOPMENT

After the muted results of shallow water Round 1.1, when just two of a total 14 blocks were awarded, the successful allocation of almost 70 percent of the shallow water blocks during Round 1.2 bolstered CNHâ&#x20AC;&#x2122;s status as an effective industry regulator and industry enabler. Investments from Eni, Pan American Energy, Fieldwood and PetroBAL boosted the industry, as drilling has already begun on some of the awarded blocks. The oil and gas sector is waiting for the next shallow water round, which involves 15 blocks in Tampico, Veracruz and the Southeast Basin, all located in the Gulf of Mexico.

The following chapter gathers the voices and opinions of relevant players from all sides of the industry to discuss the developments on the blocks from Rounds 1.1 and 1.2 and their perspectives regarding future shallow water rounds, as well as their meaning for the sector in Mexico.

CHAPTER 4: SHALLOW WATER & FIELD DEVELOPMENT 102

ANALYSIS: Shallow Waters Ready for Wave of Exploration Activity

105

VIEW FROM THE TOP: Juan Javier Hinojosa, PEMEX E&P

106

SPOTLIGHT: Ayín-Batsil Farm-Out

107

VIEW FROM THE TOP: Matt McCarroll, Fieldwood Energy

108

VIEW FROM THE TOP: Timothy Duncan, Talos Energy

110

VIEW FROM THE TOP: Esaú Sasso, Baker Hughes

112

VIEW FROM THE TOP: Rogerio Mendonça, GE Oil & Gas Latin America

114

VIEW FROM THE TOP: Alfredo Carvallo, McDermott

116

VIEW FROM THE TOP: Pavel Hernández, OH Maritime

118

SPOTLIGHT: Global Software Solutions Made Easy

119

INSIGHT: Edward Hernández, io oil and gas consulting

120

VIEW FROM THE TOP: Bruno Picozzi, Sapura Energy Mexico

101

ANALYSIS

SHALLOW WATERS READY FOR WAVE OF EXPLORATION ACTIVITY Mexico is just starting to dip its feet into deepwaters. Although

1 wells. Both were drilled in PEMEX’s Litoral de

shale has great potential, foreign expertise is required to

Tabasco asset in a water depth of 30m and

develop the segment. With a long history of production, the

12m respectively. Teekit 1001 contains oil and

county’s strength lies in its shallow-water prowess.

gas and has an initial production of 2,472b/d, while Koban 1 contains gas and condensates and

Until now, PEMEX has been the sole operator on Mexico’s

initially produced 3,276b/d..

shores but the Energy Reform is bringing stark changes. The results from the latest bid rounds, and from those still to come, illustrate the shifting landscape, where even Mexican companies are turning their sights to what was once PEMEX’s sole, and lucrative, domain.

Well

Company

Location

Water depth

Total depth

Koban-1

PEMEX

Litoral de Tabasco

6,587

Teekit-1001

PEMEX

Litoral de Tabasco

3,613

Amoca 1

Eni

Campeche Bay

3,500

Pokche 1

PEMEX

Litoral de Tabasco

6,518

Shallow water accounted for 79 percent of the country’s total crude oil production in 2016, according to CNH data, and remains the bread and butter of Mexico’s oil and gas industry. Overall production, however, has been in decline for over a decade. In 2016, total production averaged 2.155 million b/d; a drop of 5 percent on year. Production of crude oil has seen

Previously, Mexico’s most productive oil field, Cantarell’s

a steady decrease since peaking at 3.383 million b/d in 2004.

production has been in decline for 13 years, and in 2016 was just 216,000b/d; down almost 90 percent from its peak

In 2016, PEMEX completed three commercially productive

of 2.136 million b/d in 2004. The drop is due to declining

shallow-water exploratory wells: Pokche 1, Uchbal 1 and Teca 1

production at the Cantarell’s Akal field, which in 2004 was

wells. The Pokche 1 well, off the coast of Tabasco, reached total

the source of over 95 percent of the field’s output, a figure

depths of 6,518m and produced superlight oil and gas. Uchbal

which by 2016 had plunged to just 32 percent, contributing

1 was 2,670m deep and produced heavy crude and gas. Light

70,000b/d to Cantarell’s overall output.

crude was discovered in the Teca 1 well, located 30km offshore between Veracruz and Tabasco, and with a water depth of

EK BALAM CONTRACT MIGRATION

44m. Its 3P reserves are estimated to lie between 50 and 60

Cantarell’s other main field, Ek Balam, is the first of PEMEX’s

million[MM1] boe. It reaches depths between 2,750m and

assignments to be migrated to a “Hydrocarbons Exploration

3,400m and could produce around 7,000b/d.

and Production Contracts” without a partner. Law provides that PEMEX and its partners can ask to migrate the entirety

In the first quarter of 2017, PEMEX made two shallow-water

of the assignments it was awarded in Round Zero toward this

discoveries with the completion of the Teekit 1001 and Koban

new contractual model without the need of going through a

Produccion de aceite en Akal (miles de barriles diarios)

AKAL'S OIL PRODUCTION (million b/d) 450 400 350 300 250 200 150 100 Mar 2017

Dec 2016

Sep 2016

Jun 2016

Mar 2016

Dec 205

Jun 2015

Sep 2015

Mar 2015

Dec 2014

Sep 2014

Jun 2014

Mar 2014

Dec 2013

Jun 2013

Sep 2013

Mar 2013

Sep 2012

Dec 2012

Jun 2012

Dec 2011

Mar 2012

Sep 2011

Jun 2011

Mar 2011

Dec 2010

Jun 2010

Source: CNH

Sep 2010

50 Mar 2010

102

GAS PRODUCTION IN BURGOS AND CANTARELL (MMcf/d) 2,000

1,500

1,000

Mar 2017

Sep 2016

Dec 2016

Jun 2016

Dec 205

Mar 2016

Sep 2015

Jun 2015

Mar 2015

Dec 2014

Jun 2014

Sep 2014

Mar 2014

Sep 2013

Dec 2013

Jun 2013

Mar 2013

Dec 2012

Sep 2012

Jun 2012

Mar 2012

Dec 2011

Jun 2011

Sep 2011

Mar 2011

Sep 2010

——Burgos

Dec 2010

Jun 2010

Mar 2010

500

——Cantarell

Ultimos doce meses

terms of production, reserves and investment. “If we want

GAS PRODUCTION IN BURGOS AND CANTARELL (last 12 months)

PEMEX to be producing hydrocarbons in the future, it will

1,500

tender as long as the migration represented advantages in

need exploration areas both as assignments and farm-outs,” says Alma América Porres, CNH Commissioner, highlighting

1,300

the importance this type of partner-less contract migration will play in the PEMEX’s future production ambitions. Ek

1,100

Balam’s production peaked in 2013 at 60,000b/d, dropping

KU-MALOOB-ZAAP

Mar 2017

Feb 2016

Jan 2016

Dec 2016

Nov 2016

Oct 2016

Sep 2016

and 2023.

Aug 2016

500 Jul 2016

production from 30,000b/d to 90,000b/d between 2020

Jun 2016

search for a partner on the field itself and the goal is to triple

700

May 2016

in May 2017. Lasting 22 years, the contract allows PEMEX to

Apr 2016

barrels of 2P crude oil reserves, the new contract was signed

900

Mar 2016

to 43,000b/d in 2016. Containing approximately 500 million

Source: CNH

In 2009, Ku-Maloob-Zaap overtook Cantarell as Mexico’s most productive oil field. Its 2016 production output was

reversed roles in 2012, with Maloob becoming the main

867,000b/d. This figure has been relatively steady since

producer and Ku falling from the most productive to the least.

2010, varying by only 25,000b/d since that year. Although production has remained stable, the source of the majority

ENI

of its production shifted dramatically when Ku and Maloob

The year 2016 marked the first time an international oil Major

Últimos doce meses

drilled successful shallow-water exploratory wells in the country. Eni discovered approximately 110m of net oil pay in

OIL PRODUCTION IN AKAL (last 12 months)

its Amoca-2 well in March 2017, becoming the first IOC to

strike oil in Mexico since the Energy Reform. Sixty-five meters

of the Italian company’s discovery was unearthed in deeper,

previously undrilled areas. “We are seeing the natural results of

processes set in motion by the Energy Reform, not long after

it got under way,” said CNH in a press release addressing Eni’s

success. Eni may be the first IOC to strike oil in Mexico but it

will likely not be the last. CNH has granted six approvals for

private companies to drill exploratory wells in the country’s

shallow waters. Mar 2017

Feb 2016

Jan 2016

Dec 2016

Nov 2016

Oct 2016

Sep 2016

Aug2016

Jul 2016

Jun 2016

May 2016

Apr 2016

Mar 2016

ROUND 1.2/1.1 Eni won Round 1.2’s Amoka, Mizton and Tecoalli blocks at the end of 2015. Two other consortiums won in the round:

103

Oil Production in Ku, Maloob and Zaap (million b/d)

OIL PRODUCTION IN KU, MALOOB AND ZAAP (million b/d) 450 400 350 300 250 200

——Ku

——Maloob

Mar 2017

Dec 2016

Sep 2016

Jun 2016

Mar 2016

Dec 205

Jun 2015

Sep 2015

Mar 2015

Dec 2014

Sep 2014

Jun 2014

Mar 2014

Dec 2013

Jun 2013

Sep 2013

Mar 2013

Sep 2012

Dec 2012

Jun 2012

Dec 2011

Mar 2012

Sep 2011

Jun 2011

Mar 2011

Dec 2010

Jun 2010

104

Sep 2010

100

Mar 2010

150

——Zaap

Fieldwood and PetroBAL won the Ichalkil and Pokoch blocks while Pan American Energy took home the Hokchi block. Although two of the five contractual areas did not attract bids, Round 1.2 was considered a success by the industry, especially

OIL PRODUCTION IN KU, MALOOB AND ZAAP (last 12 months) 400 350

as it immediately followed Round 1.1 when only two out of 14 blocks were awarded to a consortium including Sierra Oil & Gas, Talos Energy and Premier Oil. “In our view Round 1.2 was the best round so far, from every angle. In fact, both Round 1.1 and 1.2 saw high-level bids from experienced companies,” says

300 250 200

Carlos Morales, Director General of PetroBAL. 150

capital, technology and expertise than onshore. The same can

——Ku

——Maloob

be said for Sierra Oil & Gas, which won blocks 2 and 7 along

Source: CNH

Mar 2017

Feb 2016

Jan 2016

Dec 2016

Oct 2016

Nov 2016

Sep 2016

Aug 2016

Jul 2016

Reform and enter shallow water projects, which require more

Jun 2016

marketing their local experience to capitalize on the Energy

May 2016

100 Apr 2016

PetroBAL sets an example for how Mexican companies are

Mar 2016

Through its partnership with US-based Fieldwood Energy,

——Zaap

with American company Talos Energy. “Although PetroBAL has many experienced individuals, we lack the operational

Veracruz, Tabasco and Campeche, contain crude oil and gas

experience required by CNH for participation in the bidding

reserves, while the remaining five contain gas reserves only.

rounds,” says Morales. Fieldwood, on the other hand, is the

They range in area from 466km2 to 972km2, with an average

largest operator on the US side of the Gulf of Mexico, offering

size of 595km2.

a wealth of operator experience to complement PetroBAL’s Mexican knowledge.

FARM-OUT DELAYED On Oct. 18, 2016, PEMEX sent an application to the Ministry

WORLD-CLASS RESERVES

of Energy for approval to farm out its Ayín and Batsil shallow-

As well as carefully selecting partners to ensure success in

water oilfields, following its first farm-out of the deepwater

Round 2.1, Mexico’s shallow water operators recognized the

Trion block in December, which was won by BHP Billiton.

world-class reserves up for grabs and bid accordingly. “Sierra

Originally planned to be auctioned on June 19 together with

bid on Block 7 because it saw several strong prospects with

Round 2.1, in April 2017 CNH decided to delay the date to

the right quality. These prospects have even been categorized

Oct. 4, 2017, due to fewer than expected bidders having

by consulting companies such as Wood Mackenzie as among

prequalified.

the top 10 global prospects to be drilled in 2017,” says Iván Sandrea, CEO of Sierra, which took away Blocks 2 and 7 in

With a total area of 1,096km2, the block includes the Ayín and

Round 1.1 in a consortium with Talos Energy and Premier Oil.

Batsil fields, comes with 100 percent 3D seismic coverage and mainly contains heavy crude oil. It has a total of 10 exploratory

In July 2017, 15 more shallow-water blocks will be offered.

wells and two development wells. Ayín offers 217.6 million

Ten of the 15 fields, which are spread along the coast of

barrels of 3P reserves, while Batsil has 79.6 million barrels.

VIEW FROM THE TOP

FIRST STABILIZE PRODUCTION, THEN INCREASE IT JUAN JAVIER HINOJOSA Director General of PEMEX E&P

Q: In what specific ways is PEMEX E&P (PEP) working to

and we are adjusting to the new obligations CNH and the

reverse its 12-year production declines?

Ministry of Energy are demanding of us. We have never

A: We are now trying to focus all our technical and financial

done this before so the regulatory and execution details

efforts on increasing the profitability of the fields we were

are a work in progress. We are about to migrate the first

assigned through Round Zero. Regarding the production

contract: Santuario, which we share with Petrofac.

decline, first we are trying to stabilize production and then increase it, for both oil and gas. The way to do this is by

Q: What role will farm-outs and alliances play in PEMEX’s

increasing our efficiencies and focusing on more strategic

future production?

projects. The international oil price affects PEMEX a lot,

A: We are aligning with the business plan, which is all about

putting into limbo our decision-making process at times. If

reversing the production decline by taking advantage of

our goal is to be profitable, low oil prices can cost projects

the opportunities brought about by the reform. Our goal

and work. This is beyond the company’s control.

is to arm ourselves with technology, capital and execution capabilities and we can do this through the various farm-

Q: What is PEMEX looking for in a partner for the Ogarrio

outs. Those involve exploration and extraction contracts.

and Cárdenas-Mora farm-outs?

For some of the fields we were assigned in Round Zero we

A: We are looking for technology. Ogarrio and Cárdenas-

require the support of a partner to help cover the financial

Mora have reached the point where they need secondary

or technological elements.

and enhanced oil recovery mechanisms. They also demand investments. We want a partner that has already

Q: What is PEP’s plan to take advantage of Mexico’s

successfully developed IOR/EOR projects in similar fields

untapped unconventional resources?

and that has the financial strength to provide capital. Ayín-

A: We are waiting for the regulations to be released

Batsil is the field involved in our upcoming shallow-water

regarding unconventional operations and we recognize it

farm-out. We discovered Ayín in the 1980s, but we have

is a huge opportunity for PEP with respect to development

not done anything to develop it. This is because it is at a

of unconventionals. ASEA, CNH and the Ministry of Energy

water depth of more than 180m. PEMEX has developed such

are taking into account different industry voices in the

capacity that there is no question about its shallow-water

regulations that will drive unconventional development in

capabilities in execution and development. But we have

Mexico. This is not only a huge opportunity for PEMEX but

only gone 140m deep. We are looking for a partner that

also for the Mexican state. We will enter unconventional

has worked in depths of more than 150m so we can learn

bidding rounds and look for alliances to accompany us on

from its experience and keep developing efficiently this

this venture, like in deepwater. The big discoveries are going

type of field. PEMEX discovered Batsil in 2015 and it is at a

to be in these two areas.

water depth of 80m so we have added this to the farm-out to increase its attractiveness. We want to become stronger

Q: Does PEMEX see itself becoming an IOC?

and continue as leaders in shallow-water development.

A: First, we are changing from being a monopoly to being just another industry player. We definitely have the capacity,

Q: How will the delay with CIEPs and COPFs migration

the manpower and the resources to manage it.

impact PEMEX’s production? A: The CIEPs and COPFs contracts we hold with private companies on various fields represent no more than 2

Petróleos Mexicanos (PEMEX) is the most important company

percent of the national production of oil and they are not

in Mexico, an international reference in the field of hydrocarbons.

representative of much of the reserves either. There is a

Its activities involve the entire production chain, from exploration,

delay in the process itself but the process is a learning curve

production, industrial transformation, logistics and marketing

105

SPOTLIGHT

AYÍN-BATSIL FARM-OUT AYÍN - BATSIL Year of discovery

1991 Ayín and 2015 Batsil

Ayín-Batsil

3P Reserves

359 Million boe

Round 1.2

Water depth

up to 180m

Round 1.3

Estimated Investment

US$4.2 billion

Type of hydrocarbon

Heavy crude oil

Estimated production

60-70 Million b/d

Round 2.1

Located in the Campeche Sound, 70km from Cantarell and 106

Ku-Maloob-Zaap, the area to be farmed out includes the fields Ayín and Batsil and associated fields Alux, Hap and Makech, as well as three exploration opportunities; Ichal-1, Ken-1 and Chelpul-1. The winner of the Ayín-Batsil farm-out will be announced on October 4, 2017.

3P RESERVES (million boe) Ayín Batsil 0

100

150

200

250 Name

Unit

Ayín-Batsil

PAST PRODUCTION

3-D seismic coverage

100

The two main fields included in the block, Ayín and Batsil,

Water depth

Meters

50 – 350

were discovered in 1991 and 2015 respectively. The Ayín field

Area

1,096

contains reserves totaling 217 million boe, while the Batsil

Main Hydrocarbon1

Heavy oil

Fields

Ayín, Batsil, Makech, Hap and Alux

field contains 79.6 million boe. In total, the block and its associated fields hold 3P reserves totaling 359 million boe, located in a water depth of 180m, and requires an estimated total investment of US$4.2 billion. It contains heavy crude oil and estimate production will reach 60,000-70,000b/d.

WELLS Currently, there 12 wells have been drilled in the Ayín-Batsil block, 10 of which are exploration wells and two of which are development wells.

Name

Type

Drilling Year

Alux 1

Exploration

1990

Alux 1A

Exploration

1990

Ayín 1

Exploration

1992

Dzunum 1

Exploration

1994

Ayín DL1

Exploration

1998

Makech 1

Exploration

1998

Tixan 1

Exploration

1999

Hap 1

Exploration

2002

Alux 31

Development

2010

Ayín 2DL

Exploration

2010

Ayín 11

Development

2015

Batsil 1

Exploration

2015

Original volume2

Million boe

1,387

1P reserves2

Million boe

2P reserves

Million boe

153

3P reserves2

Million boe

359

Existing exploration wells

Number

Existing development wells

Number

Exploration opportunities

Number

3 Bolol, Tabal, Choch-Mulix OBC, Chuktah, Le Acach

3-D seismic areas available Median prospective resource

Million boe

224

Total prospective resource with risk

Million boe

Minimum work program requested

Work units

152,090

The main hydrocarbon corresponds to that expected according to exploratory prospects in the area. The original volume and 1P, 2P and 3P reserves correspond to the reserves information from Jan. 1, 2016. Source: CNH 1

VIEW FROM THE TOP

LOCAL PARTNERS HELP SPELL SHALLOW-WATER SUCCESS MATT MCCARROLL President and CEO of Fieldwood Energy

Q: Why did you choose PetroBAL as a partner for the

2016 and did not get our drilling permit until January 2017.

Round 1.2 shallow-water bid?

We have experience working with government regulators in

A: Many Mexican companies could not participate in Round

the US because our activities are located in federal waters

1.2 because they did not qualify as operators due to a lack of

but dealing with Mexican agencies has been quite different.

operational history, capital and production so they looked

We consider it to be an extremely useful learning experience.

to companies like Fieldwood to partner with. We knew from the beginning that doing this alone was not possible. We

Q: What is the company’s strategy for the Ichalkil and

could have tried to partner with some of the Super Majors,

Pokoch wells?

such as BP, Chevron or Shell, but we would have been

A: We committed to drilling two wells during the appraisal

disadvantaged by a lack of knowledge and experience with

phase, one for Ichalkil and one for Pokoch. Ichalkil is clearly

the Mexican geography and culture that only a local partner

the larger of the two, with a complex geology and objectives

can offer. By working with Mexican company PetroBAL we

both in the Cretaceous and Jurassic periods, so we hope it is

got access to people who had drilled similar fields in the

sizable. Pokoch is smaller, with a Jurassic prospect only. Our

region 20 years ago and who could offer us the kind of

plan is to drill two wells this year. We started drilling in Ichalkil

knowledge that otherwise would be impossible to get.

in February and already have our Floating Production Storage and Offloading (FPSO) provider, TMM, lined up for testing.

PetroBAL is a young company with an experienced team. We have weekly meetings to go over the geology,

For the production phase, we will need to establish

geophysics, reprocessing of seismic data, well planning and

infrastructure access and figure out how to meter, sell and

other project highlights. Working with PetroBAL has been

transport the oil so it does not get mixed with PEMEX’s oil.

extremely easy because it shares our goals and values. We

Unitization is a big question because we have a PEMEX well

certainly have differences of opinion and interpretation but

drilled not too far from the outline of our block. Unitization

the strategy and critical planning remains the same. Overall,

is routine for us in the US but here in Mexico it is not clearly

our thoughts about economics, planning and safety are very

regulated and procedures are still being worked out. This is

similar. Our experience with our employees and partners in

mainly due to the fact that PEMEX had been on both sides.

Mexico has gone so well that we have submitted documents to buy the data package for Round 2.1, again in partnership

We have a mixed portfolio of contractors. We have

with PetroBAL.

executed around 50 contracts with either Mexican vendors or international vendors operating in Mexico, including

Q: What have you learned since you winning Contractual

Master Service Agreements (MSAs) for helicopters, docks,

Area 4 (the Ichalkil and Pokochin blocks) in Round 1.2?

rigs, pipes and so on. A few of our largest suppliers are

A: We knew this was going to be a completely new process,

Schlumberger, Halliburton and Weatherford. Our boat

operating in Mexico for the very first time was not just new

provider is a Mexican company and most of our casing

from our side but also for the Mexican government with its

comes from Tenaris’ Mexican steel mill. We also have plenty

new regulatory role. We have asked questions that had not

of local Mexican contractors, be it port operators, boat

been asked before, much less been answered, so that has

crews or catering personnel.

been a learning experience for both of us. We have also seen CNH offer a structured, formal and fully transparent relationship to all the companies.

Fieldwood Energy is the largest operator on the US side of the Gulf of Mexico, with interest in 500 offshore blocks in the area,

Timing delays have been hard to deal with. We signed our

principally in depths of less than 1,000 feet. It is now expanding

contract in January 2016, filed our appraisal plan in April

its portfolio into Mexican waters

107

VIEW FROM THE TOP

WILDCAT SHOWS POTENTIAL OF MEXICAN FIELDS TIMOTHY DUNCAN President and CEO of Talos Energy

108

Q: How have Talos’ expectations for the two blocks it won

because of what it will tell us regarding future inventory.

in Round 1.1 with Sierra Oil & Gas changed?

We are using the exact same team to do the data imaging

A: Our expectations have actually increased over the

in the US and in Mexico. This is the kind of technology

last year. When we signed our Professional Services

transfer the Energy Reform is allowing by opening the

Contract with CNH for blocks two and seven in Round

market. There is a reason Wood Mackenzie named Zama

1.1 in the Southeast Basin, the regulators provided

one of the “15 wildcats to watch in 2015.” The well is not

previously shot seismic data, which lets us reprocess and

just important for us but also for the Energy Reform and

re-image it instead of having to conform to the current

Mexico because it shows that there is plenty of potential

product output. With this information, we are going to

in the Mexican fields.

drill the Zama-1 prospect, which is globally recognized by companies such as Statoil, Eni, Hunt and Murphy,

Q: What types of geology is Talos Energy focusing on

companies that also bid on the block.

for its blocks? A: We are aware of the potential of other areas, such as the

Talos' seismic imaging led to a discovery at around 21,500 feet subsea. The first well is flowing over 15,000b/d

cretaceous opportunities, but we are focused more on the upper, middle and lower Miocene, looking to understand where the salt edges are and where they intercept to find potential reservoirs and their boundaries. We want to ensure we can image and tighten up previous images to recognize subsalt and salt-flank potential and other structures. The work we have done so far shows the presence of quality

Before commencing drilling, we are improving the imaging

formations. One successful discovery was part of our

of salt bodies in the area because we recognized there is

Tornado project in the US Gulf of Mexico in 2016, carried

potential sub-salt. Remapping the contracted land position

out at a water depth of about 900m. To achieve this, we

after our reprocessing efforts has grown our inventory

used the same geophysical firm we are using in Mexico for

from two to more than 10 ideas, dramatically increasing its

seismic imaging that led to a discovery at around 21,500

resource potential. The first well is important because it will

feet subsea. The first well is flowing over 15,000b/d.

reveal the petro-physical and geophysical significance of these salt basins. One challenge we face is the geological

Q: How has the Mexican market developed since the

age of the area. The upper, middle and lower Miocene is

Energy Reform in your view?

dominated by local salt, which lacks well control in Mexico

A: Capital markets function by having participants

-- understandable given that the Mexican Southeast Basin

involved in transactions, whether it is post-FID financing

wells were built on a carbonate platform while those in the

on a new discovery or M&A consulting and financing.

US were built on salt-dominated systems.

When those factors are present, things will really start happening. Just like any other place in the world, opening

For this reason, our Zama well is important on several

the market to new companies will create business and

levels. Not just because of its prospective size but also

more opportunities for local resources and markets. This has not fully materialized in Mexico yet because there simply are not enough players present. But it is definitely

Talos Energy is an oil and gas company based in Houston and

heading in the right direction.

focused on offshore exploration and production. Its expertise includes a strong emphasis on asset optimization, exploitation

There is certainly an already robust market for oilfield

and exploration in the Gulf of Mexico

related services and we are very proud that we expect

to be ahead of our local content requirements at the exploration phase on each block. However, it is critically important that our local partners know that in order for us to procure their services, we do have to do exhaustive diligence regarding their ownership and management structure, work history and any relationships regarding local government so we do not run into issues with respect to our US regulators and their expectations regarding how we manage any potential corruption risk. Local companies have been receptive to our diligence, which we appreciate, and as our comfort level increases, we will continue to increase our local content levels. Even though the US used hundreds of companies to do it, PEMEX developed the first 25 billion barrels faster than the US, so PEMEX has plenty of capabilities and has achieved incredible results. However, having one company alone doing all the work simply is not the best way maximize the resource potential of a basin, which is why the US is leading in deepwater development. Q: Why did you choose Premier Oil and Sierra Oil & Gas as partners for the bidding rounds? A: We wanted to be present in the Mexican market early, to learn the rules and bid in the first sale before the bidding became even more competitive. By establishing ourselves as a credible operator, we wanted to create more partnering opportunities. The fact that a company like Premier Oil, which has investments in Iraq and the North Sea, was interested in our working portfolio in Mexico gave us a lot of confidence. Sierra Oil & Gas helped us by guiding us through the regulatory process and providing additional resources about the local geology. We have been here now for several years and are confident in our team, our presence and relationships, so we are starting to consider more ambitious projects. We took our role as the first operator in the reforms very seriously and I am proud of our teamâ&#x20AC;&#x2122;s effort. Q: What plans do you have for 2018 in Mexico? A: Originally, we planned to drill Block 7 before Block 2 in 2018. We might drill another, separate prospect other than Zama on Block 7 before turning to Block 2 but this could change as we continue to work on the reprocessed data. Our lease lasts until the middle of 2019 and we want to test several independent prospects on each block before the end of the primary term. Depending on the drilling results, we will see a significant level of activity between the middle of 2018 and middle of 2019, which will go well beyond the minimum work program. We want to be in the position of making sure we get the right amount of data to back the government and file any appropriate extensions that show our commitment for future work.

109

VIEW FROM THE TOP

TECHNOLOGY TOPS LIST FOR EFFICIENCY DRIVE ESAÚ SASSO Mexico Country Director of Baker Hughes

110

Q: Which objectives have guided Baker Hughes in an

discrete services, something in which we were very strong.

operating environment characterized by low oil prices?

Baker Hughes had the opportunity to participate in the first

A: Due to the challenging market conditions in Mexico

integrated services tenders and we were awarded one of

and elsewhere, we had to make some adjustments to our

the contracts. We also continue to provide discrete services

business. However, we continue to invest in technology

as needed and our relationship with our customers has

because we believe it is key to improving efficiency gaps in

improved greatly because of our performance.

the industry and we also believe it is the main road to lower oil and gas production costs. Discipline is essential for every

Similar negotiation processes have been implemented

company to compete and the downturn is evidence that

in many other countries in Latin America. We leveraged

we must collaborate across all levels of the supply chain to

lessons learned to adjust our structure across the region.

improve performance. Most importantly, we must retain the

The negotiation process has proved beneficial for us and

talent of our people. For the past year, we have developed

our customers and we believe our relationships will only

a great deal of local talent. Our employees truly understand

continue to improve.

our customers’ needs, which is essential for us because our most important goal is to meet their objectives.

Q: How can Baker Hughes contribute to PEMEX as it becomes a productive enterprise of the state?

Q: How has your strategy in Mexico changed given the

A: We believe that Mexico’s NOC now needs to diversify

reforms and the opening of the energy sector?

and focus on new areas, including the creation of new

A: Baker Hughes’ main strategy is to provide technology

partnerships. Baker Hughes is very open to this. We

and solutions that help our customers build more efficient

changed our strategy in 2016 and one of our new goals

wells, optimize production and ultimately improve recovery.

is to create partnerships and JVs with new companies,

Our goal is to build on our strategy in more profitable

including Mexico’s NOC. It is the only company potentially

markets. In Mexico’s case, we have been impacted by

in the world that is a customer, a possible competitor and

low oil prices and the reduction in Mexico’s NOC drilling

a possible ally at the same time.

activity. We reorganized our business to better support more active areas in the region such as the offshore market,

Q: Which of Baker Hughes’ past projects with Chevron in

which demands the most advanced technology. Starting in

deepwater highlight your capabilities?

2014, we evaluated our footprint and redistributed activity

A: Baker Hughes has worked with most of the major

to better support the offshore market. We have provided

companies working in deepwater fields worldwide and we

significant value to our customers through advanced

have the relevant experience that will be required to exploit

applications of technology and the expertise of our people

Mexico’s deepwater fields. Baker Hughes has already proven

and we have helped our customers remain sustainable

itself as a services expert, now we simply need to replicate

during the downturn. We have three main objectives in

that success in Mexico. A major challenge will be how

Mexico, focused on technology, people and processes.

fast the oil can be extracted to begin commercialization.

We will always combine these with ethical business, which

A balance will need to be found between capitalizing on

creates long-term relationships.

private sector expertise and maintaining control within these partnerships.

Q: How does the contract renegotiation affect your relationship with PEMEX?

Q: How prepared is Baker Hughes to confront these

A: The concept of contract renegotiation was something

challenges?

that all service companies had to adjust to. There is a trend

A: We are excited because we believe we have the right

to move toward integrated services contracts rather than

technology and service portfolio, operating footprint and

Drill bits technology, Baker Hughes

111

expertise to support these challenges. We are undergoing

Q: How do you expect Baker Hughesâ&#x20AC;&#x2122; technology to evolve

a mindset change. We need to do things differently to

in Mexico?

obtain different results. We are changing our supply chains

A: We are very strong in drilling and completing wells with

and our products and services so that they are the most

some of the best tools and technology being delivered

technologically advanced and varied. We are simplifying

in the Mexican market, providing services and value

and integrating.

combinations to our customers and maximizing their results. Our well drilling services include technology in drill

The manufacturing industry changed a great deal but

bits and directional drilling tools, drilling fluids and wireline

this has not been experienced by the oil and gas industry,

services. For well completion we are a leading provider in

which has just scratched the surface of the possibilities

completion and wellbore intervention products, as well as

for manufacturing and development. We have a great

in cementing services. Baker Hughes will soon introduce

deal of opportunity and strong chance of success. As

self-adjusted cutting structure bits to the market, as well as

the industry turned its focus to the offshore market we

a new-generation of more robust hybridâ&#x20AC;&#x201C;Kymera drill bits

adapted our business to fit this need. Historically we have

and hole-opener devices that can be activated on demand

had a presence in the onshore Mexican market but as part

in real time. We are also developing new technology in

of our reorganizational strategies we decided to focus on

Electrical Submersible Pumps (ESP) for production.

offshore opportunities, where our presence has become stronger in the last years. We know there is a waiting market in Mexico with the Energy Reform and the entry

Baker Hughes is a leading supplier of oilfield services, products,

of new companies. We need to work with partners that

technology and systems to the oil and natural gas industry,

have a presence in Mexico to train and certify them as

working in over 80 countries to help customers find, evaluate,

representatives of Baker Hughes.

drill, produce, transport and process hydrocarbon resources

VIEW FROM THE TOP

MERGER OF INDUSTRY GIANTS TO DRIVE EFFICIENCIES ROGERIO MENDONÇA President and CEO of GE Oil & Gas Latin America

112

Q: What impact do you expect in Mexico from GE's

by utilizing GE’s APM tools to prevent platform equipment

acquisition of Baker Hughes?

failure and another was a power generation customer who

A: GE Oil & Gas and Baker Hughes will create a new

saved $1 million within one month of deploying APM.

fullstream digital industrial services company. The complementary transaction combines GE’s oil and gas

Q: How do these products and services relate to the

technology, manufacturing and digital platform with Baker

winners of the bidding rounds, especially in offshore and

Hughes’ oilfield services offering and technologies. The

deepwater?

combined company will have a global portfolio of assets

A: The deepwater licensing round will put Mexico in

that will drive efficient delivery of services to customers

a different stage of the E&P cycle. So far Mexico has

and create an opportunity for sustainable investing

developed capabilities for shallow water and land projects.

through the industry cycle. The transaction is subject to

Deepwater projects will require not only new technologies

approval and we are committed to working constructively

but also different skills and the presence of international

with the relevant government regulators to gain the

operators will help to accelerate the learning curve and

necessary approvals. Until then, it is business as usual for

ramp up discoveries and production.

our two companies. Q: What added value does GE offer in upstream that Q: Which technologies are creating the most demand in

differentiates it from other players?

the upstream market?

A: The exploration and production landscape has changed

A: The Energy Reform is shining a new light on the Mexican

significantly in recent years. Over the past cycle, we

upstream market, boosting its attractiveness even in an

could witness substantial growth in new resources such

environment where prices are still volatile. With 2016’s

as unconventionals, while the downcycle following 2014

deepwater licensing round, demand for high-pressure and

refocused the industry on productivity optimization and

high-temperature technologies for drilling and subsea

lower costs per barrel.

equipment will rise. The presence of H2S in some projects will also require new technological solutions.

We know the demand for oil and gas will continue to grow, and in the short term the expansion of existing production

Other technologies in demand are steam turbines for power

in low-cost basins is enough to supply the current demand.

generation, offshore turbo compressors and generators,

However, new supply sources are needed to meet future

control and safety valves for process flow and digital Asset

demand, so now the industry needs to focus on developing

Performance Management (APM) solutions.

more challenging reservoirs while managing costs and complexity. That means the progression of the upstream

APM is a suite of software applications built on the Predix®

segment is paramount for the industry’s growth moving

platform and designed to increase equipment reliability

forward and our company is not only able to provide a

and availability, while reducing unnecessary or unplanned

large number of advanced drilling solutions but also a

maintenance downtime. A couple of success cases: one

myriad of offshore and subsea technologies that can be

of our oil and gas offshore customers saved $5.3 million

deployed in Mexico’s deepwater blocks, including subsea trees, controls, manifolds, umbilicals, connectors, pipes, wellhead equipment and flexible risers.

GE Oil & Gas is a subsidiary of General Electric. The company supplies mission-critical equipment used in applications across

On the other hand, we have a variety of solutions designed

all segments of the oil and gas value chain, including drilling,

specifically to improve well performance such as water

subsea and offshore, onshore, LNG and distributed gas.

injection and gas-specific solutions such as gas reinjection

and gas lift â&#x20AC;&#x201C; all connected by our digital solutions for

It makes the totality of GE more competitive than its parts

enhanced outcomes.

because no other company has the ability to transfer intellect and technology as we can through the GE Store.

Lastly, the GE Store is a huge differentiator because it

The result is a massive, global exchange where our most

enables access to knowledge and technology from different

brilliant minds mix and match technologies, tools and ideas

businesses and industries, a benefit to the upstream

across functions and industries to create better solutions

segment. Thanks to the GE Store, we were able to take

for all our customers.

alternators from GE Aviation aircraft engines and use them to improve motors that pump oil from the ground all over

As an example, we used computational fluid dynamic

the world.

techniques developed for helicopters by GE Aviation to create a new class of gas compressors with a smaller

Q: Why should the new players entering the Mexican

footprint and higher efficiency. This is definitely our biggest

market choose GE technologies and services?

competitive advantage and where we can provide the most

A: Our customers are looking for better ways to enhance

added value for our customers.

productivity and we provide efficient and valuable solutions thanks to our consistent investments in Latin America

Q: How will the strategic cooperation with manufacturer

over the past years. We are one of the biggest oil and

Shenkai improve Mexican drilling measurements?

gas equipment and services providers, integrated over

A: The strategic cooperation with Shenkai, one of the

the entire value chain and capable of providing short and

largest public limited companies specialized in R&D and the

long-term solutions together with appropriate financing

manufacturing of petroleum and chemical equipment, is aimed

for our customers.

at ensuring product line continuity in a highly competitive manner when it comes to Measurement-While-Drilling (MWD)

We also drive enterprise advantages that benefit the

and Logging-While-Drilling (LWD) systems. This will benefit

entire industry through the â&#x20AC;&#x153;GE Store,â&#x20AC;? where every GE

our entire customer base in Mexico and also around the world

business can share and access the same technology,

because it provides increased competitiveness, commercial

markets, structure and intellect, from advanced technology,

flexibility and enhanced customer proximity. This change also

materials, software and analytics to commercialization,

allows us to respond to explicit customer needs in a highly

processes and business model best practices.

efficient and effective fashion.

113

VIEW FROM THE TOP

GLOBAL EPCI BETS ON MEXICAN MARKET ALFREDO CARVALLO Director General of McDermott

114

Q: What are McDermott’s expectations for the Mexican oil

in later when the strategy for development of the field is

and gas market in 2017?

completed. We will have to wait until the drilling, assessment,

A: Mexico is a very important market for McDermott, partly

seismic and analysis phases are completed.

due to its proximity to North America. We normally run one or two projects per year in the country, with only one in

Despite the early stage the projects are in, McDermott is still

2016 because of the industry slowdown. That was PEMEX’s

active with the new players. We already have the capabilities

Abkatún platform, which at its peak will provide 2,000

to start helping companies before the physical development

jobs and is worth US$450 million, with completion set for

of infrastructure. Later on, however, we will have a more

December 2018. Like other companies in Mexico, we are

concrete role in the definition of the fields’ size, location and

carefully monitoring the progress of new regulations and the

technology.

different government announcements, such as the possibility of future PEMEX farm-outs.

Q: What gives McDermott a competitive advantage over international entities offering similar services?

Abkatún-A2 processes around 220,000 b/d of oil and 350 mcf of gas

A: McDermott has been present in Mexico for many years working with PEMEX. We know the environment and the quality of resources available in the country. We are in a position to supply trained personnel that delivers solutions in a timely manner and within the agreed budget. Since McDermott uses the engineering, procurement, construction and installation (EPCI) model, we provide a

McDermott hopes to see the first changes in 2018 and 2019 at

complete vertically integrated service. This is a blessing for

the earliest. The complete licensing rounds will initially begin

newcomers in the Mexican oil and gas market because they

with exploration. Many of the winners of the different blocks

do not need to develop all these aspects upon entering the

expect to have the first physical infrastructure in place by late

country. McDermott can help because few companies have

2018 or early 2019. For that reason, McDermott’s focus in 2017

the complete set of skills required, from engineering to

will remain on PEMEX, which we consider to be one of our

installation.

top clients worldwide and certainly very important in Latin America. PEMEX has provided McDermott with over US$1

Everyone is wondering how big the reform will turn out to be

billion worth of projects in the past three or four years. The

and how much investment it will generate but we will have to

key right now is to deliver everything on time to PEMEX, within

wait until 2025 to answer those questions. Many companies

budget and with the highest safety standards. In this era of

believe the low cost of production in Mexico will allow them

low oil prices, it helps PEMEX when projects are executed

to be competitive. We are investing a lot in Mexico because

according to plan so it can achieve its operational objectives.

we believe the country is going to be our center of excellence for engineering and manufacturing.

Q: What opportunities does McDermott envision as a result of the past licensing rounds?

Q: How has Altamira’s status as a free trade zone affected

A: It is too early to say but the winners of Round 1.1 and 1.2

McDermott’s business in Mexico?

are focused at this point on increasing their knowledge of

A: It has many benefits, particularly when a project has a non-

the fields by doing further analysis of data and field drilling.

Mexican destination. Many materials can be sourced within

Depending on the results, they will decide whether to move

Mexico but a lot comes from abroad. The concept is of a

forward with the development of the fields. McDermott comes

maquila, where all the work is done in Mexico and then the

manufactured asset is exported. Taxes are only paid on the

with safety a top priority. Mexico still has a long way to go in

value that was added locally. This is a big advantage for a

the development of its oil and gas industry but one thing we

global customer. The strategic idea behind the development

already have is a friendly working environment. McDermott

of the Altamira yard was for it to become a manufacturing

is expanding its engineering capabilities in Mexico and the

hub in the Gulf of Mexico for the Americas, Europe and Africa.

country will join the Middle East and India to become one of our three main global engineering centers. Our choice of

Q: Which flagship projects best illustrate the capabilities of

Mexico says a lot about the quality of the people you can find

McDermott’s Altamira manufacturing facility?

in this country, especially in Mexico City, where the prestigious

A: Our PB-Litoral-A and Ayatsil-C projects are good examples

universities provide us with a pipeline of engineers. McDermott

of the Altamira facility’s capabilities, from where we recently

will be making agreements with universities in Mexico.

launched the jacket. Now, we are also focusing on the Abkatún-A2 platform, which is a very large structure with a

Q: What role will Mexico’s oil and gas industry play in

combined weight of around 25,000 tons between the jacket

McDermott’s operations in the next five years?

and the top side. It processes around 220,000b/d of oil and

A: Right now, PEMEX is one of our key customers in the

350mcf of gas.

Americas and we believe this will continue. McDermott is still participating in many projects, which we hope to win, and

Abkatún-A2 will incorporate the latest technologies available

we have a lot of faith in Mexico. PEMEX’s restructuring and

to improve reliability and safety. Our people understand

budget cuts have people wondering how things will work out

what PEMEX wants, and due to our global nature we will be

but out of every crisis, opportunities are born. New players

incorporating lessons learned from other projects to improve

will come with their own operational models and national

reliability and safety. Right now, our target is to reduce the

companies will emulate them to stay competitive, resulting

time of the project, again with the objective of supporting

in a cycle of improvement for the industry.

the customer. Q: What elements must be taken into account when hiring

McDermott is a leading provider of integrated engineering,

a Mexican workforce?

procurement, construction and installation (EPCI) services

A: A vital factor is knowledge and experience in the job, their

with a focus on the energy and power sectors, in offshore and

willingness to get the work done on time, in the right way and

subsea field developments worldwide

115

VIEW FROM THE TOP

SHIPPER’S CONSULTANCY MINDSET A PLUS PAVEL HERNÁNDEZ Director General of OH Maritime

116

Q: What sets OH Maritime apart from other port agents

One is a distributor for PEMEX in the northeast covering

and what problems does it solve for its clients?

Tamaulipas, Nuevo Leon and Coahuila. That partner is

A: One problem with working with port agencies is that

primarily an inland distributor but it wanted to launch a

they do not share any risk with the company venturing

maritime operation. Because it lacked experience, OH

on a new project. OH Maritime, on the other hand, takes

Maritime offered know-how in operating a vessel and

legal control of the vessels, chartering them from suppliers

settled the purchase for a vessel. Now we are joint ship

or parent companies. After obtaining nationalization and

owners of a tanker selling fuel in Manzanillo. Our original

authorization from the different entities, we either sublet

plan was to be in the Gulf of Mexico but we changed our

those vessels to their Mexican operators or operate them

strategy due to the market’s slowdown and moved to the

directly, ensuring that a local who is well known in the

Pacific. We began operations there in May 2016, so we are

market interacts with the new players.

the new kids on the block selling bunker fuel to vessels coming to Mexico.

Immigration could be a potential issue for some clients. If a crew member is detained by immigration, an agent would

Q: Will OH Maritime eventually expand Maritime Fuel

usually report this information and then a hired lawyer takes

Supply to the Gulf of Mexico?

over. The agents don’t get involved. Because OH Maritime

A: The name of our jointly owned vessel is Lobos Tuxpan,

is the legal tenant of the vessels, we are also the legal

since that is its original home port. In fact, the vessels

representatives, so we deal with the authorities directly and

currently carrying out seismic studies in the Perdido area

immediately on any legal situation that may arise.

source their fuel from Tampico or Tuxpan, so we wanted to use that as the core business for this company. Due to the

Q: What does OH Maritime do to mitigate the risks it takes

two-year delay of the deepwater projects there, we decided

on from its clients?

to start selling fuel to regular container vessels instead. We

A: It is correct that OH Maritime takes on a lot of our clients’

definitely want to expand to the Gulf in the future. We have

risks. To mitigate these we have a varied team specializing

many connections there and a good idea of how the Port of

in different disciplines to assess projects from the very

Matamoros will look. This port may take up to 10 years to

beginning to determine the financial, tax and legal exposure

fully develop but once it does, it will have all the capabilities

in advance. We then endeavor to explain these to the client

needed for home services like ours.

and assure them that OH Maritime will deal with all aspects. They do not need to hire separate sets of lawyers to tackle

Q: What are the main priorities for OH Maritime?

each. We also help with authorizations from the Ministry

A: Our core objective is to launch new projects and diversify

of Energy, CRE and ASEA. The set of requirements we

our business. At the moment, we are dependent on one client.

deal with is increasing so we must broaden our expertise

We started with CGG but it subsequently entered a joint

to match this. The ideal situation is for our clients to see

venture with Fugro called Seabed. We were its main providers,

OH Maritime as one point of contact for their Mexican

covering vessel chartering and obtaining navigation permits.

operations and a reliable, local partner that is available at

At OH Maritime we know that the arrival of new players is

any time of the day.

imminent and we want to make sure they know about us.

Q: What are the details of your new venture, Maritime Fuel

We are starting to review a project in Tamaulipas where I

Supply?

want to introduce our clients to the services we can offer

A: Maritime Fuel Supply is a venture that OH Maritime

them. There are few private terminals and OH Maritime

started in 2016. As the offshore industry was slowing down,

is one of the few companies in Mexico with the relevant

we decided to launch a joint venture with three partners.

experience. Some companies may simply think that if they

have storage facilities in Houston, they can replicate them

that can be managed. OH Maritime offers companies a

easily south of the border but they often forget the issues

safety net. It is not a safety net simply made up of words

in doing so. Problems with language barriers, cultural

and goodwill but of experts and professionals offering

distinctions and other factors come in to play, and this is

clients the results they need.

where OH Maritime can step in as a local partner. Q: A key factor to OH Maritime’s success is diversification. Q: What other challenges do new players face as the

What is your strategy to reach out to new companies?

market opens up in Mexico?

A: We have not been overly aggressive with our marketing

A: A problem companies face in Mexico is that the deadlines

to reach out to new players due to our focus on launching

of the different rounds are not fixed and this is often difficult

Maritime Fuel Supply. The next part of our project will be

for them to comprehend. PEMEX has a monolithic mindset

to visit potential clients directly. One of the keys that led to

and wants to keep the fields it feels are in the nation’s best

our success in winning the CGG contract was that we visited

interest. Most fields chosen by PEMEX were the most

the company directly. CGG was surprised because after 10

promising.

years operating in Mexico it was the first time a provider had visited its offices to thank them and review the project. This

One thing OH Maritime has learned from directors of

was a game changer for them. On our part, it was a bold

large companies is that they are not able to open their

move that paid off. We have started using this strategy with

budgets to the Mexican market yet because of political

Maritime Fuel Supply too. It is extremely useful as many

uncertainty surrounding the next general election in 2018.

companies that have been spending millions of dollars on

Large companies like Shell and BP have already suffered in

fuel in Mexico for 30 or 40 years have never been visited

countries like Venezuela, where legal problems arose as the

by their providers before.

country opened its market. They need to be assured that Mexico’s Energy Reform is well-planned and offers stability. In any case, for those players who have good faith in the Mexican market as it is now, many opportunities will arise when the government changes. Q: What is the profile of your perfect client?

OH Maritime wants to work on a pipeline project stretching from Topolobampo in Sinaloa to La Paz in Baja California Sur

A: The profile of our ideal client is any company with complex logistics that require a small fleet of vessels. There

Q: What would your ideal 2017 look like?

are a couple of submarine pipeline projects planned that

A: We would like to get involved in pipeline projects. When

will require dredging vessels, rock laying vessels and supply

OH Maritime enters into a project our clients are usually

vessels. There are very few companies with the knowledge

already at an advanced stage of planning. Looking at the

to provide these complex logistics, and most are agents.

Texas to Tuxpan pipeline project, we know that we are in a good position to offer our services there. There is also

The difference between a traditional agency and OH

another pipeline project planned, going from Topolobampo

Maritime is our focus on the overall result of the project. Port

in Sinaloa to La Paz in Baja California Sur.

agencies know the drill, but fail to see the big picture and the reasons why it may be better financially or logistically

For OH Maritime it is an optimal moment to start interacting

to take certain actions instead of others. Agents base their

with new companies and letting them know about our

activity on commands and fixed principles, with which

different approach. Consortiums are going to become more

they always comply. Our mindset is different, resembling

and more prevalent, so companies that source their services

that of a consultancy. Most of the new players entering the

locally will have to face at least 10 or 12 different service

market here are not familiar with Mexican ways. They have

providers for smooth logistics. It would be beneficial to

the layout of their project and its timeline but most often it

narrow that to one or two suppliers. OH Maritime is also

is unrealistic, which translates into expensive. OH Maritime

focused on reducing costs. The profits in this type of market

helps them to narrow their scope and set the right goals so

are often low so companies are keen on cutting costs. We

they can achieve the overall objective of their project, which

can help them do this.

is always doing the best job at the lowest price possible. Q: Why should clients trust OH Maritime?

OH Maritime is a maritime business management and shipping

A: Clients can rest assured that OH Maritime is trustworthy.

agency. It represents foreign charterers, investors and ship

We have international instruments spanning bonds,

owners in Mexico and is a consultancy for small, medium and

contracts and insurance agreements covering all the risks

large companies across a range of industries

117

TECHNOLOGY SPOTLIGHT

GLOBAL SOFTWARE SOLUTIONS MADE EASY

uncertainty analysis workflow allows for truly multipurpose

Behind every drop of fuel there is a long history of activity

and interactive reservoir simulation and uncertainty

that undoubtedly started with the exploration of a basin

analysis through parallel computing algorithms. Finally the

and the beginning of production. It is not surprising that

reservoir characterization and modelling workflow enables

the evaluation and management of these activities are

geologists, geophysicists and reservoir engineers to use

crucial. Beicip-Franlabâ&#x20AC;&#x2122;s new generation geoscience

multi-disciplinary data processing and editing to characterize

software OpenFlow Suite 2016 for successful and cost

and simulate even fractured, unconventional and tight

effective exploration and development of conventional and

reservoirs. All of these software modules are not limited to

unconventional oil and gas resources addresses this need.

their workflows but interlinked by a persistent data model that allows them to be combined and get the best multi-

Due to the complex and high volume of data and processes 118

disciplinary approach according to the client needs.

needed for E&P activities it is common to find solutions that do not allow for an easy usage, therefore hindering use

Beicip-Franlab boasts a generous global presence: its

to their full potential. One key element of the OpenFlow

subsidiaries serve over 1,000 clients including the largest

Suite 2016 is its ease of use. The software offers an intuitive

NOCs, IOCs and independents across the globe in cities

workspace environment with a user-friendly interface,

such as Houston, Moscow, Kuala Lumpur, Abu Dhabi and

new import and export facilities for project exchange and

Rio de Janeiro.

third-party applications. Users can wield OpenFlowâ&#x20AC;&#x2122;s set of tools according to operational requirements, allowing for

OpenFlow Suite 2016 is fully supported by the long history of

shorter learning curves and ultimately resulting a significant

successful technologies and projects offered by Beicip-Franlab,

enhancement in productivity.

a leading consultancy and software editor since 1960 with hands-on expertise in the oil and gas industry as a subsidiary

OpenFlow Suite 2016 offers nine software modules grouped

of IFP Energies Nouvelles, a major research and training player

into three workflows. The petroleum system assessment

in the fields of energy, transport and the environment. From

workflow counts with modules for thermal, pressure and

research to industry, technological innovation is the main driver

multiphase oil and gas migration and stratigraphic modelling.

behind the activities offered by IFP Energies Nouvelles, Beicip-

The reservoir simulation, assisted history matching and

Franlab and its OpenFlow Suite 2016.

INSIGHT

THE TREES AND THE FOREST OF PROJECT COMPLETION EDWARD HERNÁNDEZ Vice President Operations for the Americas of io oil and gas consulting

Efficient communication should be the norm in any industry

in place for a simple project,” he says. “IOCs and smaller

or project but in the complex oil and gas business it is

independents are adept at eliminating a lot of this waste but

often the case that the right hand does not have a very

may have limited insight other than their own due to limited

good picture of what the left is doing. Enter io oil and gas

global operations.” Those, Hernández adds, are potential

consulting, a 50/50 joint venture between McDermott and

customers that could benefit from io’s methodologies for

GE Oil & Gas that is looking to transform the industry by

early stage decision-making and holistic engineering as well

taking a more holistic approach and eliminate the “silos”

as its diversified world-class experience.

of competence that sometimes stand in the way of project completion.

Unlike other consulting companies, io oil and gas consulting also factors in financial advice and analysis. As a result, “we

“Often reservoir engineers, subsea engineers, topside

are not just looking at CAPEX but also rate of return, net

engineers and technologists are working on the same

value, economic viability and how to increase payback.”

project but have no idea what the other departments are

The potential lack of experience of partners in a market

doing,” Edward Hernández, io’s Vice President Operations

just recently liberalized after decades of a state monopoly

for the Americas, says. “io offers solutions that look at

is one of the most frequent concerns, he says.

these different elements together and provide access to real-time information on fabrication, technology, packaged

Another is the uncertainty caused by the new market and

equipment, benefits and risks, among other factors, which

specifically CNH’s reassurance of concerns over the many

provide greater certainty to projects.”

farm-outs. “Many stakeholder roles are still being defined,” Hernández says. “There will be many lessons learned as the

In a high oil-price environment, he says, a lot of companies

reform evolves and expectations need to be tempered.”

tend to overspend. But in the recent, lower for longer

But these concerns are not discouraging companies from

commodity price environment, the process of promoting io

new bid rounds. “Many operators believe the Gulf of Mexico

optimization services is made easier by the fact that many

on the US side has less potential, with more than 1,000

Majors such as BP, Exxon, Chevron and Total feel the need

operators, whereas on the Mexican side there has been

to streamline business. “US$40-50/b of oil will do that to

only one,” he says. “Mexico has shore-based infrastructure,

a company,” Hernández says.

current oil in production in shallow-water assets, an offshore industry with many capable resources and close proximity

Combining the extensive expertise from its parent

to the US, so there are many advantages in this jurisdiction.

companies, io already has a considerable advantage over

I have seen that players in Brazil are concerned about the

competitors. “Typically with early stage engineering, most

competition Mexico will bring.”

firms will evaluate alternative solutions with little supplier information because suppliers are reluctant to share their

There is also the reduced risk of Mexico having abundant

proprietary designs before a service order is awarded,” he

seismic analysis, after the tremendous success on the US side

says. “io is afforded more information due to its relationship

of the Gulf of Mexico, leading geologists to foresee the same

with GE and McDermott.”

or even greater potential on the Mexican side. As a result, Mexico has become io’s number one focus in Latin America.

One primary challenge of any E&P company is what

Most immediate potential lies in shallow water where fields

Hernández calls “silos,” or areas of business that are

have been explored and have stalled due to reduction in the

isolated from the others. “It is quite easy among large

availability of capital. Now that new players can participate,

E&P companies to employ considerable bureaucratic

Hernández expects some of those projects will begin to

processes that lead to an overdesign with too many systems

move forward. Io hopes to be a big part of the solution.

119

VIEW FROM THE TOP

NEW VESSEL GIVES MALAYSIAN FIRM A LIFT BRUNO PICOZZI Director General of Sapura Energy Mexico

120

Q. What is Sapura Energy’s top role in the Mexican oil and

Internally, the Sapura Energy group is in the final stages

gas industry?

of a transformation and restructuring process to increase

A: Sapura Energy has three main divisions: energy,

efficiency. In addition, the Sapura Energy fleet has an

engineering and construction and offshore drilling, all of

average age of less than 8 years. The SK3500 is a new

which can provide services independently or combined as

vessel that can perform different offshore construction

an integrated solution. The engineering and construction

activities, providing vital flexibility to the client and

(E&C) division provides full EPCIC capabilities, hook up

their needs. The Energy Reform resulted in an opening

and commissioning and decommissioning. It was the first

of the market to new players but the winners of Round

division established in Mexico. Three years ago Sapura

One are still three to four years away from executing

Energy decided to bring our new vessel, the SK3500, to the

their development plans and opening work for offshore

country at a time when the oil and gas market had not yet

construction. Sapura Energy is already in discussions

been hit by the low price crisis. The vessel’s characteristics

with the new companies to understand their plans for

give her the capability to install a large proportion of

the development of their fields.

PEMEX’s future platforms, as well as pipelines up to 60 inches in diameter.

Q. What key capabilities led to Sapura Energy winning the Ku-Maloob-Zaap pipeline project?

Sapura Energy’s drilling division is specialized in offshore

A: In 2015 Sapura Energy won its first contract with PEMEX.

tender assisted rigs (TADs) and owns and operates more

The performance of this contract had minimum deviations

than 50 percent of the world’s TADs. In Mexico, we are in the

from the original plan and it was successfully completed

process of studying the advantages of using this technology

and administratively closed within the contractual terms.

to reduce mobilization and logistics expenses. We believe

In almost six months, the SK3500 installed four structures,

that it could be a very cost-effective alternative in the Gulf

including the Kuil-B top side with a lift weight of 3,200

of Mexico. Finally, the energy division offers its expertise

metric tons, in addition to 20km of pipelines with diameters

on reservoir knowledge combined with the operation, well

of 24 to 36 inches. This successful execution provided both

management and maintenance of offshore production units.

PEMEX and Sapura Energy with the confidence that we have the resources and capabilities to perform work for

This mix of services uniquely positions the company

the NOC in accordance with the contract requirements.

to perform integrated projects by having a better

The KMZ pipeline 76 scope consisted of the procurement

understanding of risk allocation and therefore providing

and construction of 36 inches by 18km in length, from the

our clients with different alternatives and solutions through

E-KU-A2 platform to the CA-AJ-1 platform.

a cost-effective approach. It was a complex project due to the pipeline’s size and Q. What main challenges have impacted Sapura Energy’s

congestion in the area. These challenges required the

entry to Mexico and that of arriving companies?

best available resources. With this in mind, Sapura Energy

A: The changes in the international oil and gas market and

provided a competitive proposal with the most advanced

the implementation of the Energy Reform have created a

vessel in the region to perform the work. As a result

completely new scenario for the Mexican market. Sapura

of competitive pricing the SK3500, our qualified and

Energy is working with our clients to provide solutions to

experienced project management team and the financial

support their investment plans. Different alternatives are

capacity of the company we won the KMZ-76 project.

already in place such as construction financing, longer payment terms, higher project execution risk by the

Q. What have been the highlights in the construction of

contractor as well as integrated solutions.

the KMZ pipeline?

121

Offshore supply ship Sapura Energy 3500, Sapura Energy Mexico

A: KMZ-76 was a challenging project because of the strict

Q. How important will Mexico be to Sapura Energyâ&#x20AC;&#x2122;s Latin

time frame set by the client, spanning six months. We

American portfolio?

deployed an array of operational strategies to deliver the

A: The group has offices in the US, Mexico, Trinidad and

project on time. Challenges arose when working between

Tobago and Brazil. In Trinidad and Tobago we have a tender

two flare booms at the Akal-J complex, which required

rig that was working for one major operator. In Brazil we are

the use of a specific and powerful vessel. Not available

operating six vessels laying flexible pipelines in deepwater.

from any other company on the market, we decided to

Mexico will be the main market for expansion of the SK group

use the SK3500 because of her powerful thruster capacity,

in Latin America, not only because of the number of projects

which allowed us to keep position and work under weather

that PEMEX still has to develop but also because the Energy

conditions that other vessels would have been unable to

Reform has opened the market for new players and investors.

withstand. In the laying of the pipe we put together an integrated team using our own specialists from Asia and

Mexico has large exploration potential in shallow water

working together with a long-term partner to provide the

and deepwater. We have an operations office in Ciudad

automatic welding equipment and the NDT services. Our

del Carmen where we have created an integrated group

planning process allowed us to lay up to 138 joints in one

of professionals in all the required disciplines using highly

day, one of the best performances in the field for a 36-inch

skilled Mexican nationals as well as foreign personnel.

pipeline. In terms of health and safety performance, which is our main objective, we carried out the project with more

Q. What type of alliances does Sapura Energy hope to

than 1.5 million man-hours, zero accidents, multiple work

create in the Mexican market?

fronts and a challenging environment.

A: It is Sapura Energy's core policy to employ as much local content and national personnel as possible in the countries

Q. What are the main opportunities here, particularly in

where we operate and Mexico is no exception. We strive to

the deepwater segment?

attain strategic alliances with services companies in areas

A: In the long term Mexico has great prospects in

such as engineering, fabrication, diving operations, NDT

deepwater and we are looking forward to those projects

and support vessels. We believe that Mexico has a lot of

reaching the development phase. Sapura Energy has six

talent in offshore shallow water and we will leverage this

flexible pipelay vessels working in Brazil in water depths

experience in the execution of our projects.

of up to 2.5km. This invaluable expertise will be brought to Mexico to support our clients. Since Sapura Energyâ&#x20AC;&#x2122;s experience and capabilities are specific to the offshore

Sapura Energy Mexico is a unit of Sapura Energy Berhad, a

industry we believe that our operations will be centered

global integrated oil and gas services and solutions provider

around the Campeche Bay with some opportunities in the

present across the entire upstream value chain, specializing

northern section of the Gulf of Mexico.

in offshore ventures

Drilling operation in deepwater, PEMEX

DEEPWATER

Hailed as a resounding success, Round 1.4 of Mexico’s oil licensing process in December 2016 saw eight of the 10 potentially lucrative blocks up for grabs awarded to a range of consortiums and individual bidders spanning Asia, Europe and the US. The historic licensing round ushered in a new era for Mexico’s oil and gas industry, which has yet to dive into the country’s vast deepwater reserves, already deeply explored and exploited on the US side of the maritime border. It also marked a milestone for PEMEX, after the NOC won one of the contractual blocks, going toe-to-toe with the private sector as a partner in a consortium with Chevron and INPEX.

Analysis of Round 1.4, Mexico’s outstanding deepwater reserves and the outlook for the sector are featured in this chapter, together with interviews with the winning companies poised to shape this new part of the country’s oil and gas industry.

123

CHAPTER 5: DEEPWATER 126

ANALYSIS: Into the Deep

127

VIEW FROM THE TOP: Gustavo Hernández, PEMEX

128

SPOTLIGHT: Trion Farm-Out

130

SPOTLIGHT: JV – PEMEX – Chevron - INPEX

131

SPOTLIGHT: Nobilis-Maximino Farm-Out

132

VIEW FROM THE TOP: Bruno Lima, Halliburton

133

ROUNDTABLE: What Are the Challenges Involved as Mexico Moves to Deepwater?

134

ANALYSIS: Industry Welcomes Deepwater Rules

135

VIEW FROM THE TOP: Francisco Rincón, Dräger Safety Mexico

136

ANALYSIS: Investments Versus Royalties in Round 1.4

138

VIEW FROM THE TOP: Gene Coleman, Murphy Oil Corporation

140

VIEW FROM THE TOP: James Buis, Nalco Champion

142

VIEW FROM THE TOP: Randy Stewart, Alpha Deepwater Services

144

VIEW FROM THE TOP: Jesús Lamas, Schlumberger Mexico

145

INSIGHT: Anthony Childers, Subsea 7 Mexico

146

INSIGHT: Octavio Navarro, Heerema Marine Contractors

147

INSIGHT: José Aguilar, Oceaneering

125

ANALYSIS

INTO THE DEEP Mexico’s deepwater bidding round has been long-awaited,

in size from 1,678km2 to 3,287km2, they are

especially given the success seen in US deepwaters and the

predicted to contain varying combinations of

similarities in geologies in both countries. On Dec. 5, 2016, the

light oil, superlight oil and wet gas. The two

first eight deepwater contracts were awarded.

blocks that did not attract any bids were the only ones to contain heavy oil reserves.

In deepwater ventures, it is not just the water depth that poses

126

a risk. The financial stakes and the environmental and safety

Thirteen companies from nine countries bid individually or

challenges are high on the list of factors that can determine

in consortia. Notably, new Mexican operator Sierra Oil & Gas

a project’s outcome. Mexico’s first deepwater round showed

was part of the consortium that won Block 5 of the Cuenca

that bigger is sometimes better as the world’s largest IOCs

Salina selection, with PC Carigali, the Mexican subsidiary of

were among the most competitive participants in this round.

Malaysian heavyweight Petronas, and Murphy Oil Corp.

Majors like ExxonMobil, Statoil, BP, CNOOC, Petronas,

Iván Sandrea, CEO of Sierra Oil & Gas puts his company’s

Chevron and Total feature on the list of winners of the

triumph down to its local status. “Specifically, Sierra offered

eight blocks and will contribute to the US$34.4 billion

an important source of regional knowledge to the group

investment projected over the next 35 years as a result of

thanks to our dataset covering over 60,000km 2 of 3D

the round. On the same day, BHP Billiton won the ultra-

seismic, which we believe was one of the decisive factors

deepwater Trion farm-out with PEMEX, after tying with BP

that allowed us to win Block 5,” he says. Sierra’s win marks

and subsequently outbidding the British IOC by offering

the first time a Mexican firm will venture into deepwaters

up another US$624 million.

apart from PEMEX, which also won a block in Round 1.4 with Chevron and INPEX.

“Our analysts made very good projections during Round 1.4 based on many conversations with the participating IOCs. We

While local companies will draw on their home-grown

also had no doubt that the Trion farm-out would be a success,

expertise as a way to break into Mexico’s emerging deepwater

although we may have underestimated the dimension of the

sector, international players are preparing to transfer their

eventual investment,” says Palma Mendez, Mexico Country

own knowledge of subsea operations, and bring the latest

Manager for Wood Mackenzie.

technology to Mexican waters.

The eyewatering sums mean Mexico’s entry into the

“Deepwater knowledge is not something that can be

deepwater sector was a veritable milestone for the Energy

purchased,” says José Aguilar, Managing Director, Survey

Reform and the country at large. Encapsulating the main

Services for Oceaneering. “Mexico’s deepwater sector has

drivers behind Mexico’s historic opening of its oil and gas

always been part of our master plan,” he adds, highlighting

sector, the deepwater round draws an avalanche of capital,

the wider effect of Round 1.4 on the supply chain and

the latest technology and world-class knowledge into the

revealing it as a catalyst for new technologies pouring into

Mexican arena, along with a healthy dose of competition.

the market.

The investments are a bet on the prospective crude oil

Although technological innovations will oil Mexico’s transition

resources resting in the Perdido Fold Belt and Salina basin,

into more profound operational depths, many challenges lie

with half of the awarded blocks located in each area. Ranging

ahead in other areas. “Deepwater operations are new for Mexico and they carry great challenges in industrial safety

Contractual Area

Winner

and environmental protection,” warns Graciela Álvarez, CEO

Perdido 1

China Offshore Oil Corporation

of NRGI Broker, adding that extra insurance will be necessary

Perdido 2

Total and ExxonMobil

to cover the added risk of deepwater ventures.

Perdido 3

Chevron, PEMEX and INPEX

Perdido 4

China Offshore Oil Corporation

Round 1.4 and Trion present as many opportunities as they do

Salina 1

Statoil, BP and Total

risks and challenges for the involved operators and Mexico’s

Salina 2

No winner

oil and gas industry in general. As regulators, operators and

Salina 3

Statoil, BP and Total

the wider supply chain pull together to begin workplans and

Salina 4

PC Carigali and Sierra

eventually drill and produce hydrocarbons, the industry waits

Salina 5

Murphy, Ophir, PC Carigali and Sierra

to witness the birth of what is promising to become a thriving

Salina 6

No winner

sector in Mexico.

VIEW FROM THE TOP

PEMEX BANKING ON DEEPWATER FARM-OUTS GUSTAVO HERNÁNDEZ Director of Prospective Resources, Reserves and E&P Partnerships of PEMEX

Q: How has the drop in exploration investment and activity

A: The deepwater farm-outs will have a big impact on PEMEX’s

impacted the evolution of PEMEX’s 1P, 2P and 3P reserves?

reserves because we will be able to reclassify 3P reserves

A: Exploration activity has fallen on a global level in the

into 2P or 1P reserves, once the projects are sanctioned and

past few years due to the drop in oil prices, which also

approved and a development plan is proposed.

affected PEMEX. The company’s budget was cut last year by around MX$100 billion, roughly US$8 billion. Of that

First, we need to delineate and propose a development

cut, 75 to 80 percent was taken from E&P. We had to focus

plan but then we can develop these deepwater fields with

on our primary activities and that is why we reduced our

our new partners. This is also an important addition to our

exploration budget and investment in some studies. We

indicators for reserve replacement rates. Future exploratory

tried to direct our remaining investment toward safety and

farm-outs will also help to reclassify reserves and maybe

maintenance issues.

finance new discoveries.

We have kept our exploration focus on the two largest

Q: What are the investment priorities for the Trion block?

basins, which have high prospective-resource potential.

A: BHP Billiton contributed US$540 million in minimum carry,

This includes the deepwater basin on the Mexican side

and an additional US$624 million as their tiebreaker offering,

of the Gulf and the Campeche Basin, which has been

which comes to around US$1.19 billion to invest on behalf

prolific. It accounts for around 75 percent of Mexico’s total

of PEMEX. Before the reform, PEMEX used to operate in

oil output since 1904, which is roughly 58 billion barrels

deepwater alone but this development gives us the chance

of oil. Seventy-five to 80 percent of that originated from

to share capital and risks, making it a very good deal.

the Southeast Basin, both onshore and offshore from the Chiapas Tabasco area and the Campeche area. We focus

Q: What contribution can BHP Billiton expect from PEMEX

our exploratory activities there and in the Perdido Fold Belt

to make the Trion farm-out a success?

and southern Salina Basin, and in shallow waters.

A: Many people do not see our expertise but we have drilled around 50 deepwater wells in Mexico. We are

Q: What do you think are the successes of last year’s

bringing geological and seismic experience in our basins

exploration and development activities?

to this partnership. As part of the deal, in the JOA there

A: We are exploring deepwaters and the regulation for this

is an operational committee that consists of half PEMEX

type of area only allows for the incorporation of 3P reserves.

geoscience professionals and half BHP counterparts. The

For this reason, it is difficult to discover proven reserves in

operational committee makes important investment decisions

deepwaters because the radius associated to a single well-

for the Trion fields. Under this committee there are three more,

bore is very small. Even so, we made successful deepwater

the technical subcommittee, the financial subcommittee and

and shallow-water discoveries in 2016. We added around

the procurement subcommittee. All the decisions to allocate

580 million boe in 2016, which is not a bad result.

CAPEX, continue delineation wells and start the first phases of development on these fields will be decided by these

Due to the oil price, some of our discoveries did not count as

committees. Our team has already been working since we

reserves but rather as contingent resources. We discovered

signed the contract in March 2017 with BHP Billiton.

roughly 200 million barrels of contingent resources that could not be counted as reserves but from an exploration perspective we successfully made these discoveries.

Petróleos Mexicanos (PEMEX) is the most important company in Mexico, an international reference in the field of hydrocarbons.

Q: What is the expected impact from farm-outs on the

Its activities involve the entire production chain, from exploration,

evolution of PEMEX’s 1P, 2P and 3P reserves?

production, industrial transformation, logistics and marketing

127

PROJECT SPOTLIGHT

TRION FARM-OUT interest in and operatorship of the two blocks containing

GENERAL INFORMATION Auction date

Dec 5, 2016

the Trion field, marking the first time PEMEX has ever entered

Number of blocks

into a joint venture with a private company. The Australian

Geological province

Perdido Fold Belt

mining and petroleum company tied with British Petroleum

Oil province

Deep Gulf

in the proposal process, when both offered the maximum

Location

Deepwater

royalty of 4 percent (on top of the base royalty rate of 7.5

Eocene

percent.) The additional economic offering served as a tie-

Cretaceous

breaker and BHP Billiton went on to beat BP by offering

Fine to medium sandstone

a sum of US$624,000,000, which only just surpassed the

Ages of play Lithologies

US$605,999,999 put on the table by BP. 128

The deepwater Trion field represents Mexico’s first deepwater discovery. The Trion-1 well was drilled by Grupo

BLOCK DETAILS

R’s Bicentenario, a sixth-generation semi-submersible drilling

The Trion block, which comes with 100 percent 3D seismic

unit contracted by PEMEX. The well was drilled at a water

coverage, has an area of 1285km2 and an average water

depth of 2532m and a total depth of 6,119m and confirmed

depth between 2,090m and 2,570 meters. It contains 485

the existence of an active light crude oil system with 3P

million barrels of crude oil equivalent and initial production of 120,000b/d is expected in 2023.

reserves totaling 485 million barrels of oil equivalent.

US$570 + US$561.6/0.4 =

Trion, discovered in August 2012, is located in the Perdido Fold Belt at

US$1.974 billion

177km from the coast of Tamaulipas and 39km south of the US maritime

CONTRACT CONDITIONS The contract entered into by BHP and PEMEX stipulates a 60-40 share respectively of the Trion block, for a period of 35-50 years. The minimum requirements in the contract include

border. Although shortly after the discovery it was stated that first oil could be expected in

one exploratory well and one delineation well. The royalty

2017, PEMEX’s lack of deepwater development experience

rate represents a percenage of the value of hydrocarbons

and the estimated US$10-11 billion in necessary investment

extracted and consists of the 4 percent additional royalty

delayed the development stage until the field became the

offered by BHP Billiton combined with the basic rate of 7.5

center of PEMEX’s first farm-out more than four years later.

percent.

FARM-OUT

BHP’s winning bid translates into a US$1.974 billion

History was made on Dec 5, 2016 when BHP Billiton won

invesment commitment before further expenses will be

the Trion farm-out, acquiring a 60 percent participating

shared 60-40 between BHP Billiton and PEMEX.The figure is calculated by adding the minimum carry of US$570 million, PEMEX’s pre-existing investment in Trion and BHP

ROYALTY BREAKDOWN Basic Royalty

7.5%

Additional Royalty

4.0%

Minimum Carry

US$570 billion

Amount proposed as tie-breaking criteria • Signing bonus payable to the Mexican Petroleum Fund • Additional carry in favor of PEMEX

US$624 billion

Variable

Unit

US$62.4 billion US$561.6 billion

Billiton’s proposed tie-break amount. 10 percent of this amount goes to the Mexican Petroleoum Fund, leaving US$561.6 billion left over for investment in Trion. This amount represents the 40 percent PEMEX contribution to future investments, creating an additional investment commitment for BHP Billiton of US$842.4 million, resulting in a total of US$1.974 billion.

First place

Contract number

CNH-A1-TRION/2016

Date contract signed

Mar. 1, 2017

Second place

Bidder

BHP Billiton Petróleo Operaciones de México

BP Exploration Mexico

Country of origin

Australia

Additional offering

Economic offering

US$

624,000,000.00

605,999,999.99

DEEPWATER FIELDS FOR FARM-OUT

Alaminos-1 Mirus-1

Tiaras-1

Maximino-1DL 6

Trión-1DL Trión-1

Nobilis-101

Exploratus-101 Exploratus-1

Nobilis-1

Exploratus-1DL

Maximino-1

Pep-1 Cratos-1A

Supremus-1 Maximino-101 Vasto-1001

Vasto-1 2

Melanocetus-1

Corfu-1 Vespa-1

Astra-1

Clipeus-1

PEMEX's Assignments Wells

1. Perdido-3

3. Perdido-1

5. Trion

Fields

2. Perdido-4

4. Perdido-2

6. Maximino-Nobilis

Source: PEMEX, CNH

Name

Unit

Trion

3-D seismic coverage

100 Light oil

Main Hydrocarbon1 Average water depth

Meters

2,090 – 2,570

Area

km2

1,285

Technically recoverable 3P volume2

Million boe

485

Prospective P90 resource

Million boe

181

Median prospective resource

Million boe

537

Prospective P10 resource

Million boe

1,045

Total prospective resource with risk

Million boe

114

Type

Activity

Work Units Required

Exploration (4 years)

3-D WAz seismic acquisition. Includes the reprocessing and interpretation of the 3D MAz seismic

19,300

Drilling of one exploration well

92,000

Studies and well registration

5,650

Total Exploration

116,950

Boundary well on Trion field

57,100

Studies and well registration

12,100

Total Evaluation

69,200

Evaluation (3 years)

Total

The main hydrocarbon corresponds to that expected according to exploratory prospects in the area. Estimated technically recoverable volume for the Trion field as of Jun. 1, 2016. Source: CNH, with information from PEMEX’s Exploratory Opportunities Database version 4-2014. 1

186,150

129

PROJECT SPOTLIGHT

JV – PEMEX – CHEVRON - INPEX As Mexico’s Energy Reform unfolds at a pace rarely seen

CONTRACT

in other markets, industry observers are witnessing “firsts”

Chevron, PEMEX and INPEX signed the corresponding

across the board. In deepwater, national oil giant PEMEX

contract on Feb. 28, 2017. The block will require investments

flexed its muscle to win a key block in the December bidding

estimated at US$52 million during its initial exploration

round. For the first time, the former state monopoly joined

period, which will last four years.

a consortium with US-based Major Chevron and Japan’s top E&P company INPEX to pursue its prize. The winning

FAILED DEEPWATER BID

venture showed PEMEX to be an attractive partner as it

PEMEX also bid on Contractual Area 1 of the Perdido blocks

positions itself as a productive enterprise of the state.

included in Round 1.4 but as an individual bidder. It lost out to China Offshore Oil Corporation, which bid a royalty

130

CONSORTIUM CHEVRON/PEMEX/INPEX

rate of 17.01 percent for the block, over double PEMEX’s

PEMEX, Chevron and INPEX joined the other seven winning

offering of 6.65 percent. The Chinese NOC also offered an

consortiums and companies to take home a deepwater

additional investment factor of 1.54, exceeding PEMEX’s

block from Round 1.4, held on Dec. 5, 2016. The Mexican, US

proposal of 1.

and Japanese group bid together on contractual area 3 of the four Perdido Fold Belt blocks on offer. The consortium

CHEVRON AND INPEX

was split equally between the three parties, as shown below.

Chevron Energía de México is a subsidiary of US oil

It offered an additional royalty rate of 7.44 percent, on top

Major Chevron Corporation, which had a worldwide net

of the basic 7.50 percent.

oil-equivalent production of 2.68 million b/d in the first quarter of 2017 and a relationship with PEMEX spanning

BLOCK

two decades. INPEX Corporation is the largest oil and

The group was the only bidder on Round 1.4’s Perdido

gas exploration and production company in Japan. The

Contractual Area 3, which has an area of 2,977km and

company is engaged in about 70 projects spread across

prospective resources totaling 3.437 billion barrels of oil

more than 20 countries, including the Ichthys LNG Project

equivalent. It contains extra light crude oil, light crude oil

in Australia as the operator.

and wet gas and reaches water depths between 500m and 1,700m. No wells were committed in the bid because the

The joint venture with PEMEX marks the first upstream

additional investment factor the group offered was zero.

activity for Chevron and INPEX in the Mexican market.

CHEVRON

INPEX

PEMEX

Origin: US

Origin: Japan

Origin: Mexico

CEO: John Watson

CEO: Toshiaki Kitamura

CEO: José Antonio González Anaya

Head Offices: San Ramón,

Head Offices: Tokyo, Japan

California

Head Offices: Mexico City Capital: US$2.5 billion

Annual revenues: US$131.1 billion

Total revenues: US$61.3 More than 68 projects

billion (2015)

executed in at least 24 Number of employees:

coutries

61,500

500 most important #1 E&P company in Japan

Production of 2.2 million b/d, in more than 20 countries

Experience in high impact energy project development in Australia,

Company #31 at a global level

#98 on the Fortune Global

Indonesia and Abu Dhabi

companies globally and #8 in the oil industry in 2016

#6 company in oil sales globally

PROJECT SPOTLIGHT

NOBILIS-MAXIMINO FARM-OUT In April 2017, PEMEX’s administrative council approved

border with the US, the block also offers an estimated 250

the migration of the Nobilis-Maximino block to an

million boe in 2P reserves. Covering an area of 1524km2,

exploration and extraction contract with a partner. The

the block reaches water depths between 2,900m and

block will be the center of the NOC’s second deepwater

3,100m, and incorporates the Maximino and Nobilis fields.

farm-out, which will see private bidders compete to

Five wells, three in Maximino and two in Nobilis, already

partner with PEMEX.

have been drilled, and Nobilis-101 is currently in progress.

WELLS Well

Drilling Year

Supremus-1

2012

Maximino-1DL

2012

Maximino-1

2012

Nobilis-1

2016

Maximino-101

2016

Nobilis-101

2017

The block is in close proximity to the Trion block, which will be operated by BHP Billiton after it won PEMEX’s first farm-out in 2016. The success of the Trion farm-out last December will serve as an example for prospective bidders interested in the Nobilis-Maximino farm-out, as well as a useful learning curve for PEMEX and the regulators as they streamline the bidding and administrative processes involved. As PEMEX’s second

The block, which possesses estimated 3P reserves totaling

deepwater farm-out, the joint venture fits into the NOC’s

500 million barrels of crude oil, could add 300,000b/d to

plans to aggressively farm-outs some of its fields in a bid

the country’s production in eight years. Located 230km

to attract the capital and technology required to reverse

from the coast of Tamaulipas and 15km from the maritime

Mexico’s 12-year decline in crude oil production.

DEEPWATER FIELDS FOR FARM-OUT PEMEX's Assignments Wells Fields

Maximino-1DL Nobilis-101 Nobilis-1

Maximino-1

Supremus-1 Trión Block

Maximino-101

Source: PEMEX, CNH

131

VIEW FROM THE TOP

COLLABORATIVE CULTURE PRODUCES RESULTS BRUNO LIMA Country Manager Mexico and Central America of Halliburton

132

Q: How is Halliburton set up in Mexico and what is your

and also that all elements of the value chain are handled

outlook after the first results of the Energy Reform?

correctly. We are working with our customers, analyzing

A: The Energy Reform in Mexico has been a great opportunity

every single aspect of their projects, seeking optimal re-

for the oil and gas industry and Halliburton is structured to

engineering to lower upfront CAPEX and maintenance

systematically and actively collaborate with our customers

costs. We carry out an aggressive review of all supply-chain

in Mexico on their field acquisition plans, project definition

costs and latent operational risks, along with providing a

and future execution. We have a deep understanding of

detailed mitigation strategy. It has been an environment of

the Mexican market, which allows for early engagement

open discussions and brainstorming, which demonstrates

and collaboration with our stakeholders, encompassing a

our commitment to collaboration as the key to reducing

wide range of disciplines and job functions, from geology,

costs and generating value.

geophysics and engineering to operations, supply chain, safety, regulatory compliance and management.

Another important set of discussions we are having with our customers is related to innovative commercial models

Our collaborative culture has enabled Halliburton to capture

for integrated projects. We are looking toward leveraging

a significant share of the activity arising from the reform and

existing Halliburton infrastructure to decrease our customersâ&#x20AC;&#x2122;

already being executed, while also increasing our footprint

footprints and operational costs. We have seen results and

in the existing market. The differentiator for Halliburton has

opportunities in a wide range of areas, which can be grouped

been our unbeatable performance â&#x20AC;&#x201C; we are the execution

in various categories. The first is the de-risk of subsurface

company â&#x20AC;&#x201C; aligned with the proper deployment of resources.

targets, the second is the proper project engineering and

We have the best employees, proven application of

maximization of well construction rates and the third is

technology and integrated service offerings.

rigorous risk assessment processes and mitigation.

In Mexico, we are undertaking high-value, high-performance

One of the most useful outcomes of the collaborative

integrated projects in deepwater, shallow waters,

workshops has been the generation of a hierarchical

unconventional exploration resources and deep high

and weighted analysis of risk, allowing the stakeholders

pressure, high temperature (HPHT) land wells. The awarding

to prioritize the overall impact of any variable on the

of new blocks and the published results of exploration and

project cost, schedule and quality. Once the optimum

appraisal activity are a substantial and positive sign for the

decision is defined, the project team works closely with

Mexican energy sector as a whole and the diversity of players

every stakeholder to execute the plan and to implement

working on different types of prospects generates a new

contingencies as necessary.

avenue of opportunities for the Mexican energy industry. Q: What has been the indication from customers on how Q: How is Halliburton working to ensure the attractiveness

they will procure their projects?

of Mexican assets at this point in the oil-price cycle?

A: We have perceived a far more collaborative environment

A: We are supporting our customers by ensuring they

from all customers, regardless of their size or nature, or

receive the maximum value across their investments

whether they are NOCs, Majors, integrated or independent companies. All customers are seeking some type of cost optimization to ensure the profitability of their projects. The

Halliburton, founded and headquartered in the US, is a

discussions on costs have resulted in great opportunities to

renowned world leader in oilfield services and products,

reduce our footprint onsite and apply established learnings

offering a wide array of solutions to upstream oil and gas

on best practices to fast-track the learning curve and ensure

customers worldwide

higher performance improvements.

ROUNDTABLE As PEMEX enters ultra-deepwaters for its first joint venture with a private company and the winners of Round 1.4 begin developing the eight deepwater blocks awarded, Mexico’s state oil and gas company is drifting into uncharted territory. Lakach, the country’s only other deepwater project, reached a depth of 988m. The Trion block is more than double that depth, reaching around 2,500m. The technology, strategy and risk involved in operating at such great depths far exceed anything PEMEX and Mexico have dealt with before. We asked industry players what challenges PEMEX and new

WHAT ARE THE CHALLENGES INVOLVED AS MEXICO MOVES TO DEEPWATER?

operators face as they take on Mexico’s deepwater for the first time and how they can help.

133

Trion is a great deepwater project but it will raise a lot of challenges, given that it is a little deeper than the average for these types of projects. Since we have the experience of working with other companies around the world in deepwater, we would like to get involved as soon as we can to help gauge what the needs will be. Additionally, we can help assess risk on the Trion project through the many proprietary models that we work with and that are designed to use the limited information available at the beginning of a project and assign risk categories. Depending on the client, the terminology is different and Nalco Champion adapts to each one. We assess the risk of asphaltene inhibition, hydrate and corrosion

JAMES BUIS District Manager Mexico of Nalco Champion

inhibition.

PEMEX will have to look for guidance from its partners and learn how to become an effective operated by others (OBO) partner. Being an OBO partner does not mean it will have limited influence; almost all of the IOCs and major independents use this model. Companies frequently make a discovery but do not have the capital to develop it, forcing them to bring in partners or to convert the asset into an OBO. The ability to develop an effective OBO model will allow PEMEX to not only take part in projects that require capital investments beyond its means but to build important capabilities over time. To achieve this PEMEX must do more than just change the name of its institutions. It ultimately must change its decision-making processes and reduce red tape. Doing so involves a cultural change in an institution

JORGE LEIS Partner and Lead of the Oil & Gas Practice in the Americas for Bain & Company

that has well over one hundred thousand employees.

The development of a deepwater industry is definitely a major challenge for the Mexican insurance market, considering that the Mexican side of the Gulf is mainly an unexplored area. The initial factors that will impact insurers and reinsurers will be the high exploration costs this will involve and the length of the projects. The high and long-term exposure will increase the uncertainty for potential Mexican carriers to underwrite the risks and provide coverage. On the other hand, the global reinsurance market’s soft trend with no obvious signs of an upturn in prices will counteract the local market’s position. The main challenge will then be to achieve price stability for insurance policies as the deepwater industry evolves from exploration to production.

JUAN SEGURA President and Director General of Aon Mexico

ANALYSIS

INDUSTRY WELCOMES DEEPWATER RULES With the entry of the deepwater players in December 2016, the

and China National Offshore Oil Corporation

industry speculated how Mexican regulations will hold up to

(CNOOC).

international standards. In response, regulator ASEA published a set of guidelines based on industry best practices

Mexico’s safety regulator not only solicited the opinions of other Mexican governmental

134

Last December, Mexico’s energy, safety and environmental

entities such as the Ministry of Energy and CNH in

regulator ASEA published a long-awaited set of safety and

the rules’ creation, it also incorporated the voices of

environmental guidelines covering hydrocarbon exploration

international public bodies and the private sector. In total,

and production activities in Mexico, including specific rules

ASEA obtained 500 comments that helped shape the 45-

for deepwater ventures. Coming just one day after the

page document.

winners of deepwater Round 1.4 and the Trion farm-out were announced, the rules were welcomed by an industry

The inclusion of the US Bureau of Safety and Environmental

in search of certainty as it delves into Mexico’s unexploited

Enforcement (BSEE) and Bureau of Ocean Energy

deepwater reserves for the first time.

Management (BOEM) in the list of entities contributing to the regulation offers a glimpse into the close ties being fostered

“These are cutting edge, robust and consistent rules,

between the two countries’ deepwater sectors. De Regules

formed on the principle of risk-based regulation,” said

highlighted that the deepwater provisions were closely

Carlos de Regules, ASEA’s Executive Director, in a press

aligned with US deepwater standards, reinforcing the idea

release announcing the publication. The details of the

of regulating the Gulf of Mexico as one single ecosystem.

framework were inspired by accepted international standards, he said, including best practices such as the

A quarter of the 12 companies to win stakes in Round 1.4

American Petroleum Institute (API), the Norwegian system

were from the US. Exxon, Murphy and Chevron featured on

NORSOK, International Electrotechnical Commission (IEC)

the list of successful bidders, with the latter partnering up

and International Organization for Standardization (ISO).

with PEMEX and Japanese non-operator INPEX to operate Contractual Area 4 of the Perdido Fold Belt. The strong

The rules stipulate a range of requisites that E&P companies

presence of companies hailing from north of the border

now have to follow in Mexico. Among them is risk analyses,

further points toward budding links between the US and

guaranteeing well integrity and the reliability of critical

Mexico in deepwater developments. In regulatory and

equipment such as blow out preventers and remotely

safety terms, the US’ advanced deepwater safety standards

operated vehicles (ROVs), which are fundamental tools

will go a long way as Mexico forms its version from scratch.

used in deepwater projects. Companies must also take measures to detect the presence of protected species in

In a sector with stakes as high as deepwater, international

areas where they operate, particularly exclusion zones that

collaboration is a given. Global expenditure is forecasted to

could be home to mammals such as whales or dolphins.

total US$120 billion for the period 2017-2021 by international energy research firm Douglas-Westwood but the safety

Regulated entities must also establish a mitigating boundary

risks are as high as the financial risks when operating in

around protected areas, whether they are designated on a

deepwater, a lesson 2010’s Deepwater Horizon disaster

federal, state or municipal level. Burning and venting natural

showed the world. The catastrophe on the US side of the

gas is also prohibited in the new regulations. Additionally,

Gulf of Mexico killed 11 people and spilled millions of barrels

the guidelines set out the mandatory insurance coverage

of crude into the ocean. Calculating the cost of such an

companies must obtain, including well control insurance that

incident is virtually impossible and preventing a similar

can be implemented immediately in emergency situations.

accident is at the forefront of the industry’s mind.

At the end of January, ASEA held an informative workshop

Graciela Álvarez, CEO of NRGI Broker, sees the Deepwater

for Round 1.4’s winners regarding the processes and

Horizon disaster as a warning for Mexico. “This allows us to

requirements for beginning deepwater activities, in

grasp the challenging environment for deepwater operators

collaboration with AMEXHI . More details regarding the time

and the regulating authorities, to ensure activities are

frames for each procedure were given to participants, which

carried out under best practices with the goal of protecting

included winners of Round 1.4 such as BHP Billiton, Total, BP

people, installations and the environment,” she says.

VIEW FROM THE TOP

THE SMART APPROACH TO SAFETY FRANCISCO RINCÓN Director of Sales and Service at Dräger Safety Mexico

Q: What is the main area of opportunity for a company like

within a refinery or in upstream, such as in an offshore

Dräger in the Mexican market?

platform. This technology is the most reliable available and

A: Dräger stands out for being an innovative company with

reduces investment costs up to 60 percent. We have created

high productivity levels and business models adapted to

business schemes for this technology in the leading countries

each industry and each country. There are three factors that

for deepwater production and exploration such as Norway.

differentiate us from our competitors. The first is state-ofthe-art technology such as our wireless detection system

In general, the Mexican industry is receptive to new

that reduces infrastructure and investment costs around

technological trends. We have already made several

60 percent compared with traditional technologies. The

presentations of these new technologies here, in particular

second is our rent scheme, which significantly lowers initial

the wireless applications for fire and flame detection.

investment. The third is the diversification of our products in the safety industry.

Q: How would you describe the state of safety in the Mexican oil and gas market?

Dräger was the first company to develop drug and alcohol

A: Mexico has an acceptable level of certifications and

detection systems, for example, which are widely employed

standards but there is much room for improvement.

across the industry. We have smart emergency systems

Accidents on some Mexican platforms indicate

with employees trained by German specialists in prevention,

improvement potential for the current infrastructure and

treatment and recovery. As a company with over 127 years of

emergency and immediate response systems.

experience, Dräger has the best international safety practices. The Academy is a Dräger division at which we transfer all

Q: What will happen to the Mexican market if safety

our expertise, technology and knowledge to our customers.

requirements are not enhanced before deepwater develops?

The Academy has high demand for firefighting training, from

A: The importance of safety will become much more

equipment use to training in dangerous environments and

relevant when we go into deepwater. Dräger works with

emergency systems.

the public sector worldwide and we have government agreements for technology and knowledge transference and

Q: What innovative technologies will Dräger introduce to

training. In Mexico, we are developing a strong partnership

Mexico’s deepwater segment?

with PEMEX. We have an important contract through

A: Dräger’s wireless safety technology could be applied

PEMEX Procurement International to provide it with better

to deepwater in Mexico as development in the segment

technology at the most competitive prices.

grows. On offshore platforms, the presence of hydrogen sulfide (H2S) significantly increases the risk of explosions.

Dräger has over 20 years of experience in the Mexican

The environment also creates the perfect setting for a “fire

market, although our participation has been rather tentative,

triangle.” An offshore facility workforce varies from around 70

which is why we are seeking to expand our presence and

to 600 people, which is the potential number of deaths if an

make the company more visible. We have already established

explosion occurs. The detection and control systems must be

a relationship with many of the incoming players, such as

accurate and they are usually very costly, especially because

Halliburton and Schlumberger.

of the network infrastructure needed to connect them, send the signal to a control tower and trigger the alarm. Dräger Safety Mexico is an international leader in medical and

Around 60 percent of the cost of these systems comes from

safety technology, offering hazard management solutions with a

the wiring. Dräger has developed a wireless technology that

focus on personnel and production facility safety, including gas

avoids the entire wiring infrastructure, either in downstream

detection systems, firefighting and professional diving gear

135

ANALYSIS

INVESTMENTS VERSUS ROYALTIES IN ROUND 1.4 Deepwater Round 1.4 attracted the attention of global Majors

An investment factor bid of 1.5 indicated the

and the government felt the glare of the spotlight. Many

promise of two wells during the exploratory

praised the round for its transparency but one criticism was

period, 1 represented the equivalent of one well

the focus on royalty rates over additional investment

and 0 meant the bidder had not committed to investment for any exploratory wells. The

136

The Mexican oil and gas industry breathed a sigh of relief

two variables offered by the bidding participants were

in December 2016 when CNH’s long-awaited deepwater

then calculated by CNH using a set equation to generate

round finally materialized and was hailed as a resounding

a number termed “weighted value of the economic

success. A range of consortiums, including international

proposal.” This final calculation was the deciding factor

and national operators, won the eight blocks out of nine

determining the winners of each block.

that were awarded. But despite the success of the round, there are concerns regarding the prioritization of the

Nicolas Melissas, Director General of Athena Consulting

government’s eventual take from the projects (in the form

and expert in the academic study of bidding terms in

of royalty taxes) over the workplan investment offered

licensing rounds, believes the calculation was too complex

by bidders.

and that a simpler method would be advantageous. “It would be better to fix the amount each firm must invest in

ECONOMIC PROPOSAL SUBMITTED BY EACH BIDDING COMPANY

a given block in advance and let the bidders compete on

Royalty Rate X

the Mexican state.”

Additional Investment Factor,

only one variable. This intensifies competition and benefits

promised wells during exploratory period 1.5, 1 or 0

However, criticism of the bidding terms centered on the weighting of the calculation rather than on its complexity. Due to the weighting of the variables in the equation used by CNH to calculate this decisive number, the royalty rates offered took precedence over the additional investment factor. The result was that in some cases a bidder beat another to win a block despite promising zero wells during the exploratory phase (a 0 workplan investment), simply

With the industry’s downturn still hindering the number of

because they bid a higher royalty rate.

projects available throughout the supply chain, questions abound over whether CNH should have ranked bidders’

ROYALTY RATE BEATS PROMISED WELLS

promises to drill wells higher than royalties to push the

An example of this occurred in the auction of Contractual

industry into action sooner. Ernesto Marcos, President of

Area Four, which Petronas’s subsidiary PC Carigali and new

AMESPAC and Founding Partner of Marcos y Asociados,

Mexican operator Sierra won after beating a consortium

praises the authorities’ openness to private sector input but

formed of three oil Majors, Statoil, BP and Total.

says that “the only theme to be debated is the unbalance between the central elements of the bidding rounds, namely the government’s take and the investment amount

Bidder

Additional Royalty Rate

Additional Investment Factor

Predicted Investment Value

PC Carigali, Sierra

22.99

91.96

Statoil, BP, Total

13.00

1.5

81.67

promised by each bidder.”

CONTROVERSIAL CALCULATION In Round 1.4, the economic proposal submitted by each bidder consisted of two components: minimum workload

Source:CNH

investment factor and additional royalty rate. The royalty rate was submitted as a percentage representing the

Despite not committing to any additional investments on

eventual government take from the block’s revenue, while

the block, PC Carigali and Sierra’s proposed royalty rate

the investment factor could be one of three amounts: 1.5,

was higher, leading them to beat competitors that had

1 or 0 and was based on the number of wells the bidder

promised investment to drill two wells in the exploratory

promised to drill during the exploratory phase of the block.

phase of the block. This is a clear example of how the

government take eclipsed promises of investment and activity on the block during Round 1.4.

SUPPLY CHAIN IN NEED As Mexico’s oil and gas regulator and the counterpart to all the contracts involved in the licensing rounds, CNH is tasked with maintaining a fine balance between creating revenue for the federal government while simultaneously encouraging an open and competitive market. As PEMEX slashes its budget and subsequently reduces its activity, Ricardo Arce, CEO of Perforadora México, part of mining giant Grupo México, says that the government should favor investment commitment. “The role of the government is not necessarily to attract more money but to promote the development of a higher oil production environment,” he says.

CNH SHOWS TRUST Although an increased emphasis on investment commitment would have given the supply chain more certainty that there is light at the end of the tunnel for the lack of projects many are facing, KPMG’s Advisory Partner and Head of Energy and Natural Resources Ruben Cruz highlights the government’s trust in Round 1.4’s companies. “The winning companies that have committed themselves to work in Mexico after Round 1.4 have good reputations and are not coming to Mexico to waste time but to seize real opportunities. CNH knows this,” he says. With the participation of some of the world’s oil heavyweights and projected investment totaling an eyewatering US$34.4 billion over the next 35 years, the stakes are high for companies to commence drilling and bring a return on investment quickly.

NATURE OF THE BLOCK The balancing of royalty rates with investment quantity is a complex procedure with various factors to take into account and Carlos Morales, Director General of PetroBAL, points out that companies will bid differently depending on whether a round involves exploration or production only. Morales warns that companies participating in production rounds could be tempted to keep operations at their current levels rather than drilling additional wells, so rounds of this nature would need more focus on initial investment offerings. “The winners of production Round 1.3, for example, may be disinclined to drill exploratory wells if production on the blocks is already adequate, especially given the high royalty rates involved,” he says. Round 1.4, which offered blocks for both exploration and extraction, is less affected by this potential issue but the fact remains that the government should treat royalty rates and investment amounts on a case by case basis, studying the nature of the blocks themselves and basing calculations on that, Morales adds.

137

VIEW FROM THE TOP

LONG-TERM VISION FOR DEEPWATER GENE COLEMAN Executive Vice President Global Offshore of Murphy Oil Corporation

138

Q: What potential does Murphy see in the Mexican portion

truly developed a relationship with a collaborative approach,

of the Gulf of Mexico?

which is always stronger.

A: Murphy has been in existence for over 100 years and for over 60 years as a publicly traded company on the New York

Q: How would you compare your past projects with what you

Stock Exchange. Offshore exploration and development is in

expect from your assigned block in Mexico?

our DNA having executed projects around the world, including

A: Murphy discovered a 400 million-barrel field in Malaysia,

Southeast Asia, US Gulf of Mexico, West Africa and South

called Kikeh, in 2002. By 2007 we had already initiated

America. We recognize the value of the opportunities that are

production with 120,000b/d. In the last decade, we made

being presented in the Mexican portion of the Gulf of Mexico

discoveries in the US Gulf of Mexico. One is Medusa, in 2,000

and see this as the perfect time to invest in an area that has

feet of water. The other is Thunder Hawk, in 6,000 feet. Both

not been accessible to foreign investment for nearly 80 years.

fields were developed safely in short cycle times â&#x20AC;&#x201D; within

We operate three deepwater fields in the US Gulf of Mexico

five years from discovery to first production. We feel we can

and see Mexico as an extension of these activities. We feel we

duplicate this success in Mexico and achieve these types of

have the experience to be very successful here and are looking

cycle times as well. We feel the potential is high here and

forward to creating a long-term commitment to the country.

there is infrastructure available to quickly take the product to market. While Mexico has just recently opened to foreign

We bid in Round 1.1 (shallow waters) and were disappointed

investment, it is not as frontier as other parts of the world. We

when our bids were disqualified. However, both CNH and our

view this as an advantage for Mexico.

company learned from that experience and we participated in the successful Round 1.4, winning Block 5 along with our

Q: What is your forecast for the Mexican oil and gas industry?

partners. Our technical team has identified multiple prospects

A: We foresee Mexico developing in the same way as our

on the block so we are excited about the long-term potential

operations in Malaysia. There, we worked closely with

of that concession. Our plans are to immediately start

the Malaysian government to develop a significant local

maturing drillable opportunities with the target of drilling an

industry that could support our operations. Today, multiple

evaluation well by 2019.

companies in Malaysia are manufacturing equipment, which was not the case before. Malaysia is now even

Q: What advantages do you see in your partnership for the

exporting equipment, some of which is being used in the

block won in Round 1.4?

Gulf of Mexico. Developing deepwater projects in Mexico

A: We understand the geology of the Gulf of Mexico and we

will create opportunities not only for Mexican service

are confident in our knowledge and capabilities to develop

providers but it will facilitate the development of many

deepwater projects safely and cost effectively. Because of

specialized products and services. Indeed, there are many

this capability, we felt comfortable bidding aggressively to

companies already offering these types of services. We

win Block 5. We also feel we have a strong consortium of

believe the favorable investment environment that is being

capable partners with Petronas, Ophir and Sierra. They each

created by the government will incentivize the growth

bring unique strengths to the table that we can leverage

across the industry.

collectively, whether that is subsurface expertise, operational synergies or knowledge of above ground issues. For Round

CNH has been flexible in making adjustments and

1.4 we were successful in winning the bid based on the data

improvements to incentivize foreign companies to actively

that was available for everyone, avoiding high-upfront costs

participate in Mexico. This is reflected in the number and size

in a period of low oil prices. The fact we won the block shows

of companies that have participated in the bidding process.

that our partnership possesses the ability to work together

Overall, we view the process as very balanced. It encourages

and compete with the top names in the industry. We have

the industry to invest while at the same time ensuring that

value is ultimately created for Mexico and Mexican citizens in the form of royalties, taxes, cheap energy and jobs. Q: What does Murphyâ&#x20AC;&#x2122;s future in Mexico look like? A: Murphy sees Mexico as a long-term part of our business. We intend to be in Mexico for years to come and are evaluating opportunities to expand via future bid rounds and perhaps even accessing discovered resources or mature fields. We have a deep knowledge of the region and the opportunities it can offer, and we know that an opportunity like this is unique. In 10 years, we want to be seen as a successful and environmentally responsible company that has utilized its knowledge and capabilities, and those of our partners, to help safely develop offshore hydrocarbon resources and create value for Murphy, our partners and the people of Mexico. We are happy to be early entrants. Q: What are the main challenges Murphy and its partners face as they embark on deepwater projects in Mexico? A: Although the Mexican portion of the Gulf of Mexico has some common geological elements with the US side, differences remain. It is a proven oil province but some of the uncertainties include reservoir deliverability, oil quality and trap style due to salt and imaging complexities. Nonetheless, we can leverage our experience in the US Gulf of Mexico as we further build up our knowledge and understanding of the Mexican side. Probably a bigger challenge lies above ground with the significant regulatory framework and the numerous entities to whom we are accountable. We hear from earlier entrants about the large amount of paperwork required at every stage and the long lead-time for permitting and other approvals. This is expected as some of the agencies are new and still defining their roles. Further, deepwater activity is mostly new to Mexico so many of the processes are just being developed. But for the reform to truly succeed, the regulatory and permitting processes will need to be streamlined. We understand that government and regulators are aware of this and have plans to improve. This positive disposition by the Mexican government has been prevalent throughout the process so we are optimistic about future improvement. The Ministry of Energy outlining the Five-Year Plan is testament to this, providing a roadmap for future, recurring bid rounds. This is valuable for Murphy and others looking to invest in Mexico long term because it outlines future opportunities becoming available in a consistent and systematic fashion.

Murphy Oil Corporation is an international company dedicated to global offshore and unconventional North American onshore activity. Murphyâ&#x20AC;&#x2122;s offshore activity focuses mainly on the Gulf of Mexico, Atlantic Margin, Southeast Asia and Australia

139

VIEW FROM THE TOP

AVOIDING COSTLY MISTAKES IN DEEPWATER VENTURES JAMES BUIS District Manager Mexico of Nalco Champion

140

Q. What role will Nalco Champion play in the deepwater

A: Product quality has been a stumbling block for us in the

Trion project in terms of driving down costs and boosting

past, especially as environments became more and more

productivity?

harsh. This includes capillary strings for floating platforms

A: Trion is a great deepwater project but it will raise a lot of

and subsea tiebacks used on very distinct and deep

challenges, given that it is a little deeper than the average

platforms, which have limited chemical delivery systems. If

for these types of projects. Since we have the experience

anything goes wrong, costly robots or submarines have to

of working with other companies around the world in

be sent underwater to fix it, so product quality is paramount.

deepwater, we would like to get involved as soon as we

We have rigorous selection and testing processes for the

can to help gauge what the needs will be.

chemicals we use, which involve stressing the chemical beyond what it would ever experience in an umbilical to

Although we design chemical treatments rather than

observe how it reacts under different conditions. Sometimes

actual platforms, we can make suggestions for mechanical

chemicals precipitate under pressure or may fail when the

changes to mitigate future problems. An example has to do

temperature changes. Nalco Champions knows what can

with the number of injection points needed on a platform.

potentially plug a line due to mistakes made in the past.

There have been cases when not enough injection points

Our chemical solutions are not commodities but specialized

were included, leading to a company needing to decide

and tailored answers to our customers’ needs.

whether they wanted to implement hydration inhibition or corrosion inhibition, rather than being able to have both. An

Q: How will these deepwater solutions be tailored to the

injection point is not needed for every one of our product

Mexican market?

lines but to drive down CAPEX it is vital to get the number

A: We will treat Mexico the same as any other market in

correct during the design phase. This is the type of problem

terms of product development and quality. For deepwater,

we could help avoid on the Trion project.

we are designing a logistics chain to handle raw materials, carrying out cost analyses and working out how to localize

Umbilical cables send chemicals, power, communications and others to subsea facilities, serving as a lifeline to complex, under-stress systems

solutions. A lot depends on which port is going to be used. Currently all eyes are on Tampico, so we are looking at how chemicals would be delivered there. All our chemicals are Sureflow+ certified, so they require extra attention and a special line of custody in place. Q: Mexico’s shallow waters are increasingly producing heavier oil. How can Nalco Champion’s chemical solutions impact these conditions?

Additionally, we can help assess risk on the Trion project

A: Nalco Champion treats a lot of heavy oil in Mexico so we

through the many proprietary models that we work with and

are already familiar with it. De-emulsification is probably

that are designed to use the limited information available

one of the biggest issues but we have confidence in our

at the beginning of a project and assign risk categories.

products and people to face this challenge. Another area

Depending on the client, the terminology is different and

we feel confident in is flow improvers.

Nalco Champion adapts to each one. We assess the risk of asphaltene inhibition, hydrate and corrosion inhibition.

Q: What are the most important results the company has delivered to PEMEX?

Q: What were the highlights of the development of Nalco

A: Of particular note is our de-emulsification project with

Champion’s current deepwater solutions?

PEMEX in the north, which is a challenging environment.

141

Centenario platform, Gulf of Mexico, Veracruz, PEMEX

We have consistently met PEMEX’s requirements despite

Q: What are the differences between the specific needs

changing streams, new drills and different system

of Mexico and other areas such as offshore West Africa?

configurations. We have had this business for over 25

A: The production problems faced by Mexico’s oil and

years so this is something we are very proud of. Another

gas industry are not necessarily what is unique about

success has been our role in providing full improvement

the market. Rather it comes from how the problems

strategies and developing corrosion inhibition products

should be addressed and the related services needed.

for extremely sour fields. We also participated in some

The formula is simply different here, especially compared

deepwater activity with Lakach, helping identify key

to a market like West Africa where there may be labor

requirements for that field’s development. We worked

unions, for example.

with PEMEX on cost analysis and other areas in deepwater, during which we both learned lessons. We believe PEMEX

In Mexico, cultural acceptance poses more of a challenge

learned the lesson of involving a company like Nalco

because clients need to feel comfortable and trust that

Champion earlier on in the process due to the CAPEX

service can be delivered as promised before going ahead.

costs we can help them save.

Luckily, Nalco’s model has been in place for over 20 years so it is a well-oiled machine.

Q: What makes the Nalco Champion business model unique and how do you apply it to solving client problems?

Q: What does the Energy Reform mean for Nalco

A: Nalco Champion brings global solutions to Mexico with

Champion, given its long-standing presence in Mexico?

a local support structure. We help our distribution partner

A: Even though things are changing in Mexico PEMEX

in Mexico to diagnose problems and create solutions while

remains our main client, so our core business has not

it provides the service to the clients. This is unique because

changed so much since the Energy Reform. This is a chance

usually companies arrive in new markets with the intention

for Nalco Champion to bring its global services to the

of doing things how they usually do them or compare it

country, since we already work with IOCs and other NOCs

to other countries. We have identified Mexico as a unique

across the world. It is simply a new environment. We are

market so we provide a model that addresses the country’s

excited about working with new players and continuing our

specific needs.

work with PEMEX too.

We see Mexico as a great emerging market with many opportunities. The more it grows and as the reform’s

Nalco

changes take root, we will want to be closer to the action.

programs and services to the upstream and midstream oil

The natural progression will be to move our operations to

and gas industry. As an Ecolab company, its wide expertise is

the country.

complemented by Ecolab’s world presence

Champion

provides

safe,

sustainable

chemistry

VIEW FROM THE TOP

INTO THE DEEP WATERS WITH PEMEX RANDY STEWART President of Alpha Deepwater Services

142

Q: How do you see the industrial development of the Gulf

Understandably, this is a limited market and we expanded

of Mexico unfolding?

our scope to work on property and company evaluations

A: The Gulf of Mexico offers many opportunities both for

for private equity groups. Soon enough, market demand led

onshore and in shallow waters as well as for the deepwater

us to offer advisory and management services in basically

sector, each one with its own challenges and advantages.

all areas of the oil and gas business. Our three principal

Onshore and shallow waters have the advantage of an

partners have over 150 years of collective experience in all

already existing infrastructure through the assets owned

phases of production planning, drilling, field development,

by PEMEX. Deepwater projects offer huge opportunities

commercial evaluation and field operations. This allows us

with plenty of hydrocarbons to be potentially extracted but

to take on basically any problem our clients might be facing,

it will be expensive due to both technological requirements

including in many cases unstructured problems.

and the lack of infrastructure. Furthermore, a mistake in deepwater operations is usually measured in the millions

Q: What type of challenges will PEMEX face given its new

of dollars, putting small companies at substantial fiscal risk

status as a productive state entity?

and leaving the deepwater play to the major IOCs with

A: A major complexity PEMEX will have to face comes from

deep pockets.

the fact that it has never done a joint venture (JV) operation. It will therefore have to determine how it is going to work

Q: How does Alpha Deepwater interact with PEMEX and

with new partners, what kind of an organization to set up

how has the relationship evolved over the years?

for managing the relationship and what kind of operating

A: Our work with PEMEX started in 2009, supporting it in

agreements to reach. Basically, PEMEX will morph from active

deepwater exploration activities. In the case of PEMEX we

operations into a monitoring function with more stewardship

do not supervise operations directly but perform advisory

responsibilities on behalf of the state. Joint ventures usually

services. Starting in 2013 we placed personnel on PEMEX

involve several different companies working together in the

drilling rigs for full-time advisory duties and as time moved

management of a field, with representatives of each owner

forward, we also started doing advisory work in shallow

serving on an operating committee and governed by an

waters. The work continues to evolve. We have provided

operating agreement. Operating agreements are normally

support to development activities in the form of peer

based on an American Association of Petroleum Landmen

reviews, development-cost approximations and conceptual

(AAPL) form that is common throughout the industry but

design support. We have also provided advice to PEMEX

which can be modified to fit the specific circumstances of

groups working on farm-out and joint-venture activities.

the subject field or project. Negotiating these operating

Alpha continues to support exploration activities in the

agreements can be a difficult task for companies that are not

areas of prospect rankings and evaluation.

familiar with the process. Given our experience with both JVs and PEMEX we can support both parties by working closely

When we started as a company we focused on small

with them in developing the joint operation agreements. We

exploration businesses that did not have inherent

can also provide advice regarding activities of the operating

development capabilities, offering them a full development

committees.

service from initial discovery through field start-up. If PEMEX is to become competitive vis Ă vis the IOCs, it faces a change in corporate culture. That is going to Alpha Deepwater Services consults with companies in the

be difficult to achieve and will likely take a significant

exploration, development, drilling and operation of oil and

period of time. If the company is to operate shoulder-

gas properties, operating as an extension of an oil companyâ&#x20AC;&#x2122;s

to-shoulder as a competitor with international players

engineering and management staff.

it will need a senior management focused on bottom-

line profitability, annual goals and objective programs,

ways to reduce costs but it is extremely important to

stewardship reporting and a management development

remember the risks. Companies can penny-pinch to try

program. These are substantial requirements that will

and save money and in the end make decisions that will

take great effort to put in place.

make them lose big. This holds true particularly in drilling operations. We can help them avoid these mistakes with

Q: How has Mexicoâ&#x20AC;&#x2122;s oil and gas industry developed since

our experience and forward-looking approach. We are

the Energy Reform?

proud of the contributions we have made to PEMEX

A: There are two significant changes taking place

that have led to positive results. Thanks to our broad

throughout the industry. The first is within PEMEX, which

experience in field evaluation we were able to help

essentially was a monopoly since 1938 but now has

PEMEX increase the amount of reserves it accounted

competition and is looking forward to working with the rest

for in the Trion field, ultimately leading to the successful

of the industry. Its farm-out approach aims to bring both

farm-out partnership it has developed. We happen to

capital investment and other methodologies into PEMEXâ&#x20AC;&#x2122;s

believe that the reserves are still greater than what has

development activities. The second is the state changing

been reported but that will be determined by the two

the way it regulates the oil and gas industry. CNH, the

appraisal wells yet to be drilled.

Ministry of Finance and other regulatory and governmental organizations will now have to learn how the industry works

We are also happy to offer IOCs information regarding the

and how to cope with the market opening. It is a time when

Mexican oil and gas industry that will help them succeed,

rapid changes are taking place. People around the globe

both from a technical and economical point of view. One

are looking to do business in Mexico and the state needs to

of the biggest challenges that IOCs will have is related to

learn how to regulate and make it work in the best interest

the onshore industry. There is great potential for issues

of the country. It is not immediately clear how the state is

to arise with landowners and inhabitants. Companies

going to deal with that responsibility and we are watching

coming from the US may think they know how to handle

all of it unfold with great interest.

such situations but the truth is that it can be tough to get the rights of way for roads and rig locations to be

Q: How can Alpha Deepwater best help the industry here?

built. We are in business to achieve positive results. We

A: All the players in the oil and gas industry are dealing

are excited to be in a position to help companies solve

with low oil prices and reduced budgets by looking for

their problems.

143

VIEW FROM THE TOP

BROAD MARKET KNOWLEDGE, BOTH ABOVE AND BELOW SURFACE JESÚS LAMAS General Manager of Schlumberger Mexico

144

Q: What technical and managerial capabilities has

country that drove our selection of the areas and the specific

Schlumberger developed during its 80 years in Mexico?

technologies to be used.

A: Schlumberger has acquired a broad knowledge of the market, both below and above surface. We have developed

Our WAZ project has had a major impact in the market,

Mexican technical and managerial talent to assure that all the

helping support the promotion of the license rounds and

services offered by Schlumberger Mexico are aligned with our

helping our customers to make better-informed decisions

global standards. The combination of our global expertise

at the time of selecting the best area to bid in comparison

and R&D investment with our local experience is our most

with companies using the vintage data. We are planning to

valuable strength. We have partnered with PEMEX in many

reprocess nearly the totality of the offshore 3D data acquired

important projects and we are sure that we can help the new

historically in Mexico. In total, combined with our existing

customers coming to Mexico to reduce the learning curve and

WAZ, somewhere in the neighborhood of 200,000km2

accelerate their results

of seismic will be processed and reprocessed. We have acquired and processed 70,000km2 of new WAZ seismic and

I would also like to shine a light on our high-pressure and

reprocessed over 100,000km2 of vintage data. Undoubtedly,

high-temperature technologies for well testing. CERTIS is a

it is the largest-ever imaging and re-imaging campaign

high-integrity reservoir test isolation system that combines

embraced by a company in a single go.

many features of a conventional retrievable packer, including a built-in floating seal assembly that eliminates the need for

Schlumberger announced recently that PEMEX had signed

slip joints and drill collars to set the packer. On the other hand,

an agreement to license data from the WesternGeco

IRDV, is an intelligent remote dual-valve that combines two

Campeche wide-azimuth (WAZ) multiclient seismic survey

fullbore multicycle valves — a tester valve and a circulating

in the Salina del Istmo province in the southern Gulf of

valve — that can be cycled independently or sequentially

Mexico. The agreement also includes collaboration with

for increased flexibility. Within Production Group, the VDA

WesternGeco in the seismic processing phase of the project

(viscoelastic diverting acid) enables the stimulation of the

as well as for future technology collaborations.

oil and gas carbonate reservoirs, of reservoirs with multiple layers, long production intervals or permeability variation and

This multiclient contract is the first of its kind for PEMEX

horizon and vertical wells.

in Mexico and provides access to 3D WAZ seismic data in the province. The data license covers deep and shallow-

Q: How has the Energy Reform impacted multiclient

water areas in the basin close to prolific geological trends

opportunities in Mexico?

with well-established hydrocarbon systems, including the

A: All the multiclient investment originated from the

Cantarell and Ku-Maloob-Zaap reservoirs.

regulatory changes in Mexico and the Energy Reform that opened opportunities to new operators to participate in the

Q: How does Schumberger provide added value through

oil and gas business in Mexico. This market opening came as

corporate social responsibility?

a unique opportunity for multiclient investment, where we

A: Schlumberger’s core value of giving back to the local

could capitalize from our knowledge of the challenges in the

communities through a variety of different programs allows the company to aid those communities in which we are present. Through these programs we can bring progress

Schlumberger is the world’s leading provider of technology for

and development to these communities and contribute to

reservoir characterization, drilling, production and processing

the education of young students. It is also an opportunity to

to the oil and gas industry. Schlumberger works in more than

give back in some way to society and very specifically to the

85 countries and employs about 100,000 people

communities in which we work and live every day.

INSIGHT

READY TO DIVE INTO MEXICO’S DEEPWATERS ANTHONY CHILDERS Managing Director of Subsea 7 Mexico

Subsea 7 is preparing to draw on its Houston ties to bring

departments, an integrated approach to service is increasingly

much-needed deepwater technology and knowledge to the

in demand. Since the NOC is its main client in Mexico, Subsea

country as its oil and gas market opens to foreign players,

7 has already detected changes in the way it works. “In

although the company still sees this opportunity as some way

particular, we have perceived budgetary pressures that were

off. “Our activity in Mexico is focused on Subsea Umbilicals,

not as prevalent before,” Childers says. PEMEX’s budget was

Risers and Flowlines (SURF) and offshore maintenance

slashed in 2017, down 18 percent from the previous year to

contracting, rather than the high-tech solutions we deal with

MX$392 billion (US$19 billion). Although difficult, Childers

in Houston,” Anthony Childers, Managing Director of Subsea7

says the industry’s downturn forced all players to raise their

Mexico explains.

standards in cost-effectiveness, efficiency and productivity.

But as the market welcomes companies like Total, Chevron,

“Our maintenance work for PEMEX continues to be based

Exxon and Statoil to explore the eight deepwater blocks

on preplanned projects but there is a heightened focus from

auctioned off in Round 1.4 and PEMEX joins forces with BHP

PEMEX on delivering the plan on time and at lower costs,”

Billiton to work on the promising Trion block, the need for

he adds. The budget cuts at the company further limit the

expertise in efficient high-tech solutions is imminent. CNH

funds available to improve its existing assets. The need for

President Commissioner Juan Carlos Zepeda has said the

new infrastructure is also on Childers’ mind. He defines one

country expects additional production of 900,000b/d of

of Subsea 7’s main concerns as “the uncertainty surrounding

oil within the next nine to 10 years as a result of the eight

to what extent activities in shallow water will require new

contracts assigned in Round 1.4. Mexico, which produced a

infrastructure altogether.”

maximum average of 3.4 million b/d on 2004, is struggling to hold crude production above 2.1 million b/d.

Circling back to the industry downturn in recent years, Childers mentions that it continues to hit hard in the southern city of

The expected increase in deepwater activity comes as good

Ciudad del Carmen, where the company’s Mexican branch is

news for companies like Subsea7 whose core business are

located, and that a focus on hiring and training local personnel

seabed-to-surface engineering, construction and services

helped the company through the lean times. “Our office has

to the offshore energy industry. The opportunity to bring

a 98 percent Mexican workforce,” says the British executive.

its full capabilities to Mexico is definitely on the horizon

despite the novel challenge of deepwater, Childers is certain

and is a reason why the company took a long-term view

Mexico holds adequate talent to succeed, which will come

and established itself in Mexico in 2011, Childers says. With

as good news to the winners of Round 1.4 that will enter into

work from PEMEX becoming scarce, the firm is hard at work

contracts that require local content of up to 10 percent during

defining its strategy to take advantage of Mexico’s opening

the blocks’ development phase.

petroleum sector. One way companies may ramp up their local content levels, he “Deepwater is the future, and it has been for some years now,”

adds, is through strategic alliances with local firms employing

Childers adds. The key for Subsea 7’s Mexico team is to now

Mexican personnel, something that could pose an opportunity

adjust its mindset to match the engineering challenges of

for Subsea 7 given its almost exclusively native workforce in

greater underwater depths, a feat Childers says will depend

Mexico. The firm is no stranger to forming mutually beneficial

on interfacing and leveraging the company’s Houston-based

alliances and Childers says Subsea 7 already benefits from

expertise and experience to the Mexican context.

partnerships with One Subsea and Graheme, which primarily allow it to put forward collaborative integrated solutions in

As PEMEX transforms into a productive state-owned

combination with an early engagement approach to offer

enterprise with more focus on efficiency between its different

cost-effective solutions.

145

INSIGHT

‘EIGHT-LEGGED HORSE’ TO LEAD TURNAROUND OCTAVIO NAVARRO Country Manager Mexico of Heerema Marine Contractors

146

As Dutch marine contractor Heerema builds its massive

billion, 18 percent below the US$24 billion spending limit

new semi-submersible crane vessel “Sleipnir,” named after

it had in 2016.

the mythical Norse god Odin’s eight-legged horse, Country Manager Octavio Navarro is optimistic that the firm’s

Despite the challenges, Navarro is excited about the

slowdown in activity in Mexico will turn around.

capabilities that Sleipnir, which is expected to be completed in 2019, could eventually bring to the Mexican market with

New players are gearing up to switch on their drills on the

its two, 10,000-ton cranes and 220m-long deck that will

offshore blocks auctioned in Rounds 1.1, 1.2 and 1.4 and

make it the largest crane vessel in the world. “Specifically,

Navarro believes they will quickly begin taking advantage

the crane can be used for the installation of deepwater

of Heerema’s services, which include transporting, installing

structures, a critical point to mention when considering the

and removing offshore facilities in shallow, deep and

vessel’s possible use in Mexico,” Navarro says. One pressing

ultradeep waters.

issue the industry faces is Mexico’s lack of necessary

“

Our history with PEMEX has been gratifying and we are sure Mexico will continue to be a hugely important market for Heerema”

infrastructure to support activity at increased depths, an area where Heerema sees opportunity. Sleipnir would be the fifth of a fleet of semi-submersible vessels that also include Aegir, Thialf, Balder and Hermod, Navarro adds. As well as the advantage of a long history serving the Mexican offshore industry, Heerema will bring its focus on innovation and constant improvement to any new players it may work with in the country, including automating various processes within its vessels, although according to Navarro there is a limit to the extent digitalization can impact offshore construction operations. “Automating the insertion

“Globally, business is more or less going well but in Mexico it

of equipment at depths of 3,000m is simply impossible at

has been a different story,” Navarro says. The difficulties faced

the moment because the procedure requires such a level

by the company stem from a lack of projects put forward

of precision and safety that a human must carry it out.”

by PEMEX, Navarro says, and the low oil prices prevalent in

Heerema’s manufacturing segment, Heerema Fabrication

2015 and most of 2016 around the world only made problems

Group, is also involved in bringing R&D to the forefront of

worse for the offshore facility construction firm.

the company’s strategy and holds alliances with technology engineering firms such as Technip.

Global benchmark crude oils Brent and WTI reached prices as low as US$26/b early in 2016, according to the US Energy

The lack of activity in recent years spurred the company to

Information Administration (EIA) and Mexican Geological

reduce its presence and close offices in Ciudad del Carmen

Survey (SGM), and despite doubling those prices by early

and Tampico in 2016. But it kept its offices in Mexico City

March 2017 (US$54.65/b), they are still well below the over-

and Villahermosa, reflecting Heerema’s cautious optimism

US$100/b of the middle of 2014. Mexico’s crude mix fared

about future projects in the area. Navarro says the company

no better, averaging US$35.63/b in 2016 compared with

is competing for one of PEMEX’s only ventures. “Our history

the US$85.48/b of 2014. Such lower prices led companies

with PEMEX has been gratifying and we are sure Mexico will

to slash budgets and cut projects around the world. In

continue to be a hugely important market for Heerema," says

PEMEX’s case, this meant stringent spending reductions.

Navarro. Heerema, he adds, will be on hand with the latest

The NOC’s planned budget for 2017 is around US$19.7

technologies in platform construction and management.

INSIGHT

SUBSEA ROBOTICS LEADER SETS SIGHTS ON DEEPWATER JOSÉ AGUILAR Managing Director, Survey Services of Oceaneering

As Mexico’s future deepwater sector begins to blossom,

Chevron and Total, is the company’s opportunity to put its

the need for international input becomes essential, creating

subsea remotely operated vehicles (ROVs) and autonomous

the need for foreign players to disseminate their expertise

underwater vehicles (AUVs) to use, and a chance for

here, according to José Aguilar, Managing Director, Survey

Oceaneering to offer its other diving, intervention, testing

Services, of Oceaneering. “Deepwater knowledge is not

and engineering services.

something that can be purchased,” he says. The Oceaneering acquisition of C&C Technologies in Drawing on his company’s experiences in Mozambique,

2015 added a range of surveying specializations to the

Nigeria and Angola, Aguilar assures that countries can

Oceaneering portfolio, further enhancing the company’s

build successful deepwater sectors with little prior

service offerings. Aguilar says this means Oceaneering can

experience.

offer a complete deepwater package and provide clients with the “one-stop shop” approach that is increasingly

Aguilar’s optimism is shared by the Oceaneering leadership

demanded by the industry.

team, which, he says, is changing its strategy in Mexico to focus on more ambitious deepwater ventures. Aguilar

Originally a small diving company founded in 1964,

praises PEMEX for having an open mind to new technologies

Oceaneering has grown to provide a wide range of offshore

and future joint ventures. “Mexico is a great opportunity,”

services and products. Most exciting for Aguilar is the

he says, “and new companies will find a talented pool of

company’s fleet of robotics solutions. “We are ahead in this

technicians, a fair-playing industry and comparatively cheap

aspect,” he says, “because we offer a unique combination

labor costs in the country.”

of ROVs and AUVs.”

As technological advances in the oil and gas industry move

Oceaneering ROVs are used in all stages of offshore

forward at lightning speed and automation becomes an

operations, including drilling, installation, production

increasingly hot topic in the offshore sector, Aguilar is

and completion. These robotic vehicles, which can be

excited to introduce the firm’s robotics solutions to the

operated by a controller above water, are the main focus

new players in Mexico’s oil and gas market. “Mexico’s

of approximately 2,000 offshore Oceaneering personnel

deepwater sector has always been part of our master plan,”

who work with more than 300 ROV systems covering

Aguilar says, “and December 2016’s deepwater round was

depths from 2,500 meters to 8,000 meters. Oceaneering

a milestone for our strategy in Mexico.”

is regarded as a leader in ROV systems for the oil and gas industry and this status is bolstered by its ROV training

The company has the additional challenge of tackling

program, which boasts an annual budget of more than US$10

exploration and production (E&P) operations at greater

million per year and an active history spanning 22 years.

depths and Aguilar says that Oceaneering is well prepared

While acknowledging the debilitating impact on the

to serve Round 1.4’s winners since it is already working

industry of low oil prices, Aguilar maintains that oil price

with many of these companies in other parts of the world.

fluctuations should be considered as temporary, cyclical challenges. Hinting at technological advances to come

As a leader in providing engineered services and products

in 2017, he says Oceaneering is focusing on research and

to the global offshore oil and gas industry, particularly in

development projects specifically geared to the challenges

deepwater, Oceaneering finds itself on the correct bearing

in the Mexican market. “We are the only company that

to capitalize on Mexico’s opening oil market. Aguilar notes

provides AUV inspection services for pipelines,” Aguilar

that December 2016’s deepwater licensing round, which saw

says, “and these new technological developments will

blocks auctioned off to industry heavyweights such as BP,

enhance our capabilities even more in this area.”

147

Drilling Equipment 562, Campo Pรกnuco, Tamaulipas, Grupo Diavaz

ONSHORE & EOR/IOR

If Round 1.4 was groundbreaking for the international standing of Mexico’s oil and gas industry, Round 1.3 was the equivalent for the national side of the sector. Dubbed as another triumph for the Energy Reform and the country itself, the onshore auction concluded with the allocation of all 25 blocks located in three onshore areas. Almost 90 percent of those blocks were snatched up by Mexican companies, marking a huge step forward for the competitiveness of the national oil and gas industry. A repeat performance is expected during the upcoming onshore Rounds 2.2 and 2.3 in July 2017.

A breakdown of Mexico’s onshore blocks and prospective resources is presented in the following pages, along with the views of the winners of Round 1.3 and the experts and partners that helped them achieve success, as well as a review of what the future holds for Mexico’s onshore oil and gas sector.

149

151

CHAPTER 6: ONSHORE & EOR/IOR 152

ANALYSIS: A Complex Past, A Bright Future

153

VIEW FROM THE TOP: Gustavo Hernández, PEMEX

154

SPOTLIGHT: Onshore Farm-outs

155

VIEW FROM THE TOP: Luis Vázquez, Grupo Diavaz

156

VIEW FROM THE TOP: Rogelio Montemayor, Strata BPS

157

INSIGHT: Kevin Smith, Renaissance Oil Corp

158

VIEW FROM THE TOP: Steve Meheen, Compañía Petrolera Perseus

160

VIEW FROM THE TOP: Alexandro Rovirosa, Roma Energy Holdings

162

VIEW FROM THE TOP: Cesar Granados, Weatherford México

165

VIEW FROM THE TOP: Sergio Beristain, Beristain + Asociados

ANALYSIS

A COMPLEX PAST, A BRIGHT FUTURE In the oil and gas bidding rounds, the most successful round

While some companies assess the best

in terms of allocation rate was 1.3. 100 percent of the onshore

strategy to proceed with drilling and initiate

blocks were awarded, confirming that Mexican and international

production, others are already up and running.

operators see real value in Mexico’s onshore reserves.

Among them, Strata BPS hopes to increase its current production on the three fields it won in Round 1.3 from the current 8MMcf/d of gas to 15MMcf/d

established but that has not stunted interest. PEMEX has

by the end of 2017. “Increasing production by 50 percent

operated extensively in onshore fields and a private market

based on maintenance work that had been neglected and

already exists through its CIEPs and COPFs. Even so, the

bringing back the low hanging fruit of wells that were shut

Energy Reform has sparked more onshore activity and

are things that are easy to fix,” says Rogelio Montemayor,

2016 saw all of Round 1.3’s 25 onshore contracts being

CEO of Strata BPS.

signed. Being a purely extraction round, the blocks offered in Round 1.3 had all been operated by PEMEX previously.

DELAYED MIGRATION

Two more onshore licensing rounds are planned for while

In stark contrast to the quick progress being made on

a long-awaited unconventional round is also expected to

Round 1.3’s blocks by their winners, the delayed migration

be launched.

of the CIEPs and COPFs contracts to PEMEX’s new model has been a cause of consternation. The CIEPs (Integral Contracts of Exploration & Production) that are service

Block

Original Winner

Final winner

La Laja

Geo Estratos

Oleum del Norte

Paso de oro

Geo Estratos

Lifting de México

Pontón

Geo Estratos

Renaissance Oil

Ricos

Strata Campos Maduros

GS Oil

San Bernardo

Sarreal

Strata Campos Maduros

Tecolutla

Geo Estratos

Tonalli Energía

contracts based on a fee per barrel, and COPFs (Financed Public Work Contracts), service contract that work on a catalog price unit basis and are used for gas fields in the Burgos Basin, allowed E&P and service companies to partner with PEMEX pre-Energy Reform. The migration of the 22 existing contracts to the model aligned with PEMEX’s new status as a productive state

Source: CNH

enterprise has been in the pipeline since 2014 but little Although the winners of Round 1.3’s blocks were announced

palpable progress has been made. “The first priority should

in December 2015, the contract-awarding process was not

be to complete the contract migrations so that Mexico’s

completed until August 2016, after six blocks passed hands

private oil and gas sector can start competing properly,”

from the original winners to those that came in second.

advises Luis Vázquez, President of Grupo Diavaz, which

OIL PRODUCTION BY EACH R1.3 WINNER 2.5 2.0 1.5 1.0

Renaissance Oil Corp Servicios de Extracción Petrolera Lifting Source: CNH

Canamex Energy Holdings Diavaz Offshore

March, 16

February, 16

January, 16

December, 16

November, 16

October, 16

Septemer, 16

August, 16

July, 16

June, 16

0.5

May 16

152

Mexico’s onshore oil and gas industry may be well-

counts two CIEP and two COPF contracts among its

company has emphasized its intention to develop Mexico’s

portfolio.

shale potential through its activity in the country’s onshore sector.

With an estimated 2,208 million boe in 2P reserves present in the blocks held under CIEP and COPF contracts, the

“Unconventional reservoirs saw a boom in Canada and US

stakes are high to migrate them to CEE contracts. Despite

and new technologies were developed to take advantage of

the delays, Jesus Rodríguez, Founding Partner of RDA,

them, but that has not happened in Mexico. It is inevitable as

assures that progress has been made despite company

fields are reaching maturity and the time to start exploiting

complaints to the contrary. He puts advances down to

them in Mexico is now,” comments Kevin Smith, Vice

“PEMEX’s new vision and its improving relationships with

President of Business Development for Renaissance.

CNH and the Ministry of Energy.” This is backed up by comments made by Aldo Flores,

RENAISSANCE AND LUKOIL ALLIANCE

Deputy Minister of Hydrocarbons at the Ministry of Energy.

Despite significant postponements to the contract

“We hope to launch an unconventional resources round by

migrations, developments are still being made within the

the end of 2017, provided the regulation and every other

current contractual models. At the beginning of 2017, Lukoil

element needed to move forward is solved,” he told Mexico

chose Renaissance Oil as its new partner for operations on

Oil & Gas Review.

the Amatitlán block, where the Russian heavyweight has operated under a CIEP contract with PEMEX since 2015.

As well as the advent of shale to look forward to, onshore

Described as a “game changer” for Renaissance, which

Rounds 2.2 and 2.3 will be held in mid-2017. Twelve blocks

already has four blocks from Round 1.3 under its belt, the

will be auctioned in Round 2.2, and 14 in Round 2.3.

VIEW FROM THE TOP

COPFS AND CEIPS CONTRACT MIGRATIONS GUSTAVO HERNÁNDEZ Director of Prospective Resources, Reserves and E&P Partnerships of PEMEX

Q: How are PEMEX's plans for contract migrations

Argentinian company Tecpetrol. We have finalized the

progressing?

share of this contract, with 51 percent going to PEMEX

A: Of the 22 service contracts, three are located in the

and 49 percent to Tecpetrol. We are waiting for its board

south, six in Chicontepec, two outside of Chicontepec, one

to approve the conditions already approved by PEMEX’s

in the north in shallow waters and the rest in the Burgos

board. We expect to migrate Misión in the coming months.

Basin. We decided to migrate the oldest ones first, which

Migrating the Santuario block will facilitate this process,

we signed with the UK company Petrofac. The company

because we have learnt and are improving as we go.

had four CIEP contracts: Santuario, Arenque, Magallanes and Pánuco. In the Pánuco contract, Petrofac shared a

The third contract to migrate will be Ebano, which is

50 percent interest with service company Schlumberger.

operated by Grupo Diavaz. Petrofac’s remaining blocks,

Around a year ago, Petrofac sold 50 percent of its share

Arenque and Magallanes, will follow. Arenque is an offshore

to Schlumberger so now, although the Pánuco block

shallow-water field but Petrofac has declared that its

is still run by Petro-SPM, it is 100 percent owned by

expertise is more focused on onshore. If it can find a

Schlumberger. We decided to move forward with the

company to take the risk of that offshore field, Petrofac

other migrations, starting with Santuario. Our board has

could sell its share and stay on as a service company. For the

approved the finalized migration.

rest, we are working on three CIEP blocks in Chicontepec and we have another three that have to comply with the

The second contract to be migrated will be the Burgos

initial two-year work commitment before we can migrate

Basin’s Misión block, which is under a COPF contract with

them. We have offered a grace period for this.

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ONSHORE FARM-OUTS SPOTLIGHT

CÁRDENAS-MORA FIELD

five drilled between 1955 and 1980 and one drilled in 2011.

The Cárdenas-Mora block contains the Cárdenas and Mora

The other 106 development wells, the most recent of which

fields, which together represent an area of 168.15km .

is the Cardenas-812A well, drilled in 2014.

Located in the municipality of Cárdenas in Tabasco 62km

154

from Villahermosa, the fields wells reach average depths

PRODUCTION HISTORY

of 5,500–6,200m, and contain light and extra light crude

Production at the Cárdenas field began in March 1980 and

oil. Together they contain remaining reserves totaling 93.19

reached a peak of 158,690b/d in December 1983. It has since

million boe, 55.68 percent are in the Cárdenas field and the

fallen considerably, and the field produced only 4,290b/d

other 44.32 percent in the Mora field.

on average in March 2017.

As a mature, onshore field, PEMEX described the Cárdenas

Beginning production one year later in 1981, the Mora field

Mora field as needing “access to capital to accelerate

reached peak production in May 1984 when it produced

hydrocarbons recovery” in 2015. There are 112 wells on the

an average of 30,000b/d. This has dropped to 1,710b/d in

Cárdenas-Mora block. They include six exploration wells;

March 2017.

OGARRIO FIELD

latest one was the Ogarrio-1526 well, which was drilled in

The Ogarrio field is located in the Tabasco state’s Huimanguillo

2015. The first 12 wells were drilled in 1957.

municipality, 90km from the major port city of Coatzacoalcos in Veracruz, and 100km from important oil town Villahermosa.

SEISMIC INFORMATION

Located in a block of 155.99km , the Ogarrio field reaches

Two 3D seismic studies have been carried out on the

average depths of 2600m and produces light oil and wet gas.

Ogarrio field. The first 3D data set was acquired between

As of January 1 2016 it had 54 million boe in place.

1997 and 1998 and reprocessed in 2002, covering an area

of 172.1km2. The second was acquired during 2004-2005,

PRODUCTION HISTORY

was reprocessed the following year and covered an area

Ogarrio has been in production since prior to 1957. It reached

of 95.9km2.

peak production in September 1960 when it produced on average of 30,260b/d. Since then production had dwindled

EXISTING INFRASTRUCTURE

to reach just 6,700b/d by March 2017. In October 2015 at an

Since the Ogarrio field has long been in production,

investor day in London, PEMEX described the Ogarrio field

infrastructure already exists, a factor absent from the

as a mature, onshore field requiring secondary and tertiary

deepwater Trion farm-out and shallow water Ayín-Batsil

recovery methods.

farm-out. In its April 2017 report on PEMEX, international ratings agency Fitch highlighted existing infrastructure as a

As of April 2017, 530 wells had been drilled on the Ogarrio

factor which could contribute to a short lead time before first

field; 525 development wells and five exploration wells. The

oil is produced by whichever company wins this farm-out.

Mora

Cárdenas

Farm-outs Round 1.1 Round 1.2 Round 1.3 Round 2.1 Source: CNH, PEMEX

Ogarrio

VIEW FROM THE TOP

MEXICAN SERVICE COMPANY HAS OPERATING GOALS LUIS VÁZQUEZ Chairman of the Board for Diavaz

Q: How has Diavaz developed alongside the Mexican oil and

gas industry to incoming international players, which realize

gas industry and how will it continue to evolve?

that through our previous work with PEMEX we developed

A: On March 2017 Diavaz celebrated its 44th birthday and

skilled personnel and invaluable expertise.

although we plan to grow we will still offer the same services as all those years ago. The only difference will be an offshoot

Q: What is the outlook for Diavaz’s six fields?

company we have created called DEP Petróleo y Gas. This

A: Once our four current contracts are fully migrated, they

company will manage Diavaz’s three oil fields and three gas

will produce 28 million b/d. The Barcodón and Catedral fields

fields. In five years Diavaz will be two completely separate

we won in Round 1.3 will also allow us to boost production

companies.

and we expect to launch drilling operations there soon. We are now deciding which wells to drill first and are negotiating

Diavaz waited many years for the Energy Reform and

the sale of petroleum and gas to PEMEX. CNH has been

we seized every opportunity we could before it was

receptive to our plans for the two fields. Our three-year

implemented. In 2003 we partnered with Petrobras and

target is to produce a total 45,000b/d of crude equivalent

Japanese company Teikoku to operate the Cuervito and

at the Barcodón and Catedral fields. Development of Diavaz’s

Fronterizo gas fields. In 2006, we participated in the Multiple

six fields will require investment of around US$2 million over

Service Contracts with PEMEX. We won our first production

the next three years. After winning Barcodón and Catedral in

CIEP to provide all necessary services at PEMEX’s Ebano and

Round 1.3, we contracted a company to certify the reserves

Miquetla fields together with China’s Sinopec.

because without this certification the fields are worth zero. We plan to fully certify the reserves at those two fields in

Although we had been active in the Mexican oil and gas

the first quarter of 2017. The other four fields we operate are

industry for many years, that contract taught us that

already certified.

a service company has a different mentality than an operator. We realized Diavaz had a lot to learn to become

Q: How have delays in contract migrations impacted

a full-fledged operator. For that reason, Diavaz and our

Diavaz’s business?

new company, DEP, will have two different strategies and

A: The Energy Reform has been a success so far, especially

leadership teams. We have been preparing to separate the

the deepwater round in December 2016, which featured

organization into these two branches since the Energy

many international winners. We applaud the interest of

Reform was announced and have been legally separated

foreign players in Round 1.4, which attracted impressive

into two companies since April 2016. Adhering to CNH’s

amounts of money. Despite this, of the 22 contract

transparency rules and to ensure a competitive market,

migrations, zero have been completed so far. We know

DEP will be able to contract any service company for the

they will be migrated but CNH is already two years behind

blocks it operates.

schedule, due to the length of negotiations. The delay is problematic and led to financial losses for PEMEX and

Q: What opportunities will DEP pursue?

Diavaz last year. Since we could not advance on the fields

A: DEP’s mission is to seize new opportunities where perhaps

involved in the contracts, we lost around US$15 million and

Diavaz lacks experience. For example, we plan to join with a

the NOC lost US$98 million.

foreign company to bid in the offshore rounds in June and July 2017, a move that will allow DEP to learn vital offshore skills. Partners are not choosing DEP because they lack

Diavaz is a 100 percent Mexican oil and gas services provider,

money or technology; they are entering into partnerships

covering areas from engineering and well design to directional

with us because of our excellent reputation and experience

drilling and field profiling, as well as off-shore platform

in Mexico. We offer vital knowledge of the Mexican oil and

maintenance, among other services

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VIEW FROM THE TOP

NOW COMES THE HARDER, MORE EXPENSIVE WORK ROGELIO MONTEMAYOR Director General of Strata BPS

156

Q: What progress has been made on the three blocks Strata

A: Strata has a project in Texas but at current price levels it

BPS’s subsidiary Strata Campos Maduros won in Round 1.3?

is not profitable. In Mexico we would need to find the prime

A: From our participation in Round 1.3, Strata Campos

spots, which would require a process of trial and error. Our

Maduros ended up with three fields: Peña Blanca, Carretas

fields are more natural gas-focused, so we are looking more

and San Bernardo. We signed the contracts in May 2016 and

at the developments in LNG. We want the US to export all of

have been operating these fields since August 2016. We have

its surplus gas so we can achieve a better gas price in Mexico.

increased production by around 50 percent since we began

Due to the geographical location of our fields in the north,

operating the fields. The company is still carrying out studies,

we already offer very competitive gas prices for US buyers.

well and pressure testing to better evaluate the fields’

The same would not be the case if we were operating in the

potential and create an intervention plan. For now, our plan

south of the country.

to increase production will mostly involve well interventions and reopening wells previously drilled by PEMEX rather than

Q: How does being a Mexican company benefit Strata

drilling new ones. Our goal is to produce around 15MMcf/d

Campos Maduros in terms of national content?

of gas and right now we are producing around 8 million.

A: We see the national content rules as affecting suppliers

Hopefully we can hit our target by the end of 2017. We are

more than operators. The rules are in place to ensure that

also reinterpreting the seismic studies provided by CNH, to

companies select as much input from Mexican suppliers

see if we can find more undrained areas.

as possible. This is difficult because a lot of the input equipment is manufactured elsewhere. The Ministry of

Boosting production by 50 percent by focusing on

Energy has many plans for supplier development in the

maintenance work that had been neglected and picking the

country. Having a lot of players is better for suppliers

low-hanging fruit of wells that had been shut are things that

because it simplifies the business process and streamlines

are easy to fix. Now comes the harder and more expensive

prices and negotiations. The advantage of being Mexican

work of studies and interventions and perhaps drilling in

is more in knowing how to navigate regulation and the

the next few years. We are the second-largest producer of

way of generally doing business in Mexico.

natural gas from Round 1.3. The Ministry of Energy, ASEA, CRE and the Ministry of Q: Do you have plans to participate in the upcoming

Finance all have something to do with the process and

licensing rounds?

for foreigners it is sometimes difficult to understand that

A: Yes, we are looking at possible participation in Round

process.

2.3 but we have not decided yet. Future rounds are always of interest to us and our investors have a lot of appetite to

Q: What is your opinion on the balancing of royalty rates

expand our portfolio. At the same time it is important to

and investment amounts in Round 1.3?

consolidate what we already have.

A: I agree that the current system values royalty rates over investment amount but there is no perfect way of doing

Q: How is the recovering oil price changing Strata Campos

this. This is why the government has been persistent; it is

Maduros’ plans to delve into unconventional resources?

not so easy to find the right balance. In Round 1.3, I think the government got the balance right in the requirements to qualify. For 2.2 and 2.3 the equity requirements are too

Strata BPS is a Mexican company involved in exploration and

high. Demanding half a billion dollars from companies that

production (E&P) with a focus on oil and gas projects in Mexico

want to prequalify is too much. In Round 1.3 they required

and South Texas. Its subsidiary Stratos Campos Maduros won

US$5 million per field and now they require US$100 million

three blocks in Round 1.3.

or US$500 million.

INSIGHT

BRINGING SHALE INTO THE LIGHT KEVIN SMITH Vice President, Business Development of Renaissance Oil Corp

While the rest of North America has increasingly turned to

bill. Since its discovery in 1962, the block’s oil production

the development of unconventional resources to increase

reached a peak of 650b/d in 2005, a number that has since

national oil production, Mexico’s shale potential has yet

dwindled to negligible volumes due to a lack of drilling

to be realized. Despite preliminary indications that the

activity. Hoping to turn this around, and tap into the

country holds a rich unconventional resource, efforts to

blocks’ estimated multi-billion barrels of oil and trillions of

commercialize shale in Mexico is in its infancy.

cubic feet of natural gas in place, Smith says Renaissance will mobilize its internationally acquired knowledge for

Canadian operator Renaissance Oil has been evaluating

the venture.

Mexico’s shale resources for several years. After achieving a huge success in the mature, onshore Round 1.3 auction,

“Our technical team is especially knowledgeable in

Renaissance has turned its attention back to the potential

conventional and unconventional resource development,”

“gold mine” in Mexico that is shale development. “Our strategy

he says. “They bring a unique understanding of rock

has been from the start and is still is to focus on both reviving

characteristics, drilling and completion techniques to ensure

mature fields and developing shale resources,” says company

the successful development of projects in shale and mature

Vice President of Business Development Kevin Smith.

fields reinvigoration.” The program will include workovers of existing wells, the drilling of new wells in the shallower

The company, formed in 2013 to take advantage of the

Chicontepec formation and, most exciting according to

Mexican Energy Reform, carried this tunnel vision over to

Smith, the drilling of a deeper well targeting the Upper

Round 1.3, when it took home four of the 25 onshore blocks

Jurassic shale formations.

up for grabs — more than any other participant and securing a bulk of the production from the auction. Now, after adding

The same international knowledge and experience is being

a partnership with Lukoil to its growing Mexican portfolio

leveraged to develop the four blocks Renaissance won in

in 2017, it has operations in five fields across Mexico. The

2015 in Round 1.3, says Smith. Learning CNH’s new process

alliance with Lukoil makes Renaissance a partner for the oil

for the administration of the Mundo Nuevo, Malva and Topen

Major’s operations in the Amatitlán block near Poza Rica

blocks, all located within 61km of Villahermosa in Tabasco,

in Veracruz. The transaction, valued at US$1.75 million, saw

as well as the Ponton block in Veracruz, provided the firm

Renaissance acquire an indirect 25 percent interest from

with its greatest challenge to date. “We are one of the first

Marak, Lukoil’s previous partner on the Chicontepec block.

companies to experience the new system,” Smith says, “but we are happy to accept the challenge because we are all

Described as a “game changer” for Renaissance, Smith

learning and can see our feedback is shaping the industry.”

attributes the success to a few factors, citing the young operator’s rapidly expanding experience in Mexico as a

The company’s exclusive focus on Mexico’s opening oil

competitive advantage uncommon in the industry due to

and gas market certainly brings challenges but also offers

the market’s new status. “Lukoil is a huge and successful

Renaissance’s investors a unique opportunity. In Smith’s

company that produces over 2 million b/d of crude oil,” he

eyes, the firm offers its stakeholders the chance to direct

says. “Renaissance’s Mexico focused operations team was

their capital specifically to Mexico, which is a unique

an excellent complement to Lukoil’s global capabilities. The

opportunity globally. As a small and aggressively growing

partnership significantly enhances the execution ability to

company, Renaissance offers investors transparency as

achieve the goals agreed on with PEMEX.”

to where their investment is going. “We can minimize investors’ unsolved questions and therefore enable a faster

Keeping in mind Renaissance’s focus on mature fields with

and more efficient capital investment, which in return brings

shale potential, the Amatitlán venture with Lukoil fits the

faster transactions and strategic advantages.”

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VIEW FROM THE TOP

LAND OWNERSHIP AN OUTSTANDING ISSUE STEVE MEHEEN CEO of Compañía Petrolera Perseus

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Q: What are your plans for the two blocks you won in

A: Thanks to the millions of dollars we have invested in new

Round 1.3, Fortuna Nacional and Tajón?

geological studies we are expecting the recovery factor to

A: We are happy with both the Fortuna Nacional and Tajón

increase to 20 percent, still low by international standards

fields. Fortuna Nacional is a mature field where we have

but certainly achievable. We expect the peak production

found plenty of remaining product in the upper layers.

of Fortuna Nacional to be around 45MMcf/d of gas and

We believe there may be around 24-25 million barrels of

1,000b/d of liquids. For Tajón we expect the peak to be

reserves in the block, mainly gas and condensates. This

around 36,000b/d. We are sure the blocks will turn out to

figure is considerably bigger than what CNH had evaluated

be good investments and we hope to keep them at their

for the bid. As a result, we are looking at the possibility

production peak for several years.

of becoming a mid to long-term gas supplier. Tajón is an underdeveloped discovery with deep carbonates at high

Q: How much investment is needed for the development

temperatures and pressures. We have done extensive

of these blocks?

geological work and are pleased to see potential recovery

A: That is not easy because both formations have high

of a few hundred million barrels of oil, which is substantial.

temperatures and pressures. Wells in these kinds of formations are expensive and can cost up to US$25 million

Once we finish the evaluation phase we still have some

each, which for land-based operations is pretty expensive.

land-owner issues we need to take care of before starting

Developing around 10 wells we are talking about a quarter

production. Our plan is to extensively test the reservoir

of a billion dollars, plus US$100 million to US$150 million

characteristics and verify the geological models by starting

on facilities, making it a big investment. Planning is very

production by the middle of 2018 and slowly ramping it up

important.

until it reaches adequate development. We want to ensure a well-thought out and workable development plan that

Q: What issues remain to be addressed regarding the oil

maximizes production instead of going for a fast ramp-

and gas regulations?

up that may increase the quantity of barrels in the short-

A: The issues we see that still have not been properly

term but hinder it farther down the road. The four wells

tackled are related to land ownership. PEMEX should have

that were developed by PEMEX in Tajón are off-formation,

handed over the rights, leases and access to property of

which is understandable because they were developed

the bidders instead of asking for a renegotiation with every

without the cutting-edge technology available nowadays.

individual land owner. The reform has been too gentle on

We will probably keep one of the existing wells for long-

land owners, allowing them to lease their lands twice, once

term production while the other three will be abandoned.

to PEMEX and once to the operators. The responsibility of

We are also looking to drill another eight to 10 new wells

dealing with 50 to 60 individual land owners is being put

in the structure, which will allow each to produce around

on private companies and each specific leasing or buying

12,000b/d.

case is hampering the beginning of production and worsens the economic situation for the private sector. What makes

Q: How do you expect the recovery rate of these two

the negotiation harder is that the land owner can demand

blocks to change in the future?

whatever he wants and if companies do not agree the case has to be taken through a judicial process that can take a couple of years. Companies end up spending money trying

Compañía Petrolera Perseus is a Mexican oil and gas

to meet obligations to the state because of specific land

exploration and production company. Perseus was awarded

owners. For the land owners it is understandable because

the tenders for the Tajon and Fortuna Nacional blocks in

some of them went through bad experiences 40 or 50 years

Round 1.3

ago with PEMEX. But it is not good for the industry that

they now want new companies to pay for it. The Ministry of

can offer a higher added value due to our experience with

Energy should probably have the key to solve this. PEMEX

the formations and social factors there.

hands over the properties to the ministry and CNH conducts the bidding so in this process all the property rights should be handed over. Most places in the world follow this scheme but that is not happening in Mexico and that is an area that could be improved. Q: What are the companyâ&#x20AC;&#x2122;s immediate goals and longerterm plans? A: The immediate goal for Fortuna Nacional is to deepen three to four wells to test for gas there and then shut them down to look for a term-based sales contract with which

The peak production of Fortuna Nacional is expected to be around 45 million MMcf/d of gas and 1,000b/d of liquids

the field development can be financed. We expect this to happen by the third quarter of 2017. Our access to pipelines

The company has a wide range of nationalities with

in southern Mexico will make this process easier, having

Mexicans, Americans, Venezuelans, Colombians, Peruvians

the Mayakan pipeline that serves Yucatan crossing our

and Chileans, making it a niche of opportunities for the

property. To call 2017 a success we would like to first have

right people. Our philosophy is to put the right people with

oil and gas production together with middle development

the right skills in the right place to empower them to do

on both fields.

the best job. Our long-term goal is to become one of the larger players in Mexico and Latin America, venturing out

We are not sure if we are ready to bid on Round Two. It is

of Mexico both to the north and south, looking to finance

a round with interesting blocks and the fact that blocks

ourselves with institutional investments and probably

can now be nominated makes it even more interesting.

being listed on the Mexican stock exchange as a company

For now, we would like to fill the period in between

and looking for ADRs in the US. Luckily our investors in

with other developments. This could mean doing a joint

Monterrey are backing us up and are open to the financing

project with PEMEX or another company, preferably in

options because they find the industry enjoyable and filled

the south of Mexico where we feel more comfortable and

with opportunities.

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VIEW FROM THE TOP

WHEN OPPORTUNITY KNOCKS, SUCCESSFUL COMPANIES ANSWER ALEXANDRO ROVIROSA CEO of Roma Energy Holdings

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Q: How did Roma Energy approach the bidding of Round 1.3?

A: Tubular and Roma are owned by the same group and

A: Roma Energy has been a service provider for the last

ION Geophysical entered the bid as a technological G&G

20 years, working closely with PEMEX on several different

partner because of its experience. ION was a really good

projects. When the Energy Reform became a possibility,

partner to work with during the bidding round but when we

we saw an opportunity and decided to take advantage.

signed the block we decided to exercise the option to buy

Initially we had different roads to follow: the first was

its part too. Now it is working with us as a service provider.

working for the new players entering the market, the

We have no plans to replace ION because working with it

second was developing strategic alliances with potential

so far has been extremely successful.

new players based on our knowledge of the Mexican business and with the benefit of our 600 employees

For drilling operations we chose Halliburton as a service

working on the ground. The third and most ambitious was

provider after undergoing an international bidding process

to become a new E&P player.

with major companies like Schlumberger, Baker Hughes and Weatherford. During the process, Halliburton proved

When Round 1.3 came around we saw the perfect

to be a reliable partner. This is our first operation and we

opportunity because the guidelines and technical aspects

want to make sure everything goes right. For the appraisal

of the onshore blocks were perfect for us. It was an

plan all the players involved, including Halliburton, Sinclair

aggressive round and high royalties were offered but our

Engineering and ION through its E&P Advisors division,

strategy helped us win a block. From the very first moment

contributed their knowledge. We will follow the same

the blocks for the bidding round were announced we

procedure for the development plan once the appraisal

started working on G&G studies and hired an independent

gets accepted.

firm to do reservoir assessments. The company also hired an engineering company to help us develop the appraisal plan. We submitted that plan to CNH, as well as the social and environmental baselines to the Ministry of Energy and ASEA, and now we are waiting for approval and getting ready to start operations. Everyone is learning in the Mexican market, even the regulators. They did not know what condition the blocks were in when PEMEX put them up. These blocks have not been in operation for the last 20 years and much of the infrastructure is aged and requires maintenance or must be completely replaced.

For each well drilled in the Paraíso block, Roma Energy's consortium can expect production of around 2,000b/d, for a total expectation of 10,000b/d once the five wells are in production

Q: How are Roma Energy’s partnerships helping the

People and knowledge management have been among

company develop the Paraíso block?

the most challenging areas we have encountered. Putting together a team with ION, Sinclair Engineering, Halliburton and our own people, who have plenty of experience as

Roma Energy is an E&P specialized company, with expertise

former PEMEX employees, has given us a clear advantage

also in O&M consultancy. It has a long history of projects

but there is also a lot of work to do. Our main requirement

developed with PEMEX, and was awarded the Paraíso block

is that the people who work with us have to be open and

in Round 1.3

collaborative.

Q: What are Roma Energy’s specific drilling and production plans for this block? A: We are planning to drill five wells in 2018. We are confident we will drill all of them during the next year because they are in shallow waters and because we are going to target a Miocene area. Initially CNH announced that the block had a Cretaceous era formation down to 7,000m and with high pressure. After doing our homework and reprocessing existing data we found an interesting opportunity in the Miocene reservoir that is easier to reach, therefore making it our priority target in the appraisal plan. If this reservoir had not been discovered our job would have certainly been harder, involving higher investment and risk. We will comply with our offer in the bidding process but will now achieve it more easily thanks to this discovery. Sinclair Engineering calculated that, per well, we can expect around 2,000b/d, for a total expectation of 10,000b/d once the five wells are in production, hopefully by next year. The crude in the Miocene is light, API 32° to 35°, so it is not too complicated to produce. For production, we are planning to first use modular facilities and eventually build a pipeline from our block to the Dos Bocas facility, which is really close. We have already held talks with PEMEX and PMI about this. It has certainly helped that we are seen as locals and that we have plenty of contacts in the region, making it easier to work with the five land owners and the one ejido positioned right in our target areas for drilling. We are all on the same page in negotiations, which does not happen too often. Many companies have found this area to be problematic. In terms of location and production, this block turned out to be excellent. Q: After finishing its planned wells, what does Roma Energy’s future look like? A: After drilling the five wells and starting production, we are planning to go into the Cretaceous reservoir. Furthermore, we are also looking at Round 2.3. We are aware that there are 16 companies interested and that only one has been granted access to the data room. We want to focus on the southern onshore area close to Tabasco in this round and are planning to bid for blocks CS-1 to CS-6. In the long term, we want to consolidate ourselves as a major reliable E&P onshore operator in the southern Mexican region. We do not discard the opportunity of offering our knowledge as a service provider for both PEMEX and the IOCs that are coming to Mexico because we know the importance of having know-how and experience working in the region. Tubular Technology would take the lead on that while we will keep growing toward our goal of becoming an E&P operator.

161

VIEW FROM THE TOP

FINANCIAL DISCIPLINE, SERVICE THE RECIPE FOR SUCCESS CESAR GRANADOS Country Manager of Weatherford México

162

Q: How has the overhaul of Weatherford’s global business

Q: Weatherford Mexico has worked solely with PEMEX.

strategy impacted your work in Mexico?

How will it deal with new, possibly international clients?

A: The changes in our global strategy have also been

A: Mexico is presenting attractive investment opportunities

reflected in Mexico. We have taken all the necessary

for companies looking to develop the vast hydrocarbon

operational steps to pave the way for consistent financial

resources in the short and medium term in practically

and operational performance. After difficult years of

all operating environments. Weatherford is prepared to

internal financial discipline and re-engineering our field

continue to expand and to adapt our services to those

execution workflows, in 2016 Weatherford achieved the

potential customers in their selected fields. It is important

best safety record in the company’s history, and measurably

to note that significant experience has been gained after

improved our service quality and performance. Our Mexico

almost four decades of operations in the country, not only

team was part of this collective success. We remain fully

for PEMEX but also for international customers. The level

committed and focused going forward and our priorities

of technological development, integration and overall

remain intact. Our customers, our financial discipline and

operational complexity have evolved significantly and we

consistent service quality in the field will be our recipe for

are ready to provide this knowledge and to put it into action

success when partnering with customers on their different

in offshore and deepwater operations in the country.

projects in Mexico. Q: How will Weatherford remain cost-effective while Q: How is Weatherford repositioning itself to increase

improving quality and safety?

competitiveness at a difficult time for the industry?

A: This is not an easy feat. The key is integration, with many

A: The drop in oil prices was a shock for the whole industry

product lines working together on the same project, so

and has affected Weatherford as much as any other

production time is reduced and processes improved. This

player. The downturn was worse than anyone could have

method is not only advantageous for the client but also

predicted. We have adapted our processes accordingly and

useful for building Weatherford’s reputation as a provider

are working with PEMEX and other operators to find the

of high-quality, efficient services.

best ways to meet the challenges of the industry’s new landscape. Although the lower level of activity has led us to

A great way of optimizing costs is providing our personnel

reduce personnel and implement new strategies, we are still

with high-quality training. Customers like to see real

investing in training our staff and maintaining our facilities.

talent in the employees we send from Weatherford. By

We are definitely more focused on providing high-quality

paying more attention to the quality of our services the

services to customers and on developing our employees’

chance for errors is greatly reduced. Avoiding service

skills to achieve this goal.

failures is vital to preventing subsequent costs and the negative impact on customers. Weatherford understands

Q: What opportunities does Weatherford Mexico have in

the importance of a proactive approach toward safety

its sights in the coming years?

and training. The cost of investing in these areas pays

A: The biggest opportunities we anticipate will be in

off because we avoid mistakes that could result in more

unconventional and offshore operations and we are

expenses later. In fact, we were pleased to receive

preparing our structure for these projects now. We are

PEMEX’s Safety, Health and Environmental Protection

establishing Weatherford as a partner for the majority of

recognition thanks to our zero accidents rate throughout

our customers in the country, helping them optimize their

all our operations in Mexico in 2016.

processes and making them realize our company is one of their best options for their reservoirs in the short and

Q: How can Weatherford’s special focus on safety help

medium terms.

PEMEX and new operators in Mexico?

A: As Weatherford has transformed into a more mature Onshore operation, PEMEX

company, our safety standards have likewise grown. We hire high-level specialists with a lot of knowledge and experience in oil and gas safety, making Weatherford a leader in this area not only in Mexico but in most of the countries where we operate. Our statistics reflect these improvements. Our standards, procedures and regulations are vital in achieving these advances. For us the motto is not “safety first,” but “safety always.” Q: Why should potential customers choose Weatherford over other oil service companies? A: Weatherford has more than 40 years of experience in the Mexican oil and gas industry, originally as a well construction company and now as a fully integrated

163

service provider. We have an impressive level of experience in many product lines in Mexico and also a high level of responsiveness to our customers. In Mexico, our successful projects in the past were in unconventional fields, in Chicontepec and Terciario in the south, and now we are breaking records in offshore operations. IOCs and PEMEX are aware of Weatherford’s presence in Mexico, our price competitiveness and service quality.

in the second half of 2017. If that happens, we can expect to see increased activity in 2018.

Q: After Chicontepec, which projects best demonstrate the company’s capabilities as an oil service provider?

Q: What are your goals for 2017 and how will you reach

A: The Chicontepec project was a positive experience for

them?

both Weatherford and PEMEX. For us it served as a basis

A: Weatherford Mexico is in constant communication with

for subsequent growth in other parts of the country. It used

the global corporate branch of the company. The main

to be our main project and was also the best known but it

drivers will be service quality, the competence of our

was not our only area of operations. We also had projects

staff and forming partnerships with operators working

in Burgos and Villahermosa. Our main strengths lie in the

in Mexico. We are especially focused on the last goal and

offshore and unconventional areas where we continue

we are working on building relationships with new private

improving our capabilities. We are actively upgrading our

operators. Weatherford reacted very quickly to the changes

offshore operations, so we are well positioned to service

in the Mexican oil and gas market, adapting the company

PEMEX and other incoming companies in this area. We

through internal restructuring. We refocused our attention

are also very interested in working with the winners of

on our product lines, technical sales staff and highly trained

onshore blocks from Round 1.2 and are approaching them

staff in marketing, sales and business strategy. These

to promote Weatherford’s capabilities.

changes have been made to cover the requirements of the industry at the moment.

Q: What role will PEMEX play in Weatherford’s future? A: The reality is that the budget cuts instigated by the

Our presence in Mexico is for the long run and we base

Mexican government will affect PEMEX and have a chain

our decisions in the country with that perspective in mind

effect on its production activity so it is looking for new

Mexico is a country that depends heavily on the oil and gas

ways to avoid decreases in production. We will have

industry. Revenue from oil is vital for the economy’s stability

extra work coming from the private sector, resulting from

and this will continue to be true. The Energy Reform was

increased activity from IOCs and national oil companies.

enacted at the right time and is attracting investors to the

Also, Weatherford is the main services provider for many

country so more opportunities will be available for all of us.

of the companies involved in CIEPs and COPFs contract migrations. Weatherford is a global oil and gas services company that

Regarding oil prices, there is little certainty in the industry

specializes in innovative formation evaluation techniques, well

on what the future holds. However, popular opinion among

integrity and drilling reliability, novel reservoir completion and

CEOs and economists is that the price will recover slightly

stimulation technology that optimizes recovery

VIEW FROM THE TOP

LOCAL EXPERTISE NEEDED FOR LAND ACCESS SERGIO BERISTAIN Founding Partner of Beristain + Asociados

Q: How should companies operating onshore fields deal

an expensive and bureaucratic process that makes selling

with rights of way challenges?

to parties other than PEMEX too complicated. The lack

A: Each challenge must be addressed in its own, unique way

of infrastructure because of PEMEX’s underinvestment

but there are some universal solutions that can be applied

is another issue for companies entering the Mexican oil

to a variety of cases. The first is to have good lawyers, which

and gas industry. CNH strives to help these companies

are not necessarily the most expensive but local lawyers

succeed in the industry but it has not fought PEMEX as

who know how to work in the field and understand the

much as is necessary.

needs of the inhabitants of a specific area and who have experience in litigation of very complicated court cases.

Q: Where do you detect gaps in Mexico’s oil and gas

A second solution is the use of a social witness, for which

regulations?

the best candidates should have qualities similar to good

A: Some of the key elements missing from the regulations

lawyers, such as a comprehensive understanding of the law

pertain to rights of way and commercialization, for which

and local insight into the needs of the people in the region.

PEMEX’s insight and expertise are always important for other companies. The financial regulations still lack a clear

Insurance is another relevant topic. The application of

scheme to approach optimal solutions. For Round One,

jurisprudence in civil cases through a particular focus on

Mexican authorities strived to perfect a process carried out

how the energy industry works in the country is another

in the country for the first time. We are addressing major

crucial element when facing a legal challenge. A long-term

challenges such as corruption, a monopolistic scheme

perspective is key when addressing rights of way since the

under which the oil and gas industry had been regulated for

social aspect will be the most relevant. Developers are

over 70 years and the natural evolution of human resources

going to be involved with the communities and individuals

requirements.

surrounding their projects for a long time, so to be socially sensible is a must.

A major challenge for the industry has been the transition from when fields and assets are handed over to private

Q: What problems will companies face during the

companies to when production begins. This is when issues

commercialization of hydrocarbons and what do you

such as safety, infrastructure, the geographic limitations

recommend?

of wells and many others arise. Ultimately the successful

A: The main problem is taking over and using some of

solution to these challenges involves the participation and

PEMEX’s infrastructure with an unclear set of rules on

collaboration of all interested players such as PEMEX, CNH,

how to deal with PEMEX as an infrastructure owner but

private companies, local governments and very importantly,

not as the owner of the field. Bidding companies do not

the law firms. Law firms are particularly important as the

have access to the same competitive prices for using the

analysis of the Energy Law needs to be widened to include an

infrastructure that PEMEX had for several years, which

in-depth look at merchant solutions as well as international

impacts the companies’ business plans.

norms and good practices. The new law is fairly complex, which is why understanding it is so important to find a legal

Cross-field infrastructure also presents a problem

solution despite not having a completely defined regulation.

because sometimes different companies own or manage one area’s infrastructure, making it difficult to maintain contact with them all. Additionally, the metering norms

Beristain + Asociados is a Mexican law firm specialized in

in Mexico are still nonexistent and international rules

litigation, enterprises, energy, food, insurance and intellectual

for metering are not well known in the country. An

property. It also offers consultancy services regarding the

additional problem is the sale of permits, which implies

creation and structuring of companies’ legal departments

165

PEMEX engineer, PEMEX

SUPPLY CHAIN

After PEMEX’s transformation into a productive enterprise of the state and the influx of foreign private companies into Mexico’s oil and gas industry, its supply chain is undergoing a deep change. With higher safety and compliance standards to comply with, changes in PEMEX’s contract-awarding scheme to get used to and a payment and activity slowdown to bounce back from, service and product companies are adapting to meet the current challenges.

As new operators begin drilling on blocks won in CNH’s licensing rounds, supply companies are gearing up for tough competition. Investing in certifications, diversifying in creative ways and implementing new financing strategies are just some of the ways they are preparing to navigate the changing landscape. This chapter looks at the evolution of Mexico’s oil and gas supply chain and the exciting new ventures which lie ahead.

167

CHAPTER 7: SUPPLY CHAIN 170

ANALYSIS: Surviving a Tidal Wave of Changes

171

VIEW FROM THE TOP: Victor Oliveros, WorleyParsons Group

172

VIEW FROM THE TOP: Miguel Ángel Servín, PEMEX

174

INSIGHT: Sergio Saldívar, Amec Foster Wheeler México

175

VIEW FROM THE TOP: Jim Peden, Katoni

176

VIEW FROM THE TOP: Telésforo Segura, COBSA

178

VIEW FROM THE TOP: José Bermudez, Dow Chemical

169

Regina Oliveira, Dow Chemical

179

VIEW FROM THE TOP: Daniel Gutiérrez, Pepperl+Fuchs Mexico

180

ROUNDTABLE: How Did PEMEX’s Payment Slowdown Impact the Supply Chain?

182

INSIGHT: Angélica Linares, Cemza

183

INSIGHT: Manuel Flores, Taylors

184

VIEW FROM THE TOP: Andrew Auns, Williams Scotsman

185

INSIGHT: Diego Aguilar, McQuilling Mexico

187

VIEW FROM THE TOP: Jaime Zubillaga, MAN Diesel & Turbo Mexico

188

VIEW FROM THE TOP: Gerardo Flores, ABB

189

VIEW FROM THE TOP: Carlos Palavicini, Petrolink

190

VIEW FROM THE TOP: José Zepeda, Transportes Aéreos Pegaso

191

INSIGHT: Humberto Lobo, ASESA

ANALYSIS

SURVIVING A TIDAL WAVE OF CHANGES

170

In the wake of the opening of the oil and gas industry in Mexico,

tell us the exact date when they will pay us.

the country's supply chain has become more important than

Even if there is a delay, knowing the payment

ever. But with issues like PEMEX's payment slowdown to

date is useful for Grupo Hosto’s budget and

contend with, companies have been stretched further than ever.

planning.”

For nearly 80 years PEMEX dominated Mexico’s oil and gas

The supply chain’s relationship with PEMEX has changed

industry, leading to the development of an experienced

but so has the way companies compete with each other

supply chain consisting of companies that were designed

to win contracts. In 2016, 30 percent of all goods and

to provide products and services to just one final client.

services purchased by PEMEX were awarded under no-bid

These companies now face the dual challenge of adapting

contracts, which entail a single-source service or product

to the needs of international operators while also taking in

with no competition vying for the contract. This was down

PEMEX’s new procurement strategy and processes, which

from 80 percent in 2015, a change which resulted in savings

are increasingly geared toward productivity, efficiency and

amounting to US$1.1 billion for PEMEX last year.

profitability. Fewer no-bid contracts fit into PEMEX’s overall strategy On top of dealing with a complete overhaul of the energy

aimed at increased cost-effectiveness. PEMEX’s Director of

sector, the Mexican supply chain felt the pinch as PEMEX

Procurement, Miguel Servín, cites “transparency, contractor

suspended countless projects indefinitely amid budget cuts

certainty and more competition” as three byproducts of

and liquidity challenges resulting from a wider industry

the new awarding scheme.

downturn, which saw the benchmark WTI crude oil price hit lows of less than US$27 per barrel in February 2016. The

PEMEX is not alone in pushing the Mexican oil and gas

suspended contracts and delayed payments left PEMEX’s

supply chain toward a more competitive future. The arrival

contractors reeling as they faced an uncertain future.

of international operators means suppliers of services and products must up their efforts in terms of certification,

Toni Solis, Vice President of International Sales and

compliance, performance and safety standards. As well

Operations for TSC Group, which saw PEMEX nearly

as being a prerequisite for securing work with IOCs,

cancel the rig refurbishment project TSC was working

compliance with certification can instill confidence in

on, explains the lengths companies are going to in order

newcomers as they request services from local companies,

to keep working for their biggest client. “When PEMEX

says Rubén Benítez, CEO of Integra Marine Services. “We

began to cut spending, its intention was to cancel the

acquired Trace certification, valid since Jan. 1, 2017. This

entire project. The problem was that it was contractually

means we comply with Trace’s due diligence standards in

bound to pay TSC a certain minimum amount, even if the

terms of financing and ethics, giving international clients

work did not go ahead. Rather than having the company

certainty about Integra’s service standards.”

pay us for nothing we renegotiated the deal to three rigs but it was a long process.”

Telésforo Segura, Director General of COBSA, echoes the importance of certification in helping the supply

As the supply chain grappled with fewer available projects,

chain survive the influx of international competition. “The

those lucky enough to secure a contract were given the

majority of similar Mexican companies did not worry about

additional challenge of a change in their main client’s

obtaining international certifications before the market

payment terms. In 2015, PEMEX increased its payment

opened up, especially financial certificates,” he says, adding

terms from 20 to 180 days. Most of its debts are now paid

that his construction firm realized the necessity to invest

off but the impact on its suppliers is still being felt.

in certifications so it could cater to international players.

Dealing with less capacity for future planning and even

With the higher standards demanded by international

turning to alternative financing methods, in many cases

players and the new direction and processes of PEMEX to

PEMEX’s contractors and suppliers changed their strategies

get used to, Mexico’s oil and gas supply chain has its work

to reflect the NOC’s transformation. Abraham Zepeda,

cut out as the industry emerges from the slowdown of the

Commercial Director of Grupo Hosto, says the situation

past few years. But with an increased focus on compliance,

has improved vastly since PEMEX’s new leadership took

a consolidated payment time frame from PEMEX and a

over in 2016 and adds that certainty can mean more to

cautious optimism, the path is set for a competitive supply

suppliers than a quicker payment period. “Now PEMEX can

chain to develop.

VIEW FROM THE TOP

‘GREAT EXPECTATIONS’ PUSH FOCUS ON ALLIANCES VICTOR OLIVEROS Business Development Director Mexico of WorleyParsons Group

Q: What are WorleyParsons’ expectations in Mexico?

such implementation depends solely on the project’s

A: We believe the Mexican market is going to grow and we

requirements.

are positioning ourselves to take advantage of that growth. We have great expectations for the IOCs and NOCs that

In refining we are especially strong because of the

will enter Mexico as the Energy Reform allows for greater

capabilities we have developed working on large-scale

competition. That is also reflected in our focus, which

projects, mainly thanks to our mining division. We bring

has slowly shifted from only working with PEMEX to now

that capability to the refining world. WorleyParsons

pushing for alliances with independent players. Most of

has a center of excellence for refining located in

our work during the last few years has been in consulting,

California, where we have done a lot of work for some

mainly in front-end development.

major companies such as Chevron, with whom we have worked in an engineering capacity and on technology

Q: How has WorleyParsons participated in the refining

development.

sector? A: A large part of WorleyParsons’ business focuses on

Q: What is WorleyParsons’ involvement in deepwater?

refining, mostly in the US. We see plenty of potential to

A: Deepwater is definitely a big priority for us, mainly

transport that experience to Mexico, mainly because of

because we have Intecsea as a key differentiator in that

the industry’s need for modification, maintenance and

segment, making us one of the leading if not the leading

expansion. The refining market, for example, understands

company in the world. Through Intecsea, WorleyParsons

that plants need to be renovated but it is not certain where

has developed some of the most important deepwater

the capital for that work is going to come from. We are in

projects in the world, such as a 260km tie-back to shore

standby mode until the market decides to start working

project developed in the South China Sea.

fully in that area. In terms of technology development, we worked on the Private companies will not be investing much capital in

creation of a cutting-edge FPSO that allows companies to

new facilities, especially given current market conditions.

cut their capital expenditures in half in certain cases. This

Most probably they will partner with PEMEX on revamping

development came about because of market demand as

its facilities but that also involves a major challenge,

companies are looking for ways to reduce project CAPEX.

particularly the decision on who will control and operate those facilities. Working with PEMEX can be tricky for

Our experience in deepwater is not only with technology

companies but fortunately we have seen a positive

but also in management. We have worked with most

collaborative environment emerge in offshore with the

major and independent oil and gas companies in the

farm-outs. The same will have to happen with PEMEX’s

world and we are fully committed to knocking on every

other action areas, from onshore to refining.

door and establishing personal contact. The fact that many of these companies are located in Houston makes

WorleyParsons also has a long history in engineering,

this process easier, as well as our experience working in

working on the integration of different equipment. It is an

the Gulf of Mexico.

advantage for us to be technologically neutral, we neither sell nor fabricate any equipment, allowing us to also be neutral in our advice to customers. This does not mean

WorleyParsons Group, founded in Australia in 1971, is a consulting

we do not innovate. We have worked with equipment

and advisory company with expertise in EPC, safety and risk

manufacturers to develop special technologies that

management and asset integrity for oil and gasand is developing

have been implemented in some of our projects but

further business strategies to offer its expertise within Mexico.

171

VIEW FROM THE TOP

OPTIMIZING MEXICO’S OIL AND GAS SUPPLY CHAIN MIGUEL ÁNGEL SERVÍN Chief Procurement Officer for PEMEX

172

Q: What have been the highlights of PEMEX’s procurement

Another key development is the formation of our “Corporate

function since the start of the company’s transformation?

Advisory Commission,” which includes the seven main

A: Our evolution in the past year has been very positive,

Mexican chambers as members: CONCAMIN, CANACINTRA,

having consolidated our centralized procurement scheme.

CMIC, CANACERO, AMESPAC, AMEXVAL and COPARMEX.

Before 2015 PEMEX employed a decentralized model, which

This initiative includes quarterly sessions, to share information

was not in line with the industry best practices and did not

on our activities and also incorporate best practices into our

take advantage of our economies of scale and demand

procurement model. All of our actions are aimed at fortifying

aggregation. Not only are we now strengthening the new

the relationships we have with suppliers and also gaining their

model, we are working on being as transparent and efficient

confidence.

as possible while providing certainty to our suppliers. It has been a big challenge but we are gaining the confidence of

Q: How are providers dealing with the shift from multiple

our providers.

contracts to comprehensive integrated contracts and from direct awarding to more competitive processes?

Until 2015, on average four bidders participated in each of

A: Our providers understand our new model. PEMEX’s current

our bidding rounds for different projects. In early 2017, this

biddings are showing a lot more competition and we are also

number had increased to nine per round, showing a marked

providing training on how to use the electronic platform. In

increase in interest and competition for PEMEX contracts. We

some cases, we are aware that we have to do a better job at

are definitely heading in the right direction toward a more

communicating all the changes. There are still some in the

competitive process.

industry who remain skeptical. PEMEX’s job is to convince them to approach us so we can show them that if they are

Q: How has the relationship between PEMEX and its suppliers

competitive and skillful, they have a real chance of working

evolved as it shifts from a cost strategy to value driven in its

with us. But the new model has only been in place for around

procurement activities?

one year, so it is an ongoing process.

A: Due to the current oil price situation, we can take advantage of the market. There are many companies

Q: How are the newly structured contracts being used by

offering PEMEX their services and products and that are

PEMEX changing what types of suppliers win bids?

eager to participate in our processes. In June 2016, we

A: In 2016, we launched a big bidding round after we integrated

launched our e-procurement platform and since November

all our well services. Traditionally, only four companies

2016 all of PEMEX’s procurement process are run through

would participate in these types of tenders: Halliburton,

this platform. We are also very close to our providers,

Schlumberger, Weatherford and Baker Hughes. Under the

with a dedicated office handling supplier relationships.

new scheme, we found that more companies were interested,

In February 2017, we held our first Supplier Day, when we

including Mexican companies that in the past used to be

presented our 24-month plan to our providers. Different

subcontracted by one of the four companies listed above.

segments of PEMEX participated, including Pemex

These Mexican companies had developed the technology,

E&P and PEMEX Industrial Transformation. The day is

knowledge and finances to be able to participate themselves

structured with presentations and a feedback session.

in the bidding, for example by partnering in consortiums

It is very important for us to receive feedback from our

which went on to win part of the integrated well service round.

suppliers. We did this in Mexico City and Ciudad del

Mexican companies are partnering up to compete with larger

Carmen, and we will host an event in Villahermosa as well.

companies and we see this as an ongoing trend.

We recognize the importance of providing our suppliers with information in advance so they can carry out their

Q: What developments does PEMEX want to implement in its

own planning procedures.

procurement function to keep helping Mexican companies?

PB-Litoral-Alfa, Litoral de Tabasco, PEMEX

173

A: We have taken three main actions to enhance our relationship

partners to help with these services. In February, for example,

with Suppliers and Contractors, such as our aforementioned

we contracted a French company called Air Liquide to provide

Supplier’s Day. We have also set up an Advisory Commission

hydrogen in the Tula refinery. We are doing the same for our

with representation of Mexican companies, which will serve

Cadereyta and Madero refineries. We face big challenges in

as a forum in which all participating companies will be able

refining, to increase our efficiency and carry out maintenance.

to provide feedback, share best practices, and their most

In the following months and years, PEMEX will form more

important projects. Another benefit that derives from such

partnerships and associations with large companies.

Commissions is the transparency that will result from having different chambers and PEMEX in the same place, sharing

Q: How will having new partners impact the culture within

information, being able to anticipate any situations that could

PEMEX?

arise from the lack of communication. Our third action is active

A: It has a huge impact. Culturally, the Energy Reform was

participation in Medium and Small Companies Forums. We

a major challenge for us. At the moment, our CEO is very

are taking advantage of the different events related to the Oil

clear about what PEMEX needs. He has been able to transmit

and Gas industry, which will help maintain PEMEX’s leading

the message that everyone is in the same track and that the

position in the Mexican industry and strengthen relations with

changes are the best and only option for PEMEX if it wants

different suppliers across the value chain.

to be successful.

Q: What is the status of PEMEX’s payments to its suppliers

Q: What lessons has PEMEX learned from its payment

and how has this improved in the past year?

slowdown to its suppliers and how are you applying these

A: How we pay suppliers is a key part of our new procurement

lessons?

model because we are very aware that if we do not pay them

A: We have learned the importance of financial discipline,

on time, it will be reflected in their economic proposal and

which has not always been implemented at PEMEX. Financial

we will end up paying for it anyway. Additionally, small and

discipline is a big topic for us right now, and we hold monthly

medium companies suffer more than larger ones in this

budget review meetings with our CEO. We also learned that

respect because they are sometimes unable to pick up the

we have to maintain communication between all of PEMEX’s

cost when waiting for late payments. We are working closely

areas. In procurement, we only go to the market if we have

with PEMEX’s financial office in order to pay on time to our

sufficient funds to buy the services or goods. We work with

suppliers, mainly to small and medium companies.

the financial department to achieve this through weekly meetings. Planning is a very important element in this process,

Q: What are your aspirations for consolidation and offering

which did not happen in the past in PEMEX. We now have a

more projects to the Mexican supply chain?

planning process that is creating successful results.

A: For the next months and years, we are working on both farm-outs, and co-investments with other companies to capitalize new business opportunities along the value chain

Petróleos Mexicanos (PEMEX) is the most important company

including our refineries. Before the Energy Reform, PEMEX

in Mexico, an international reference in the field of hydrocarbons.

did everything in its refineries, including, for example, water

Its activities involve the entire production chain, from exploration,

treatment and hydrogen supply. In the future, we will look for

production, industrial transformation, logistics and marketing

INSIGHT

DIVERSIFY TO SURVIVE MARKET IMPACT SERGIO SALDÍVAR Director General of Amec Foster Wheeler México

174

The long period of depressed prices in the oil and gas industry

The firm can also capitalize on existing relationships with

until 2016 delivered a stark lesson about the need to adapt

the Majors entering in the deepwater rounds. “Operators like

and diversify, as drilling and connected services ground to a

BP and Exxon have global agreements with Amec Foster

halt in many regions. Those companies that can tweak their

Wheeler and we are trying to ensure those agreements are

focus will have the greatest opportunities for success, says

in place in Mexico,” Saldívar says.

Sergio Saldívar, Mexico Director General of London-based EPC and consultancy firm Amec Foster Wheeler.

December 2016’s deepwater licencing round brought some relief to industry players nervously watching the

Saldívar speaks from experience. Amec Foster Wheeler’s

outcome. “This event means we are finally able to prove

Mexican unit was among those schooled by the sector’s

to our headquarters the value of the Mexican market,” he

financial woes, especially after state-owned PEMEX canceled

says. “The entrance of the Majors is now a reality, not just

contracts in the middle of a sharp budget reduction.

speculation.” That round, Saldívar believes, was the catalyst for the return of oil and gas activity to Mexico.

Amec Foster Wheeler holds various large EPC and project management contracts with PEMEX, including work on the

Saldívar says the biggest challenges on the horizon are

Salina Cruz, Cadereyta, Madero and Salamanca refineries.

underinvestment and the ballooning maintenance issues

Some of those were cancelled during the downturn and

at PEMEX’s refineries resulting from budgetary restrictions.

according to the executive, “other EPC jobs are moving at

If left unaddressed, the problems will spiral. There are also

a slow pace, only requiring preservation activities. They are

issues with the unions and with assets that have not yet

still active but are progressing slowly.”

been reconfigured. “The competition in the fuel market came at the worst possible time for PEMEX,” Saldívar says.

Saldívar believes the industry will not see a great deal of

“But all these challenges will force the NOC to reinvent

change in 2017, spurring the firm to diversify away from

itself, both culturally and in a business sense and it will

downstream. “Amec Foster Wheeler is working in upstream

decide which assets to keep and which ones to divest.”

globally and we are now bringing this to Mexico,” he says. The firm is also chasing O&M contracts across the entire

Going forward, more clarity would be welcome in the

value chain, relying on its North Sea experience in this area.

downstream industry. “I do not believe projects will be

“We also want to enter the midstream market in Mexico

advancing within the year but we should at least have

because this is developing at a quicker pace,” Saldívar says.

a better idea of what is to come,” he says. Amec Foster

This is a market where he sees considerable opportunities

Wheeler wants to engage in basic planning of some

in fuel storage, marine terminals, transportation and even

midstream projects and is already working to obtain some

the gas station business.

smaller midstream contracts. “These will involve connecting marine fuel storage terminals by building pipelines or

The company has a key advantage over others that are

distribution networks,” he says. This will satisfy Amec Foster

only now seeing the opportunities of the Energy Reform,

Wheeler’s need to keep going while it waits for the entry

says Saldívar. “We have a strong presence in the country

of the new upstream players.

and a great deal of experience working with PEMEX. We can execute locally but we have the strength and support

But the entrance of the Majors and their complex demands

of a global operation.” Often, Amec Foster Wheeler shares

could also spell trouble for smaller EPCs. “The types of

staff between its global locations, drafting in workers from

demands and contracts required by the Majors will be

Spain, Thailand and the US to bridge knowledge gaps in

too complicated for smaller EPC companies to meet,”

its Mexican workforce.

Saldívar says.

VIEW FROM THE TOP

ONE EYE ON OFFSHORE, ONE ON MIDSTREAM JIM PEDEN Projects and Developments Director of Katoni

Q: What was Katoni’s route into the Mexican oil and gas

Q: What is Katoni’s approach to health and safety?

industry and what experience does it bring?

A: Oil and gas operators seek to acquire safe, compliant,

A: Katoni has its roots in providing the oil and gas industry

efficient and cost-effective services from its supply chain;

with integrated engineering and design solutions in

this applies to PEMEX operations, or operating with new

the UK’s upstream offshore sector. Our services cover

entrants. It is important that as a service provider we offer

new capital projects, brownfield modifications and the

the very best in value to our clients, whether it be in the

management and implementation of major asset outages

North Sea operations or here in the Mexican Gulf. While

(TAR). Our capabilities now extend to include onshore

we recognize and incorporate the specific requirements

facilities. We are also a well-established provider of heli-

of the region, our goal remains to consistantly provide the

aviation lighting systems, which form part of our overall

highest standards in QHSE, compliance and diligence to

service capabilities.

all our clients.

Our journey into the Mexican market began with attending

Q: How has Katoni interacted with PEMEX thus far?

trade shows and, with the support of Scottish Enterprise and

A: PEMEX is a highly integrated organization and our initial

the UK’s Department of International Trade, it developed

discussions have focused on the key areas of operational

into a planned phase of establishing our base here in Mexico

support, production protection and enhancement across its

City. Our objective is twofold: one, to offer our experience

existing asset base. Part of this process provides us with a

in mature fields optimization to Mexico’s existing offshore

developing understanding of the organizational structure

asset base and two, to bring our capabilities, including

and the supply chain process. Our discussions to date have

innovative solutions in asset management and execution,

been encouraging, and discussions concerning how we can

to the midstream sector.

potentially enter the supply chain are ongoing. Our experience in mature asset operations and production enhancements

Q: How does Katoni view the opportunities arising in the

together with innovation and technology and our expertise

Mexican market?

in large-scale turnarounds are of specific interest.

A: The Mexican oil and gas sector is well-established, with the existing asset base entering its mature phase. This

One of the ways we can demonstrate the benefits of

brings different challenges with it, as well as the obvious

integrated engineering and operational support services

need to react to the impact of lower oil prices. In addition,

to PEMEX is with our system capability. We made

the industry’s reforms have resulted in new entrants looking

significant investment in not only obtaining the highest

to develop deepwater opportunities. All of this means the

levels of certification (LRQO) but also coupling this with

landscape here in Mexico is changing. It is an established

our integrated engineering processes. What this achieves

but evolving market.

is a streamlined, integrated process that enables all our staff, engineering and designing in Mexico or reporting

It is important to understand that as in any established

and planning in the UK to be fully compliant with our

market, for any new entrant to succeed it needs to offer

certification and specific regional requirements. This is

something different and be more effective at delivering

supported both by Mexico and in the UK by Lloyds Register.

services. At Katoni, our capabilities and services have a foundation grounded in extensive oilfield experience, coupled with innovative engineering and execution methods

Katoni is an independent engineering company offering smart,

supported by relevant technology. These factors give us a

scalable solutions delivered safely. It specializes in Brownfield

compelling narrative, and we believe make us relevant to

modifications, engineering, design, procurement, installation

the Mexican market. It is our competitive advantage.

and commissioning

175

VIEW FROM THE TOP

PREPARATION PROVIDES ADVANTAGE TELĂ&#x2030;SFORO SEGURA Director General of COBSA

176

Q: What have been the biggest opportunities for COBSA

and competitive. To achieve this we are carrying out a

since the Energy Reform?

range of initiatives. One main component is the constant

A: The Energy Reform has had positive and negative results.

updating of our staffâ&#x20AC;&#x2122;s training. Despite the fact that 2016

It is a complicated process with a steep learning curve for

was difficult in terms of income, we have continued to

all involved, particularly new players with less knowledge.

dedicate ourselves to the bettering of our employees

For unprepared companies, the opening of the market was

and that has helped us reach international standards of

chaotic. Thankfully, COBSA spent four years preparing for

productivity.

these changes, which gave us an advantage. Q: How does COBSA ensure it can offer its clients the latest As a construction company we have high-quality standards

technology?

that approach international guidelines. The majority of

A: COBSA always selects the most competitive companies

similar Mexican companies did not worry about obtaining

on the market as technological partners. Our partner

international certifications before the market opened,

Rosen, for example, is a global leader in pipeline integrity

especially financial certificates. COBSA is a financially

management. We also have a strong alliance with a

viable company, a factor that has greatly benefited us in

coatings provider and providers of tubing reinforcement

the new market.

equipment. Together we are building four storage tanks for a client, using the latest technology to deliver the project

Our focus on social responsibility also positions us well

in record time.

because we can use social initiatives to remove the stigma around foreign companies coming to Mexico to take

Q: What has COBSA contributed to the Los Ramones

advantage of our resources. This, together with our financial

project?

strength, international certifications and high-quality

A: Like any pipeline project, once the pipes are installed

standards, mean foreign companies coming to Mexico are

they require quality inspections to detect any failures. These

seeking us out as partners.

details are extremely important and can be dangerous if not caught in time. This is the service we are delivering at

Some people say Mexico was too late in introducing the

Los Ramones.

Energy Reform but we like to think it happened exactly on time. Mexico can look at other countries to avoid certain

Even new pipelines will require maintenance work further

mistakes while adopting their successful approaches. We

down the line but in reality it begins with the pipelineâ&#x20AC;&#x2122;s

will also see important economic progress in a few years as

construction. COBSA is a maintenance company ready to

a direct result of the Energy Reform. With the liberalization

take on this challenge with certified maintenance work. We

of the gasoline market we will see a range of companies

are one of the few national companies that can deliver the

importing and selling fuel at competitive prices. This will

required standards when it comes to pipeline maintenance.

be a niche opportunity for the construction industry and especially for COBSA.

Q: What role will COBSA play in the evolving gas pipeline sector in Mexico, which includes new and old pipelines?

Q: How does COBSA help its clients to increase their

A: Haulers are not worried about the construction of the

productivity and efficiency?

pipelines but about the long-term maintenance commitments.

A: In Mexico we are used to working within a monopolistic

To get the final product to the customer, the security and

setting, which does not encourage competition between

integrity of the pipeline is indispensable, especially given

companies. The new rules state that PEMEX is just another

the large amounts of financial investments made in these

player. This means COBSA must become more productive

projects. When a gas pipeline stops functioning, it does not

end there. It stops the whole industry. COBSA’s core business

certified by DNV-GL and have obtained ASME and AWS

addresses these worries, offering services to improve the

certification. Finally, COBSA holds a certification for being a

mechanical integrity of pipelines.

socially responsible company. The professionalization of our business has been a step by step process from the beginning

COBSA has been dedicated to pipeline and petroleum

and that continues. The key is investment in training our

installations maintenance for 20 years. Throughout

human capital.

those two decades and with more than 1,200 pipeline interventions, we have perfected our safety processes,

Q: How does COBSA’s focus on social responsibility

resulting in zero accidents over the history of the company.

contribute to the company’s success?

Our response time is very quick and clients can be assured

A: COBSA’s dedication to social responsibility has helped

that we are a fully certified construction company.

the company in various ways. We do not treat social responsibility as a superficial image enhancer. Instead, it

Q: What opportunities does COBSA envisage to grow its

is about really showing people that COBSA cares, whether

storage business?

it is for an individual or a community. Our clients also

A: The storage and distribution market in Mexico has not

feel they are part of something bigger because instead

grown as much as the market demanded so with PEMEX

of focusing solely on turning a profit we give back to the

offering its pipelines in its business plan, we see lots of

communities where we work. COBSA’s social plans also

opportunities. We are certain the new operators in the

include sustainable solutions. Social responsibility is not just

country will require the construction of new distribution

the responsibility of one department but of all COBSA’s staff,

lines and storage units.

as well as its providers and clients.

There is definitely demand for storage and distribution in the

Q: How can COBSA help incoming international companies

fuel market so as a construction and maintenance company

gain acceptance from the Mexican public?

COBSA can be involved in this. We already have experience

A: Foreign firms are not coming to exploit Mexico but to

constructing and maintaining tanks.

invest in it. Through our work we can help foreign companies shed the negative stereotype that they are coming to take

Q: How has COBSA’s client portfolio changed over the

advantage of the country. In fact, we have managed to

past year?

achieve this in the past with PEMEX. We have worked with

A: For many years we were used to working with just one

PEMEX in deprived communities, providing bicycles to

large client: PEMEX. The introduction of new companies into

children who live far away from schools.

the Mexican oil and gas market forced us to learn how to work and negotiate with different types of businesses. We also had to offer more value. We prepared for four years to

COBSA is a Mexican construction, restoration and maintenance

get our standards up to scratch for these new players. The

company specialized in hydrocarbon pipeline projects and

preparations paid off and we are now qualified to work with

storage tanks. Its team of engineers and technicians is

major players like ENGIE, IEnova and Bonatti. We are also

experienced in project execution, administration and supervision

177

VIEW FROM THE TOP

ENABLING CHANGE IN THE MEXICAN MARKET

JosĂŠ Bermudez President and Director General of the Northern Region Latin America at Dow Chemical

Regina Oliveira Commercial Director for Oil, Gas and Mining in Latin America of Dow Chemical

Q: How important is the oil and gas market for Dow?

shale, and technology will be a key enabler to make this

RO: Oil and gas is a strategic market for Dow and we

opportunity a reality.

expect it to remain a growing platform for us. Dow has 178

a comprehensive portfolio for the oil and gas chain, with

As for the rest of the value chain, the Energy Reform is

solutions ranging from exploration, production, refining and

dramatically increasing opportunities because the needs in

processing, to fuel conversion processes. The company is

infrastructure, the transportation of key molecules across

heavily investing to bring new technologies to the shale

the chain and the required upgrades in manufacturing

and deepwater markets, which are strategic not only

capabilities are real and we strongly believe Dow has the

for Mexico but for Latin America overall. We produce an

portfolio of products and technologies to cater to those

important proportion of the products and technologies

needs.

in the region and have technical support teams in each country. They know the companies in depth and can offer

Dowâ&#x20AC;&#x2122;s ultimate goal is to create a strong industry in Mexico.

solutions with greater assertiveness. Dow works with the

It will not happen overnight, it will need a transition period,

entire value chain to bring the best solutions to Mexicoâ&#x20AC;&#x2122;s

but we are happy and excited about the opportunities. We

specific challenges, both with national players like PEMEX

are stewards of the entire value chain. We not only want

or international companies, contributing to improving oil

to participate as a player in the market but also act as the

and gas operations and participating in critical activities

bonding factor that brings together all the key players in

that directly impact results.

the value chain to discuss and create, under the umbrella of our innovation and sustainability pillars, the solutions

For Latin America we have a strong focus on solutions that

demanded now and in the future.

increase productivity of shale gas and oil, for example by cleaning the hydrogen sulphide (H2S) out of the shale gas or

Q: How is Dow working toward the implementation of

introducing biocides to control micro-organisms that would

better technologies in Mexico?

otherwise affect E&P activities, the transportation of the

RO: Each country in Latin America has specific features and

fluid and even the quality of the extracted product. Another

needs. In Brazil, we know that there is strong demand for

set of products that we are introducing in Mexico, and that

deepwater projects. All operations were scheduled to start

were developed specifically for Brazil and its deepwater

but due to the political crisis those were postponed. Even

infrastructure, is our range of technologies for flow control

so, they already have the FPSOs and operations will most

in pipelines, which comes at a perfect time now that the

probably begin in 2020 once the environment is stable.

deepwater industry is starting to develop in Mexico.

Dow is ready to work in Brazil as a provider because our products are proven. Argentina, on the other hand, is a

JB: Opportunities have really increased dramatically.

strong market for our biocide products used in gas E&P.

Diversification of the economy is a key pillar for the authorities and for private industry in Mexico. The Energy

Thanks to our involvement in both markets we can

Reform allowed the diversification process to start in

bring cutting-edge proven technologies to the Mexican

upstream oil and gas, especially with deepwater and

market once activities start ramping up. Our strategy for technology implementation in Mexico is to approach the operators, prove our technologies and then move back

Dow Chemical is a global chemical company with products

in the value chain to offer these technologies to service

and services in almost every industrial area, ranging from

companies. Our local presence is an added value, as we

automotive to infrastructure and energy, with operations in

are ready to meet all demands and develop tailor-made

Mexico since 1959 and offices in Mexico City

solutions for each challenge.

VIEW FROM THE TOP

DEMAND FOR WIRELESS TECH SEEN GROWING DANIEL GUTIĂ&#x2030;RREZ Director of Pepperl+Fuchs Mexico

Q: What are the main problems you are solving for PEMEX

Q: What challenges do companies face when first

with your upstream solutions?

implementing your technology?

A: PEMEX is focusing on corrective rather than preventive

A: Integrating our systems and training staff pose different

maintenance. Following the explosion at the AbkatĂşn

degrees of challenges. In the case of connecting our systems

platform in February 2016, the main focus has been on

with others, the extensive information available through

replacing lost production and repairing the damage.

diagnostics simplifies the process. Training personnel is

The problem with this approach is the budget restriction

where the bigger challenge lies. Workers are not familiar

that follows, which will cause the cessation of existing

with this type of technology. They need to learn how to carry

production and a lack of investing in new projects. Thus,

out tasks that would usually be done manually on a handheld

for the next couple of years all new developments are most

digital device or laptop. One of the keys to the success of

likely to come from the private sector.

our technology is its user-friendly and accessible design.

Q: Which products in your portfolio will be most in demand

Q How should PEMEX approach the new market to

by new operators in the upstream market?

guarantee success?

A: Protective methods such as purge and pressurization

A: There is a new head at PEMEX Industrial Transformation

systems, explosion-proofing and intrinsic safety technology

helping us to deal with our evolving partnership and to

will be our most popular products for the oil and gas market.

identify key areas of improvement. If PEMEX does not

We are providing a lot of Fieldbus technology but demand

partner with private industries, maintenance and safety

will grow for wireless technologies like Human Machine

levels will suffer. Lessons need to be learned from disasters

Interface (HMI), which is used for monitoring processes.

like Pajaritos. A special focus on safety is key for PEMEX

Most of our prowess is in the digital realm, with increased

to attract private investors who will refuse to participate if

connectivity between all the systems a main concern. Our

maintenance is not at sufficient levels.

strategy consists of presenting the technology supplied to PEMEX to incoming private companies. Our success with

Q: What are the main projects you have been involved in

Braskem IDESA was a result of it witnessing our technology

over the past 12 months?

being used by PEMEX firsthand, which inspired confidence

A: Our focus is 20 percent on upstream and 80 percent

in our products.

downstream, mainly due to the drop in oil prices. Projects are being delayed indefinitely but our activity in E&P

Q: What systems does Pepperl+Fuchs supply that are

continues because of the impact we have in that area.

installed at Etileno XX1?

Our petrochemical and refining projects are delayed

A: The primary purpose of the technology we supply is to

but ongoing. Fortunately, the private sector is not only

protect raw material from the risk of explosion. Companies

developing new projects but also investing in PEMEX.

have a strong preference for intrinsic safety technology

Although the exact details are not yet clear, we know that

because it makes it possible to maintain installations online

agreements between PEMEX and private companies are

and survey a plant remotely. Preventive measures can

being made for shared-production contracts and joint

be taken based on the extensive diagnostic information

operations.

provided by these systems. Fieldbus technology allows companies to identify issues before they develop into more serious problems. Additionally, all on-field information can

Pepperl+Fuchs is a manufacturer of sensor technology for

be easily and quickly accessed by the operations center,

industrial automation as well as explosion protection. The

increasing connectivity between production decision-

company specializes in innovative solutions for safer processes

makers and the plants.

in the oil and gas industry

179

ROUNDTABLE

HOW DID PEMEX’S PAYMENT SLOWDOWN IMPACT THE SUPPLY CHAIN?

Hit by severe liquidity problems, PEMEX was US$8.5 billion in debt with its suppliers at the end of 2015. By May 2016, it had paid off US$5.3 billion, helped by credit lines from development banks and a liquidity injection from the Ministry of Finance. The situation arose after changes to PEMEX’s procurement function in 2015, when the payment period it promised its suppliers was increased to 180 days from 20. As PEMEX’s relationship with its suppliers stabilizes under new leadership and a recovering industry, Mexico Oil & Gas Review asked a range of industry players about the impact from the NOC's payment slowdown and the difficult choices suppliers faced when deciding how to react.

Filing lawsuits against PEMEX was not advisable due to the complexity of the

180

situation. The fault does not lie with PEMEX because it was a public finance issue. PEMEX and CFE’s treasuries are run by the Ministry of Finance and companies should understand the risks when they agree to do business with them. The first influencing factor was the drop in oil prices, which changed drastically after many contracts had already been signed. Secondly, the previously strained relationship between

JESÚS RODRÍGUEZ Founding Partner at Rodríguez Dávalos Abogados

PEMEX and the Ministry of Finance negatively impacted the NOC’s ability to make payments. PEMEX has now started to pay providers, focusing its efforts on smaller companies. This causes issues because if the larger companies are not paid there is a chain reaction and they cannot pay their subcontractors.

Most providers did not resort to legal action to recover delayed payments from PEMEX because the state company was often the only client they had. International companies facing this issue in Mexico accepted that if they demanded the payment from PEMEX it would be the last contract they would ever have with the company, and would basically amount to leaving Mexico. Mexican firms do not even have this option. The process is improving for two reasons. On one hand, PEMEX officials

ERNESTO MARCOS President of AMESPAC and Founding Partner at Marcos y Asociados

have the responsibility to fully follow up any debt with providers in a transparent way because they are civil servants controlling public assets. On the other, providers are no longer threatened with losing their only client because PEMEX is no longer the only industry player.

Our relationship with PEMEX has not changed significantly over the past year. PEMEX’s work is still extremely scarce with very little activity happening. The only palpable difference is its lower level of activity and its changing payment schemes. PEMEX’s payment slowdown has improved but it remains complicated. The payment terms were increased from 20 days to 180 days. This meant we had to find a way to finance Petricore in the meantime, so we turned to the NAFINSA invoicing system,

JOHN LAWRENCE CEO of Petricore

through which we now collect all our invoices. Although we have to fund this new financial system, we are relieved that PEMEX’s payments are now more regular and stable. We had to adjust our strategy to fit in the changes but the most important factor is the stability of payments now.

When companies are considering how to react to delayed payments from PEMEX, they must make a business decision as much as a legal one, the question being, do they want to fight with their best client? The best move companies awaiting PEMEX payments can make is to approach law firms like Haynes and Boone for an informed legal opinion, instead of spending millions on official litigation procedures. This way PEMEX and the client can protect the relationship and avoid friction. They can then base their subsequent actions on this opinion and make the right decision based on different factors. We already detect a trend of PEMEX relying more on legal opinions

NICOLÁS BORDA Partner at Haynes and Boone

rather than fully entering into litigation because it is a cheaper way of doing things and avoids drawn out disagreements.

By November 2016 PEMEX had paid us around 70 percent of what it owed us. In

181

times of crisis we made sure to keep meeting our commitments because we trusted it would eventually pay us. The situation with PEMEX’s payments improved in 2016 because the new leadership has offered certainty, which is key. Now PEMEX can tell us the exact date of payment. Before the new management came in there was a lot of uncertainty. Even if there is a delay, knowing the payment date is useful for Grupo Hosto’s budget and work planning. It allows us to react and make internal decisions on important projects.

ABRAHAM ZEPEDA Commercial Director of Grupo Hosto

Contention was unavoidable given PEMEX’s payment slowdown. One must analyze the different parties involved in categories. Firstly, there are the oil service companies that hold service contracts with PEMEX. They have two choices when PEMEX does not pay them: either wait for payment or demand that payments be made more quickly. The first option allows them to maintain a positive relationship with PEMEX and avoids the long and complicated process of suing the NOC. Both factors make the decision to negotiate a more attractive option than taking legal action. Contention with operators is a different matter because these alliances are regulated by standardized, international terms and official bodies.

DAVID ENRÍQUEZ Senior Partner at Goodrich, Riquelme y Asociados

Fortunately, we have a strong relationship with our financial partner, Navix, which works with us on these issues. The big issues for us are not cash-flow related but are related to activity levels. Not having enough production could kill our business so this is a big challenge for us. Having strong financial partners means we can give customers the credit they need. We think PEMEX is moving in the right direction. As suppliers, we need to help PEMEX design business models. The personnel at PEMEX Perforación y Servicios are enthusiastic about creating more integrated services and reducing excessive bureaucracy and supervision. It is a big area to change so the pace is slow but it is materializing.

GERARDO TAMAYO Director General of Sumimsa

INSIGHT

STRENGTH IN NUMBERS ANGÉLICA LINARES CEO of Corporativo Cemza

182

As the global oil and gas industry slowly emerges from the

is optimistic about the future and believes Cemza’s current

downturn of recent years, which saw prices drop amid an

50-50 split between private and public business will tip

overflow of crude, one method companies have used to thrive

toward the former.

despite the lack of activity is by joining forces in partnerships. Angélica Linares, Director of Corporativo Cemza and its

As well as investing in certification and training for its various

subsidiaries, is well aware of the importance of uniting in

teams to prepare for the influx of international players in

difficult times. “There are three keys for surviving a period

Mexico’s offshore sector, Cemza is looking to take on the

of struggle: patience, preparation and the most important,

challenge of expanding and operating its own field. The group

unity,” she says.

recently welcomed its 10th member, Maren Energy, an E&P

“

Cemza’s structure provides each company with a financial pillar. When one is struggling, another can step in to support it for a while”

company through which Cemza will look to enter consortiums to bid in Rounds 2.1 and 2.3 in 2017, Linares says. The switch to incorporating an E&P segment will signal a big change for the group, she adds. The country’s oil and gas authorities have encouraged 100 percent Mexican groups to enter the bidding process. While Cemza intends to seize the Energy Reform’s opportunities by bidding on the upcoming shallow-water licensing rounds, it is also planning to expand its oil field services to reach Mexico’s emerging deepwater sector. In December 2016, CNH awarded eight deepwater blocks to a

Corporativo Cemza comprises 10 oil and gas companies

variety of IOCs, NOCs and independents through licensing in

dedicated to providing offshore services for operators in

Round 1.4, and Linares sees big prospects and a challenge for

Mexico’s shallow waters. Its services span specialized vessel

Cemza there. Operators venturing into Mexico’s deep waters

provision, rig catering, the supply of personnel, marine fuel

for the first time will require specialized equipment, vessels

and much more, resulting in a comprehensive network of

and personnel, which Cemza is preparing to provide. “The

service companies for the offshore industry. “The group acts

change requires a big mindset shift. The risks are higher but so

like a clearing house. Clients approach Cemza with their

are the returns and this is why we are taking on this challenge.”

needs, then we direct them to one of our more specialized service providers,” Linares says. This network structure does

Linares foresees joint ventures on the horizon for Corporativo

not only benefit the client, which she highlights as Cemza’s

Cemza to achieve its deepwater and operator ambitions. She

number one priority, but also each member company.

is confident about the strength its 10 companies bring to the table in any partnership. “We have already worked with

“Cemza’s structure provides each company with a financial

Mexico’s largest oil company, so we boast the highest safety

pillar. When one is struggling, another can step in to support

standards,” she says.

it for a while,” Linares says. Their combined strength comes in handy considering Mexico’s reduced drilling activity over

As a Mexican conglomerate expanding into deepwater and

the past three years. Cemza now has four specialized vessels

E&P activity, Corporativo Cemza considers itself the epitome

under PEMEX contracts compared to eight before, she says.

of the opportunities brought about by 2013’s Energy Reform. Defining the common thread that links all its members as

By the end of 2016, PEMEX’s crude output fell by 5 percent

“passion and an entrepreneurial spirit,” Linares looks forward

year on year to 2.154 million b/d. Despite that setback, Linares

to Cemza’s future as a trusted partner to offshore operators.

INSIGHT

A VITAL INGREDIENT FOR OPERATIONAL SUCCESS MANUEL FLORES Country Manager Mexico of Taylors

An oil rig requires many essential ingredients to remain

levels: presidents of companies, our contractors and the rig

operational. Electricity and trained personnel are two of

workers,” Flores says. “The responses allow the company to

the most obvious but a third is often overlooked: Food. It

tailor each service on a case-by-case basis, an added value

is a simple issue: No food, no rig.

demonstrating our flexibility to match the client’s needs.”

“Without a good supply of food for platform workers, there

With taste preferences, budget restrictions and even

is no oil rig,” says Manuel Flores, Country Manager of oil rig

religious factors to take into account, Taylors’ customized

catering firm Taylors Mexico. He says adequate nutrition

menus are not easy to put together. “Satisfying everyone at

plays a pivotal role in the success of any oil operation and

viable costs is a complex operation that requires excellent

companies need to go above and beyond when providing

management,” Flores says, defining the challenge as an

it. “In 2016 we maintained our quality and completed our

attempt to reflect the taste of 200 people on one piece

commitments 100 percent of the time,” he says. This despite

of paper. This becomes even more taxing when funds are

operators tightening their belts as they slash budgets.

scarce and companies are looking to cut costs at every turn. “To satisfy their demands for lower costs, negotiation is key

Yet, companies such as Taylors were not immune to the

as much with our clients as with our suppliers,” he says.

low oil prices and ensuing drilling slowdown that plagued Mexico’s oil and gas industry during last year and 2015.

The strong relationships Taylors maintains throughout the

“The year 2016 was characterized by adjustment, survival

supply chain ensure competitive pricing is achieved without

and preparation,” says Flores.

compromising quality. “Our complete honesty about ingredients achieves the same end,” Flores says. On top of

Despite the difficulties, in October 2016, Taylors won a

preserving competitive pricing, Taylors’ alliances in the oil

critical contract extension to cater for various active PEMEX

and gas industry could bring about new contracts in 2017.

rigs. With business from the NOC increasing from 50 percent to make up 85 percent of Taylors’ client portfolio,

The brand is on a solid footing with US company Fieldwood,

PEMEX’s success is integral to Taylors. Flores is optimistic

which won the Pokoch and Ichalkil blocks in Round 1.2.

about the company’s future as a service provider for the

Since the blocks are located just off the coast of Ciudad

transitioning enterprise. “If PEMEX bases its decisions on

del Carmen, where Taylors’ Mexican headquarters are

performance quality and contract fulfillment, there is not a

located, Flores hopes the launch of Fieldwood’s operations

doubt in my mind that Taylors will continue working with

generates new business for his firm.

it,” he says. Indeed the new players entering Mexico’s oil and gas Taylors is the Mexican unit of global life support services

market are a source of potential clients for Taylors Mexico

company Taylors International Services, Inc, which was

and the company’s service advantages are not limited to

founded in 1996 and is active in the land and offshore oil

nutritious food at low costs. “When a company understands

and gas industry. The Lafayette-based firm also does work

what it means to have happy employees, efficiency and

in the defense arena and for the government.

productivity increases,” Flores says. Satisfied workers carry out a better job and Flores sees his end clients’ happiness

Flores puts the company’s success down to its focus on

as a top priority. “Employees work to a higher standard

offering the highest quality customer care, a core aspect

because they are looked after and they see that they are

of the Taylors philosophy. As well as constantly being

valued by the company,” he says. A motivated and healthy

attentive to clients, Taylors continually improves its service

workforce is critical in an industry that is demanding more

by gathering feedback through surveys. “We survey at three

efficiency at lower costs.

183

VIEW FROM THE TOP

REMOTE LOCATIONS REQUIRE UNIQUE SOLUTIONS ANDREW AUNS Vice President and General Manager Central US and Mexico of Williams Scotsman

Q: What makes modular solutions more attractive than

quicker to install and uninstall but also are less intrusive on

traditional options?

the environment.

A: Modular solutions are still relatively new in Mexico but 184

more companies are embracing them because construction

Q: How can these products impact a workforce’s

timelines are short and penalties for infringing them are stiff.

productivity?

We also are always developing newer products such as our

A: What we have seen typically in Mexico is that the project’s

ASFlex line, which was developed in Europe and consists of

employees stay in hotels, rental houses in nearby towns

20 steel panelized boxes. These can be used for buildings

or even outside the project’s geographical scope. This is

up to three levels high.

why our purpose is to create safe, comfortable and quality space solutions that give companies the opportunity to

Q: What challenges have you identified in the oil and gas

improve the efficiency and productivity of their workforce.

sector that could be addressed with modular systems?

We keep the needs of our customers in mind so we work

A: The remoteness of the locations is the biggest challenge.

together to get the best solution on time and on budget.

Some of the energy projects we have been working on still

We absolutely believe that having workers in one place

need infrastructure built off the main highways to get to

where they are safe, feel well-rested and can avoid long

the construction site. We have had some wind farms where

commutes, improves their usual activities considerably,

part of the scope of the project was to build a road to get

resulting in the successful completion of the project.

to the site. Williams Scotsman’s advantage is that it has different types of products, some of our lines are highly

Q: How do you adapt your products to the different

versatile and can get to hard places.

conditions found in the country? A: Our solutions come 100 percent pre-manufactured, a

Q: What added value does Williams Scotsman offer the

bit of installation work is required onsite but that is the

industry?

extent of the labor needed. Everything comes pre-wired,

A: Our solutions are 100 percent temporary. We build them

pre-installed and air-conditioned. We can handle hot and

to comply with the highest US building codes so they last

cold weather. We have used the product across the country

a long time. We can bring in a new work camp in a third of

and tested it against the variety of weather conditions that

the time it would take a regular site to be built and when

exist in Mexico, from the south where it is typically wet and

we leave there is no sign of the work camp’s existence. This

humid, to the north where it is typically dry and hot. We

is because we do not need to create cement foundations.

are experienced enough to handle any climate in Mexico.

All we need is compact earth and a clear space to put it in place, so it is environmentally non-intrusive. The semi-

Q: How do you ensure your products comply with local

permanent solutions typically used in Mexico require

construction standards?

a concrete path and the installation of panels. When a

A: Typically, the requirements for modular solutions are

project is completed the company either has to uninstall

much less severe than for regular buildings worldwide.

the solution, which increases the budget, or leave it onsite,

The industry is not as heavily regulated in Mexico as it is

which hurts the environment. Our solutions are not only

in other parts of the world such as the US but we use US building codes to ensure our products are top quality, which separates us from the competition. Safety and quality of the

Williams Scotsman, a Baltimore-based company, offers

product matter to Williams Scotsman. With us, customers

modular space solutions, a convenient and cost effective

know exactly what they are getting regarding electrical

solution for temporary infrastructure needs such as housing

and installation standards. We build to codes that we know

and offices for building sites.

work, are safe and last for a long time.

INSIGHT

ONLY THE BEST SURVIVE A CRISIS DIEGO AGUILAR Managing Director of McQuilling Mexico

With Round One successfully completed and gas

farm-outs, Aguilar says. “In the case of the Trion block, which

liberalization being rolled out, the Energy Reform seems to

PEMEX will operate with BHP Billiton, there is a lack of port

be ticking along nicely. But that ticking could in fact be the

infrastructure to serve activity there,” he adds.

sound of a time bomb about to go off as companies face

185

the challenge of a serious oil and gas infrastructure deficit,

The Matamoros port intended for offshore oil projects is

says Diego Aguilar, Country Manager for Mexico of global

still under construction and the Altamira port, which will be

marine services company McQuilling Partners.

used as an alternative, is 208km further away, he says. “It is not the operator’s responsibility to develop the necessary

Mexico’s representative for the New York-based company

infrastructure to support its operations,” Aguilar says.

warns the problem stretches from upstream to downstream

“Instead new entrants will focus on what they are good at:

but also says that McQuilling’s many years of providing

exploration, drilling and extraction.”

the Mexican oil and gas industry with transportation and ship-brokering services positions it well to assist incoming

One solution to the lack of infrastructure for deepwater

companies.

players could be Floating Production, Storage and Offloading (FPSO) solutions, where according to Aguilar,

Looking downstream to the opening gasoline market,

Mexico is already ahead of the game. He highlights PEMEX’s

Aguilar envisages logistical roadblocks for Mexico’s future

Ta’Kuntah floating storage tanker used in the Cantarell field

distributors. “Currently only PEMEX moves fuel through

as its best offshore investment, given that it moved 2 billion

tankers and different storage facilities but with the

barrels of oil during its active period. Floating storage is a

liberalization of the fuel market, this will all change very

trend across the oil and gas maritime sector and Aguilar

quickly,” he says. The demand for tankers will therefore rise

believes it is the future of the industry. “Mexico will have

and it is here where McQuilling, which has a wide continental

10 to 12 FPSOs in the next decade,” he projects. “The

presence spanning New York, Houston, Caracas, Mexico

companies that won blocks in the deepwater round will

City, Lima and Rio, sees many opportunities to lend its

also be using these facilities.”

services to companies taking advantage of Mexico’s newly liberalized gas prices. “We are already the largest tanker

McQuilling already boasts experience working with PEMEX

broker in the world and work with the biggest players in

on a floating storage project for the Ayatsil area but the

the global market,” Aguilar says. With over 35 years of

project was interrupted by the industry downturn, which

experience working with PEMEX, he adds, the company

resulted in a crisis for the NOC. Due to PEMEX’s previous

brings crucial local expertise to the table in the new oil

monopoly in Mexico, this crisis extended to much of

and gas landscape. “Although (the reform) took longer to

the value chain. Despite the difficulties, Aguilar remains

happen than we anticipated, we used the time to really get

positive, saying the crisis served to clear out inefficient

to know the Mexican oil and gas industry.”

companies. “Now only the best players remain, making the whole market more competitive,” he says.

PEMEX currently operates a fleet of 31 tankers via its PEMEX Logística unit as well as an extensive pipeline and storage

To survive the offshore activity slowdown, McQuilling, which

infrastructure it put at the market’s disposal at the beginning

first set up shop in Mexico eight years ago, focused on

of 2017 via an Open Season, an additional factor that alleviates

midstream storage and distribution activity because this

the lack of tanker and storage access in the country. But the

is not dependent on oil prices but on simple supply and

infrastructure deficit extends beyond the downstream sector

demand, Aguilar says. “We see many opportunities and new

to upstream and will especially affect the new operators

players in this market, so we anticipate having a lot of new

entering the market through deepwater bidding rounds and

clients in Mexico,” he adds.

VIEW FROM THE TOP

SUBSEA ADVANTAGES OUTSHINE TOP-SIDE STRUCTURES JAIME ZUBILLAGA Managing Director of MAN Diesel & Turbo Mexico

Q: What opportunities does MAN Diesel & Turbo expect

expansion, we worked with the NOC to help modernize

with the arrival of international players in deepwater?

its facilities. That affords us a unique and valuable insight

A: We will get involved when the companies responsible

into what the refineries need to improve operational

for confirming reserves develop and go deeper into the

efficiency.

187

engineering phase. At the end of the day it depends on which technology these companies implement at

Q: What advantages do you have over the international

each field. Some companies might decide to use water

players that might partner with PEMEX?

injection, for example, a service MAN Diesel & Turbo does

A: We have not only dealt directly with the company

not provide. We use natural gas injection and similar

PEMEX Industrial Transformation but also with other

technologies such as nitrogen and CO2 injection.

subsidiaries such as PEMEX Logística, which focuses on transporting oil products from Mexico’s Gulf and Pacific

MAN Diesel & Turbo has developed innovative solutions

coasts. We hold an important service and maintenance

that involve putting gas compression equipment on the

contract for the main and auxiliary engines of PEMEX’s

seabed rather than on conventional upstream structures

fleet of oil tankers, which includes 16 vessels. MAN Diesel

such as platforms or Floating Production, Storage and

& Turbo’s advantage in Mexico is its local and well-trained

Offloading (FPSO). This pioneering technology is in

manpower. We do not have production plants here in

use in the North Sea by Statoil, which has the world's

Mexico but we have locally trained people who provide our

first subsea turbocompressor in operation at a depth

clients with savings and high-quality service. One of our

of around 300m at the Asgard field, where we have

global objectives is to be customer-centric, ensuring we

two high-speed, oil-free integrated motor compressors

are close and available to our clients to meet their needs.

(HOFIM) supplied to Statoil contractor Aker Solutions. Q: What unique services does MAN Diesel & Turbo offer Q: What are the benefits of MAN Diesel & Turbo’s subsea

and how will you diversify?

technology?

A: Natural gas is gaining a foothold in new areas. MAN

A: Placing apparatus on the seabed compared to

Diesel & Turbo is looking for leads in the energy sector

conventional upstream facilities not only saves

in Mexico, particularly, in the field of natural gas engines

investment costs but also raises recovery rates while

for power generation. We can replace a plant’s typical

reducing energy consumption and CO2 emissions for oil

gas turbine-based units with gas engines, which offer the

and gas production. When compared to regular top-side

advantages of splitting the total power generated into

platforms, the subsea system will demand less in terms of

several smaller units. This increases a plant’s availability.

weight with no space requirements for the compressor

There is also no deterioration in performance due to

equipment. We offer remotely controlled, encapsulated

altitude, whereas gas turbines lose power as altitude

and emissions-free HOFIM compressors that meet all

increases. Our engines also considerably reduce the time

the conditions for a maintenance-free operation on the

required to produce full power, which can be available in

seabed.

less than one minute. This would take several hours with a gas turbine.

Q: What opportunities will PEMEX’s search for a new partner to reconfigure its refineries create? A: This will definitely create opportunities for our

MAN Diesel & Turbo is the world’s leader in design and

company because MAN Diesel & Turbo has experience

manufacturing

working in every single one of PEMEX’s six refineries.

transportation and industrial applications, such as power

Whether it was on rehabilitation, reconfiguration or

plants and gas-injection turbocompressors

low

and

medium-speed

engines

for

VIEW FROM THE TOP

DEEPWATER GOES DIGITAL GERARDO FLORES Strategic Account Manager for PEMEX of ABB

188

Q: What role will digitalization play in the development of

A: Despite its financing problems, PEMEX has made good

Mexico’s new deepwater sector?

progress on cultural change. One of its main changes is

A: It will play a very important role. Since the segment

to focus on core businesses instead of doing everything.

is almost starting from ground zero there is an excellent

Adopting international best practices will also reduce the

opportunity to adopt digitalization strategies from day one.

cost of projects and extend the lifespan of its assets.

ABB’s Collaborative Operations, Intelligent Infrastructure, Engineering, Services and Applications is our core platform

Q: How do the technologies offered by ABB help oil and

for digitalization. ABB uses digitalization and analytics

gas companies increase efficiency and reduce costs?

to provide expert guidance, actionable information and

A: With intelligent services and cloud platform services we

process enhancement.

provide a common cloud solution, based on Azure, that combines ABB, Microsoft and third-party components for

Q: How can ABB help PEMEX with its transformation into

advanced collaboration and digital services. These reduce

a competitive deepwater player?

costs because there is no need for unnecessary hardware.

A: We have had talks with PEMEX in the past regarding

We can also contribute to increased safety and enhanced

deepwater. PEMEX now has partners for its Trion farm-out

operations through various services and applications such as

(BHP Billiton) and Area 3 of Perdido (Chevron and INPEX),

our online simulators, alarm management, loop performance

thus PEMEX will work out decisions to successfully develop

monitor and our cybersecurity system, for example.

these fields with its new partners. ABB has an extensive offering for deepwater solutions so hopefully we will take

Q: How do ABB’s digital solutions help transform

part in these new projects.

information into knowledge to improve operations? A: Automating production requires processing large

Q: How will ABB adapt its strategy to match the needs of

amounts of data and the volume of data processing

private companies after years of working with PEMEX?

increases with the complexity of the production processes.

A: Our portfolio is suited for process applications and oil

As production advances, variables combine to diminish

and gas solutions that fit both IOCs and NOCs. As a global

productivity. Finding the causes of inefficiency is a

company, we do business with IOCs all over the world and

challenge. ABB Advanced Services identifies sources of

we have strong engineering and execution capabilities

issues that inhibit peak performance in equipment and

locally. PEMEX’s strategy was set to move ahead mainly in

processes and provides recommendations to resolve

associations, therefore we expect to have a good balance

issues quickly and systematically. Recommendations are

between private clients and PEMEX. There is no question

prioritized based on actions that deliver the greatest

that our High Voltage Direct Current (HVDC) is a practical

economic return.

solution for powering shallow-water installations but time will tell if it is needed for future offshore field development.

Q: What does integrated digitalization mean and how could this be implemented in Mexico?

Q: What challenges must PEMEX overcome in financing and

A: Many companies are talking about integrated digitalization,

culture to implement the latest automation technologies?

a term that already has too many meanings. At ABB we do more than connecting products and merging processes. We make people the priority. This is what sets us apart from

ABB works on the future of industrial digitalization. For more

other companies. We start with data and analytics – placing

than four decades it has been innovating to digitally enable

information into the hands of people who can act on it.

industrial equipment and systems. ABB operates in over 100

Furthermore, we offer the consultative expertise to put that

countries and employs around 132,000 people

information into the best practice possible.

VIEW FROM THE TOP

BIG DATA TO OPTIMIZE OPERATIONAL TIMINGS CARLOS PALAVICINI General Manager Mexico of Petrolink

Q: How has Petrolink evolved its offering over the last

Q: How will you communicate these values to the new

few years?

players entering the market?

A: Petrolink started operations in 2004 but our first contract

A: Some of the companies that are coming to Mexico are

in Mexico was granted in 2006. We have overcome many

already our clients. My colleagues in Houston have been

milestones during these 10 years but in the last five we have

helping us to reach out to them. However, there are many

positioned ourselves as PEMEX’s main provider for real-

new players, particularly small Mexican companies, that

time services. This achievement is related to the fact that

will be in onshore or service companies that are becoming

we introduced PEMEX to some of the best practices that

operators. We also are working to support them. There are

we have implemented in other locations such as the Middle

also companies that won blocks in regions that we have

East or the US. We provided PEMEX with a mechanism that

already worked on so we can provide them with information

allowed real control of the data from wells that were being

about that particular well and help them tackle any issues.

drilled. This allowed PEMEX to control the data, even though

We are going after the companies to which we can provide

most of it is generated by third parties.

high value. This requires us to think outside the box because we have been working for PEMEX exclusively for almost

Q: How do Petrolink’s data systems help companies

10 years. Petrolink now has a separate team exclusively

increase the efficiency and cost effectiveness of their wells?

handling new opportunities.

A: The main issue in the industry right now is control of operational costs. When oil was at US$100/b nobody cared

Q: What are the company’s expectations for the next

if their operations were efficient or not. But when the price

few years?

dropped below US$30/b everyone started looking at things

A: For PEMEX we are the reference for real-time services,

differently. Companies have been forced to become more

not necessarily the biggest provider. We promote the use

aware of their costs and are investing in technological

of standards that were not developed by Petrolink because

solutions that represent savings or an increase in production

they help our clients to be independent. It does not matter

rates. Our solutions do not increase production levels but

if the data used is from Schlumberger and the software

we help our clients reduce operational times and costs. If

from Halliburton as long as the data is standardized.

we save our customer one day of well operations at a cost

This is one of the main values we managed to include in

of US$500,000 per day, that client will pay for our services

PEMEX’s operations. The NOC released the first policy on

for two or three years.

data collection in 2015 and it states that all data has to be standardized. This opens the market for companies like

Q: How do the needs of clients and needs related to

ours because operators do not have to stick to the same

business strategy drive R&D?

provider. It offers more competition and more power to the

A: Petrolink is a company whose executives are involved

oil company. This year, we started working with PEMEX on

in the operations and are always open to new ideas.

a concept it created called PEMEX Operational Excellence

We focus on our clients’ needs worldwide, which shape

Center, which works with our technology and management

Petrolink’s operational strategy. Operators like PEMEX and

tools. PEMEX chose us because we are a neutral company

Saudi Aramco have a great influence on our development

and it knows it can use our standards.

strategy. We listen to our clients and we are not necessarily thinking what we can sell to them but what can we do for them. We are aware that sometimes we miss out

Petrolink is an independent and global data solutions

on projects because there are budget constraints or

company that allows companies to aggregate, integrate,

the operations were suspended, but we tend to have

analyze, store and distribute well data for drilling optimization

longstanding relationships with clients.

and analytics

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VIEW FROM THE TOP

SHUTTLING THE INDUSTRY FROM A TO B JOSÉ ZEPEDA Operations Manager of Transportes Aéreos Pegaso

190

Q: What are Pegaso’s specifics in terms of air bases,

A: Most of our staff are ex-military or ex-marine pilots with

capacity and aircraft?

extensive training. Some of them instruct the remaining

A: Pegaso is a Mexican helicopter company. We recently

team members on the new standards, regulations and

diversified from solely operating in the oil city of Ciudad del

required training, which is then incorporated into their

Carmen to include Villahermosa, Dos Bocas and Matamoros.

everyday tasks. We have a training program for new

We are in a position to cover other locations in the Gulf of

pilots with three levels of expertise, each comprised of

Mexico, which we are still analyzing, particularly in the northern

250 flight hours, including the operation of the newest

portion of the Gulf. Our current northern locations supply

aircraft technologies. For instance, the pilots operating

deepwater projects while our southern locations supply both

the new EC175 model have a minimum of 6,000 hours

deepwater and shallow-water projects. Our southern projects

of experience with our company. Pegaso also has a risk-

require small to medium-sized helicopters, while our northern

management program to further improve the performance

projects necessitate medium to heavy aircraft. The passenger

of our pilots.

capability of Pegaso’s fleet ranges from six to 16 passengers and our models include Airbus Helicopters EC135, EC145,

Q: What are the main concerns from oil and gas clients and

EC155 and the new H175. We choose our aircraft models in line

how does Pegaso address these?

with the new rules outlined by the International Association

A: Those are usually related to incident or accident

of Oil and Gas Producers (IOGP).

statistics and probability. A fundamental component for any helicopter or aviation company is its risk-mitigation

Q: What kind of aircraft demand are you seeing at each

strategy. Pegaso is proud to have accumulated 140,000

location and what influences that?

flight hours without incident. Our last accident was in 2003.

A: We have eight helicopters in Ciudad del Carmen, two

Our success is largely due to the reliability of our Airbus

helicopters in Dos Bocas, two helicopters in Villahermosa

fleet, with smooth motors, fast engines and an important

and four helicopters in Matamoros. Our onshore business in

comfort factor.

Toluca has been active with corporate flights, provided by two helicopters. At the moment, our entire company fleet

Q: What factors influence the makeup of Pegaso’s fleet?

comprises 26 helicopters but this year we are operating

A: We have been operating these models for a long time.

only 20. Our fleet size provides an important comparative

When we first obtained them, we did so under a lease

advantage because we can offer each client two aircraft,

because we decided it was too early to integrate them

one main aircraft and a backup. Of the remaining six

into our portfolio. Today, demand is changing, the market

helicopters, some models are rotating through our

is evolving, especially in deepwaters, and I think the new

maintenance cycle while others are stored at our hangars

aircraft that are now being developed will eventually be in

in Ciudad del Carmen. These stored aircraft help us respond

high demand. The new Airbus helicopter is the AC160, for

quickly to unanticipated requests from our customers.

example, which will debut in 2019. We are excited about its eventual potential but right now we feel it is too early to

Q: What is your strategy to ensure the best pilots are flying

incorporate it into our portfolio since the aircraft is still in

with Pegaso?

development. We are not opposed to the idea of integrating this model in our fleet in the coming years but it is not our primary concern at the moment. Also, integrating a new

Pegaso has offered executive air transport service since 1981.

model into a fleet takes between 18 to 24 months, so any

In 1983, it won its first PEMEX contract to shuttle passengers

decision we make today will not come to fruition until that

and cargo to platforms on the Gulf of Mexico. It has completed

time. Our fleet strategy must be adapted to the evolution

more than 1.1 million flight operations

of the oil market and its inherent risk factors.

INSIGHT

CRISIS OR OPPORTUNITY? HUMBERTO LOBO Director General of ASESA

What some call a crisis, others call an opportunity as hard

Reform will likely bring a positive change to the market.

times separate the passionate companies from the rest.

With more players coming to the country, an increase in

When oil prices began their plunge in 2014, helicopter

helicopter operations will follow suit. Nevertheless, these

services were among the hardest hit. Lower oil prices

new international companies will also have high standards

mean companies are willing to take fewer risks. That leads

that only the best service providers will be able to meet.

to fewer operations and ultimately lands at the door of

Helicopter service providers will have to acquire training

the helicopter segment in the form of reduced demand

and certifications from international third parties. But

for services like personnel transport, aerial supervision or

resilience will also be extremely important as a more

offshore operations.

diverse range of companies will also mean a wider range of operations and expectations.

One key to survival, and eventual success, is adaptability, says Humberto Lobo, Director General of helicopter services

In this regard, Lobo sees ASESA having a strong tactical

company ASESA. Ensuring competitive advantages against

advantage against its competitors. “We always try to

other service providers will help guarantee prosperity in

accommodate our client’s individual needs because every

leaner times. “2016 was a difficult year for helicopter service

client is different. This strategy has allowed us to generate

providers, forcing players in the industry to become better,”

many returning clients who like our services, quality

says Lobo. “During this period ASESA focused on improving

and personnel. Over 90 percent of our clients are return

itself by becoming more cost-effective and enhancing its

customers. Some of them, such as PEMEX and CFE, have

productivity by improving processes and services.”

been with us for many years.”

The helicopter executive says passion also plays a part. “ASESA is always analyzing new ways to renew itself and stay at the front of the pack. What differentiates us from the competition is our passion toward the sector. This year ASESA turns 40 thanks to its excellent services. ASESA is a well-known name in the sector. We have trained about 95

95 percent of helicopter pilots in Mexico were trained by ASESA

percent of helicopter pilots in Mexico.” Diversification is one of the solutions that helicopter

With a large fleet of helicopters, ASESA wants to be ready

service providers can work on until activity in the oil and

for job that may arise. As Lobo points out, “there is a

gas sectors resumes because focusing solely on a market

specific helicopter for each specific mission. At this point

that is going through hard times and is not expecting a

our fleet includes the Bell Helicopter 407, 429 and 412 and

strong recovery in the near future could spell disaster.

AgustaWestland AW139, which we incorporated in 2016.

Serving other companies with its expertise in repairs and

This helicopter has a longer range and provides unique

maintenance has helped ASESA support itself during the

capabilities to offshore clients.”

lean times. But even then, it is not safe to stick to single markets. “We are exploring other attractive business

Despite the difficult business times, the company

opportunities,” Lobo says.

is looking at expanding its fleet. “We are analyzing a fleet expansion and expect to acquire new aircraft in

Even though the industry is not expecting a quick rebound

the next 18 to 26 months. We work very hard to be at

in oil prices – in New York in early May, the price of a

the forefront of our customer’s minds by focusing on

barrel hovered around US$50 – in Mexico the Energy

providing excellent services.”

191

PEMEX platform, Campeche Bay, PEMEX

NATIONAL CHAMPIONS

Local requirements to support national content and companies have yet to deliver the expected creation of a dynamic domestic industry. Although the market will continue to grow, it remains a challenge for local players to seize the new opportunities and solidify a true national oil and gas sector. Despite the hurdles, a number of success stories have emerged. These companies are setting the stage for what will come, partnering with international firms to win upstream auctions, delving into the natural gas market and developing petrochemical projects.

2016 brought to light the ability and willingness of local entrepreneurs and national champions to go toe to toe against some of the worldâ&#x20AC;&#x2122;s biggest industry names. In the following pages we hear directly from Mexicoâ&#x20AC;&#x2122;s national oil and gas champions and their effect on the industry.

193

CHAPTER 8: NATIONAL CHAMPIONS 196

ANALYSIS: National Champions Emerge From Energy Reform

197

VIEW FROM THE TOP: Luis Vázquez, Grupo Diavaz

198

VIEW FROM THE TOP: Néstor Martínez, CNH

200

VIEW FROM THE TOP: Carlos Morales, PetroBAL

201

VIEW FROM THE TOP: Juan Vega, Naviera Integral

203

PROFILE: Local Partner of Choice, Cotemar

204

VIEW FROM THE TOP: Mauricio Mondragón, PPG Comex

Guillermo Peña, PPG Comex

205

VIEW FROM THE TOP: Abraham Zepeda, Grupo Hosto

206

VIEW FROM THE TOP: Emmanuel Montaño, Consorcio Emcro

207

SPOTLIGHT: EMCRO Gains Stricter Certification for Mud Skips

208

ROUNDTABLE: What Hurdles Do Operators Face When Adhering to Local Content Rules?

210

INSIGHT: Alejandro Hernández, CSIPA

211

VIEW FROM THE TOP: Rubén Benítez, Integra Marine Services

212

VIEW FROM THE TOP: Ricardo Arce, Perforadora México (PEMSA)

213

INSIGHT: Camilo Kuri, Vallen Proveedora Industrial

214

VIEW FROM THE TOP: Raúl Alonso, América En Triunfo

216

VIEW FROM THE TOP: Daniel Zuluaga, Tiger Engineering

Remigio Delfin, Tiger Engineering

217

VIEW FROM THE TOP: Gerardo Tamayo, Sumimsa

218

VIEW FROM THE TOP: Vicente Cabeiro, Hasue de México

Carlos González, Hasue de México

220

VIEW FROM THE TOP: Manuel Mariscal, O&L Offshore

221

VIEW FROM THE TOP: Gerardo Sánchez, Naviera Bourbon Tamaulipas

195

ANALYSIS

NATIONAL CHAMPIONS EMERGE FROM ENERGY REFORM Mexico's oil and gas industry is entering a new era wherein new

It is not just companies that are transferring

international players are flocking to reap the rewards of the

their past experience to new, upstream

couuntry's promising reserves and resources. But Mexico's own

ventures but also individuals. Carlos Morales,

homegrown titans must not be overlooked, or underestimated

Director General of PetroBAL, resigned after almost 40 years working for PEMEX, of which

196

International players are not the only ones champing at

the last nine were spent running its upstream division. After

the bit as the Energy Reform unfolds. The new playing

a mandatory one-year absence from the Mexican oil and

field paves the way for national companies to join the race

gas industry, he became the Director General of Grupo

and seize opportunities never before available to them.

BAL's new E&P company PetroBAL in February 2015. In

From domestic suppliers and service providers becoming

partnership with Fieldwood, PetroBAL moved fast to win

operators after bidding successfully in licensing rounds, to

contractual area four in shallow-water Round 1.2 during the

private companies branching into the downstream gasoline

same year. To staff the new venture, Morales looked to local

market as prices and brand participation are liberalized,

talent to fill entry level, mid and senior positions.

examples of Mexican success stories made possible by the reform are starting to emerge.

“To find the experienced professionals, I interviewed PEMEX employees and retirees,” he says, hinting at the abundance

Sierra Oil & Gas’s entry into the market stands outs. Proudly

of talent to be found among the NOC’s veterans.

wearing the badge of Mexico’s first independent oil and gas company, Sierra won blocks two and seven during Mexico’s

Supply and service companies with experience in the

first-ever licensing round in July 2015 in consortium with

country will be vital not only for the wealth of knowledge

Talos Energy and Premier Oil. Last December, the company

they afford but also for new operators bound by CNH

also became the first private Mexican company to win a

contracts to comply with local content rules. How the

deepwater block, the fourth Salina Basin contractual area

rules will be enforced is not yet apparent. "We have doubts

in Round 1.4. Complementing its groundbreaking activity

about how the government will actually measure the local

in upstream, Sierra is also taking advantage of midstream

content in a given project,” says Luis Vázquez, Founder of

opportunities, teaming up with TransCanada and TMM for

Grupo Diavaz. “Given that the majority of Diavaz’s services

a refined products project that includes the construction

are completed in alliance with international firms it will be

of a marine terminal in Tuxpan, with 265km of pipeline

difficult to quantify how much of a job has been done by

and an inland storage and distribution hub. “Sierra wants

Mexicans.” Standing out as an example of a Mexican firm

to become the first independent Mexican company to

diversifying into upstream, Grupo Diavaz was founded in

participate in the complete oil and gas value chain, to

1973 with the objective of providing services to the offshore

become a local energy champion able to attract investment

oil and gas industry and won two blocks in onshore Round

and develop projects that will benefit the country,” says Iván

1.3 to become an upstream operator.

Sandrea, CEO of Sierra Oil & Gas. “Noncompliance triggers the payment of the missing Sierra Oil & Gas’ desire to sew roots in all areas of the

percentage in local content,” explains Nestor Martinez,

oil and gas panorama is echoed by Grupo IDESA. With

Commissioner at CNH. “In the end, CNH and the operators

a history spanning 61 years, the Mexican group boasts

are partners: they take special care in complying with

activities ranging from petrochemicals to midstream

all our provisions, just as we are diligent in making sure

storage and distribution. Now, through its alliance with

they comply.”

Canadian International Frontier Resources, it is operating the Tecolutla onshore block that it won in Round 1.3 under

As a new era rises over the oil and gas industry,

the name Tonalli Energia. “Grupo IDESA has 60 years of

challenges lie ahead and questions remain. Among the

experience but our human capital is our main asset,” says

main sticking points, the Mexican players ready and

José Uriegas, the group’s CEO. Notable for the partnerships

willing to take advantage of the opening landscape, and

with international firms that led to its upstream win and

the international operators who will work alongside them,

the US$5 billion Braskem-IDESA project, IDESA’s CEO says

still wonder how the rules will be assessed and enforced.

that international companies are looking for “a partner that

Three years after the Energy Reform was approved, the

already has serious foundations in the country.”

race is just beginning.

VIEW FROM THE TOP

EXPERIENCE, KNOWLEDGE AND ADHERENCE TO STANDARDS LUIS VÁZQUEZ Chairman of the Board for Grupo Diavaz

Q: What new skills must Diavaz develop to succeed in the

the Ministry of Finance. When the reform was implemented

new-look market?

the authorities decided to pass PEMEX’s labor liabilities to the

A: Diavaz needs to transmit the message to new foreign

Ministry of Finance but this has not happened.

companies that we have the experience and knowledge garnered over many years in the Mexican oil and gas industry.

Q: What political incentives should be considered in the

The first step toward this is a contract we are signing with

oil and gas industry?

a Canadian company to begin working with them as if we

A: The government is not giving any indication that it will

were PEMEX. We have to comply with safety standards, an

take more action in the oil and gas industry before the 2018

aspect that has not always applied in Mexico. A pertinent

election, raising the possibility that PEMEX’s situation will

example is the pollution that used to be caused by oil and gas

worsen in the next year. In recent years PEMEX had its belt

operations in Mexico. Tampico, Ebano and Villahermosa were

tightened considerably and many projects were cancelled.

heavily polluted in the past because PEMEX was only loosely

Unfortunately not much has changed since it got new

bound to comply with weak and rarely enforced policies and

leadership. PEMEX officials urgently need to sit down and

laws. Now that things have changed, Mexican companies must

work out how the company will continue its production

comply with standards set out by the industry’s regulatory

levels of 2 million b/d without maintenance budgets. It is

bodies. Meeting those requirements allowed PEMEX to

not the current government’s fault, instead the problem lies

partner with Australian company BHP Billiton because it sees

with Mexico’s political system itself.

that the NOC adheres to international standards. Similarly, the Canadian operators Diavaz is partnering with supervise

In the face of PEMEX’s worsening financial and production

us to ensure we are complying with all ASEA’s requirements.

outlook, the key for large service providers like Diavaz is to search for new clients entering the market. In five years

Q: How can Diavaz contribute to Mexico’s new rules for

Diavaz’s goal is to have 70 to 80 percent of its portfolio

local content?

dedicated to PEMEX, with the rest focused on the private

A: Being a Mexican company Diavaz will always help

sector. Diavaz will continue working in the same way and

meet local content quotas. We have doubts about how

investing in the sector, although PEMEX owes us an incredible

the government will actually measure the involvement of

amount of money.

local workers on a given project. Given that the majority of Diavaz’s services are completed in alliance with international

Q: What are Diavaz’s three objectives for the year to come?

firms, it will be difficult to quantify how much of a job has

A: Our first priority is to finalize the separation between

been done by Mexicans. Mexican companies should demand

Diavaz and DEP and have one president for each company.

that local content be measured well, but not before they

Secondly, we are focusing on partnering with a foreign firm

are fully trained and accredited.

to bid on the licensing rounds. Lastly, we would like to finish migrating the four CIEPs and COPFs we hold with PEMEX.

Q: If you could share three priorities with the ministry of

There is a lot of uncertainty about how the Mexican oil and

Energy, what would they be?

gas industry is going to develop, but we believe Diavaz is well

A: The first priority would be to complete the contract

positioned to take advantage of the opportunities.

migrations so that Mexico’s private oil and gas sector can start competing properly. The second would be to improve planning. Most importantly, the Ministry of Energy should prioritize

Diavaz is a 100 percent Mexican oil and gas services provider,

strengthening PEMEX financially and organizationally. The

covering areas from engineering and well design to directional

best way to strengthen PEMEX is to leave it alone and grant

drilling and field profiling, as well as off-shore platform

it independence rather than having so much involvement from

maintenance, among others

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VIEW FROM THE TOP

IMPLEMENTING A NATIONAL SYSTEM OF ECONOMICAL VALUE CREATION NÉSTOR MARTÍNEZ Commissioner at CNH

198

Q: How much progress has been made toward the reform’s

in line with what the market dictates to obtain the best people,

long-term objectives?

while the state is constrained by salary provisions, inhibiting

A: Numerous operators have entered the reformed national

competition with operators in terms of personnel. Changes

oil industry. They are analyzing the specificities of the oil

in this regard need to be made. PEMEX already stepped in

fields to engineer exploitation plans. Once the exploitation

with regulatory modifications to allow differentiated salaries

plan is operational, we will get the tangible version of the

but the state at all levels does not allow this. We need to

expected benefits, primarily through variables like increased

move toward what I call a National System of Economical

employment and investment in Mexico. This process gives us

Value Creation, similar to the academic National System of

time as a country to mobilize the possibilities of the industry.

Researchers that provides an additional salary to researchers

Universities and academic institutions will be major players

in academia to be internationally competitive. The approach

as they train the industry experts operators need to maximize

is the same. This new system would endorse state employees

the industry’s value.

that add value through their work to gain additional monetary gain and compete with the salaries of the private sphere.

Regulations support this by requiring 25 percent national content, which eventually will rise to 35 percent. CNH

Q: What will be the role of the different generations in the

projects the industry will develop in such a way that the

development of the industry?

national content percentage will increase far beyond these

A: I do not see these divisions. In my previous experience,

numbers. Our research has been focused on the operators’

I have noticed young people who had better professional

particular needs, primarily related to oil well operations

competence than older people. Seniority does not necessarily

and surface hydrocarbon production as revealed in their

mean quality. These young people exhibit better performance

engineering development plans. These plans give us a clear

than those in the 50 to 60-year range. The opposite is also

understanding of what they will require over time. From

true, with some unqualified young people surpassed by highly

a business perspective, services need to be competitive

competent senior professionals. Our goal is not centered on

compared to those available from abroad.

managing generational gaps but, rather, to oversee working groups integrated by both experienced and inexperienced

A key element is human capital. The Ministry of Energy

people so that expertise spills across the group. There should

regularly publishes statistics about the number of people a

also be a platform for new entrants to propose new ideas and

particular project may require based on certain premises,

changing paradigms.

which include tangible oil resources available in exploration areas, a development level that allows stable hydrocarbon

This is how I frame my proposed National System of

prices and the possibility of increasing oil reserves. Beyond

Economical Value Creation: creating additional benefits

the quantity of human resources, quality is critical. The issue

together with a tutoring obligation. Generational gaps cannot

can be divided into two main axes: personnel required by

be managed as independent receptacles. Everything has

operators and the trained professionals the government

to be integrated within this human resource organization

needs. The government and operators are partners in this

where everyone can and must share ideas and knowledge.

business so both sides need high-quality staff. Operators are

This organization has to maintain an open system, without feeling that ideas and tutoring must be done because of the boss’ orders. This is CNH’s differentiating factor compared to

The National Hydrocarbons Commission (CNH) was set up as

other public institutions.

a result of the Energy Reform. Its duties include the handling, regulation and oversight of the oil and gas bidding rounds in

Q: How should the private sector participate in preparing

Mexico

future professionals?

A: The private sector must prepare to satisfy the operators’

A: We have direct contact with the Ministry of Economy,

needs. It should examine how to do business with the operators

although we are the ones managing contracts. Part of

while being competitive against the products and services

what the contract stipulates is this 25 percent local content

offered abroad. Private companies play a fundamental role

initial provision that will eventually increase to 35 percent.

because they have the economic resources and knowledge

We only verify the provision is duly outlined. The Ministry

to enhance the industry’s value. Some can close partnerships

of Economy oversees the details, such as invoices or any

with foreign companies to bring service manufacturing to

other data operators provide to satisfy the ministry’s internal

Mexico. The oil industry generates a considerable value but

requirements to comply with local content. CNH wants a

everything surrounding the oil industry represents an even

more proactive role in this process. We want to go further in

greater value for the country. Who will generate all this

our attributes, beyond assessing operators in future market

value outside the oil industry? The private sphere. There is a

requirements and confirming the Mexican component of the

continuous effort from private players to determine ways to

operators’ staff.

invest to guarantee their business an acceptable success rate. Many private individuals are eager to enter but the picture

Q: What actions do you take when an operator does not

is not clear for them yet. The government can help through

meet local content requirements?

what CNH is doing for future business.

A: We work to anticipate these scenarios since it would mean a contract breach. Noncompliance triggers the payment of

Q: How can operators participate in this process?

the missing percentage in local content. In the end, CNH

A: Most major operators and service companies have a

and the operators are partners: they take special care in

foothold in academia, through collaboration agreements in

complying with all our provisions, just as we are diligent in

which they offer scholarships and free software, for example.

making sure they comply. We can anticipate noncompliance

This virtuous circle provides universities with otherwise

and warn our operators whenever we detect imminent

expensive software, technology and information unavailable

infringements.

in books and helps private companies to identify the best talent universities have to offer and hire them. Some small

Q: Which role will national champions that rose from the

operators enroll their employees in postgraduate programs,

Energy Reform play in the development of the industry?

just like PEMEX, Exxon or BP. Unfortunately, the process is still

A: Among these national champions, the crown jewel will still

in an early stage. Further down the road, groups like AMEXHI,

be PEMEX for some time. I do not discern a second place

constituted by all the major operator companies, along with

champion as of yet. As a country, it is in our best interest to

associations regrouping smaller operators, will work together

have not one or two but many national champions. Small

to design projects that can be developed with universities

operators that increased an oil field recovery by 15 percent

and bring people in to develop new ideas for the company.

also fit into this category. Fundamentally, our major problem

These are small investments, adding value to the industry,

is gas related. Small operators can offer a more adequate

that flourish into great benefits.

solution for this issue. Major operators will aim for high profitability but small operators, even though they invest and

Q: How does CNH help ensure the new operators meet the

gain comparatively small amounts, in aggregate they weigh

local content requirements?

as much as a single champion.

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VIEW FROM THE TOP

PEMEX VETERAN TAKES THE PLUNGE CARLOS MORALES CEO of PetroBAL

200

Q: Why did you choose to found PetroBAL, after almost 40

Costs, prices and rig rates have all fallen but since cost always

years working for PEMEX?

correlates to price, in the end everything will surely level out

A: When I left PEMEX I did not have a clear picture of my

and PEMEX will successfully adjust. National oil companies

next career step. During my mandatory one-year leave of

always survive despite financial and market struggles, so in

absence I had the opportunity to reflect and consider the

our opinion PEMEX’s outlook remains positive.

various options available to me. Perhaps the most obvious option was academia, followed by setting up my own

Q: What are the main differences between the way PEMEX

company or working for someone else. After exploring

and PetroBAL operate?

every choice, I joined Grupo BAL and founded PetroBAL

A: There is basically no difference between PEMEX’s and

with the support of the group’s strong foundation and

PetroBAL’s project implementation and development.

performance in Mexico.

PEMEX has a very structured decision-making process when it comes to assigning resources to different projects

Q: What criteria did you use when assembling PetroBAL’s

and PetroBAL will follow similar procedures.

team of oil and gas experts? A: My first thought when recruiting PetroBAL’s team

PEMEX can now participate in partnerships. PetroBAL has

concerned its size, which I wanted to keep lean. Secondly

complete freedom from the outset to make alliances and

I considered the setup of the team, finally deciding on a

partnerships with other companies and this is something

three-tier system consisting of experienced professionals,

we strive to take full advantage of. Associations will allow

midrange professionals and younger recruits. To find the

PetroBAL to diversify risk, grab synergies and complement

experienced professionals, I interviewed PEMEX employees

our existing knowledge.

and retirees. Then I looked for people working in other companies to fill the midrange component. Finally, I visited

Additionally, the way in which we negotiate terms with our

universities to seek out new talent.

partners is different from PEMEX’s strategy. As a smaller company we do not have the same capacities as a company

PetroBAL won the IchalkilPokoch area in Round 1.2, with Fieldwood Energy

as large as PEMEX. Our authorization processes are very much alike, although PetroBAL may have a quicker turnaround time. Q: What should PetroBAL’s portfolio look like in 2025? A: Our philosophy and Grupo BAL’s philosophy is to build to stay. By 2025 we want to be producing 50,000b/d and

Q: What will happen if PEMEX’s production drops to 1.5

100,000b/d by 2030. After drilling commences in the areas

million b/d and how would this affect operators?

we won in 2015, we will enter into the development plan

A: We do not expect such a dramatic drop to occur but

phase and this will run into 2018. We will start drilling and

if that were to happen, PEMEX will start looking for more

building facilities and we will see the first oil in the second

investments. They are not investing at the same levels as

half of 2019.

they were three or four years ago but they are still investing. Q: How important are PEMEX’s operational activities for private operators that want to enter the market? PetroBAL, founded in March 2015, focuses on hydrocarbon

A: PEMEX is a company with production above 2 million

exploration and production. It forms part of Grupo BAL, a

barrels a day and is among only a handful of global companies

group of Mexican companies active in various industries

that produce at such a high level. PEMEX has played a huge

including mining, insurance, financial services and retail

role in the Mexican economy but also as a global operator.

VIEW FROM THE TOP

RIDING THE CREST OF THE WAVE JUAN VEGA Director General of Naviera Integral

Q: How has the company navigated the changes in the

With our fleet we can satisfy the demand of the incoming

industry?

market. We continue to work with PEMEX, although we have

A: The industry has indisputably undergone a period of

reduced our percentage of active vessels to 70 percent, and

difficult changes, especially for maritime companies that

are keeping a close eye on the NOC’s contracts that will

service the oil and gas sector. This will continue into

expire in 2017. Naviera Integral will continue to adapt to

2018 with the industry currently in the crest of the wave.

meet the needs of our clients.

Naviera Integral is riding the wave successfully thanks to our commitment to efficient operations and management

There are many alternatives within the maritime transport

without neglecting the quality of our services. Our

sector that are not related to oil and gas. If our fleet is

company is characterized by innovation and by being

immobilized for a long period of time we run the risk of

more technologically advanced than other companies in

it depreciating and deteriorating at a much faster rate,

our sector. In 2016 alone, we added three new ships to

making it much more expensive to repair. PEMEX must be

our fleet with state-of-the-art technology, differentiating

ready to make a decision regarding fleet contracts because

us from our competitors. These new technologies reduce

we cannot afford to wait five years to see what happens.

pollution and the quantity of fuel consumed because they

There are new players, new rules and new standards in the

use clean energy sources. Implementing these changes has

market and we will be ready to work alongside whoever

positioned us in the market as pioneers and allows us to

needs our expertise.

create new expectations for the sector. Q: Which ports are most likely to see the highest demand Q: Why has Naviera stayed away from traditional business

in the coming year?

strategies?

A: Ciudad del Carmen is remodeling a section of the port

A: International best practices from countries such as

but it will not be enough to cover the necessities of the

the Netherlands inspire us to offer better services. When

industry and it will not become a hub in the future. Mexico

establishing a strategy, it is important to consider the

must look to the north for growth. Campeche is a virgin

entire logistics process a customer is expecting, which is

port and has many opportunities for growth. The north of

why we invest in new vessels, machinery and design. This

Veracruz will offer various opportunities for shallow waters

guarantees that we can offer our clients a well-rounded,

while the Port of Matamoros will meet the needs of the

efficient service using the latest technology. Customers are

deepwater rounds in the north of the country.

looking for security, efficiency and cost-optimization and services that are environmentally friendly.

The industry is demanding modernized ports that have the technology available for it to grow. The government

Q: How is Naviera Integral positioned as new operators

is promoting the creation of the Special Economic Zones

enter the Mexican market?

(ZEEs) that will be in Ciudad del Carmen, Campeche and

A: Naviera Integral has more than 30 years of experience

Yucatan and function as polygons of development. Naviera

working in Mexico’s offshore market. Mexico’s fleet is

Integral is well positioned in Campeche and Tamaulipas and

within the top five most important in the offshore market

is looking to enter Veracruz very soon.

worldwide and Naviera Integral is number one in the country. Q: How many ships are in your fleet?

Naviera Integral is a 100 percent Mexican company with

A: Naviera Integral has 36 Mexican ships in its fleet. We

over 30 years of experience offering maritime services to

stopped constructing new ships because of the recent crisis

the country’s oil and gas sector. It has more than 30 vessels

and have decided to simply observe the market for a while.

covering the industry’s different needs

201

PROFILE

LOCAL PARTNER OF CHOICE Experience, efficiency and excellence are what define Cotemar.

Cotemar collaborates closely with clients to

It is ready to help E&P companies execute projects. Cotemar

optimize resources to deliver the best result.

is your integrated offshore solution in Mexico, one stop to

Cotemar not only takes pride in its impressive

get it done and done right, from logistics to complex topside

infrastructure, but also in the wide products

projects.

and services portfolio:

To take advantage of opportunities created by the Energy

MECHANICAL SERVICES

Reform it is important to select responsible local partners

Extends the life of offshore facilities and ensures the

with a proven track record. Collaboration with a partner

integrity of structures

that has experience across the Mexican offshore oil and gas services will help reduce risk, overcome challenges

ASSET SOLUTIONS

and deliver projects successfully, efficiently and on time.

Provides such services as facility operations, turnarounds and outages, heavy lifting and relocation, plant

Cotemar is a 100 percent Mexican company prepared

commissioning and decommissioning, and startup and

with the infrastructure, capabilities and culture that

refurbishment of production facilities and offices

makes Cotemar the prime valuable long-term partner. It is committed to the welfare of its people and communities

PRODUCTION OPTIMIZATION

development as well protecting the environment.

Portfolio offers gas management, separation and

That good stewardship has been recognized by many

compression, CO2 emission reduction, and water treatment

organizations including Pemex.

EPC AND MAINTENANCE Cotemar offers integrated E&P offshore solutions in

Division offers corrosion and surface preparation,

Mexico.

With more than 38 years experience, the

installation of turbomachinery, modernization and

company has a can do corporate culture and an

upgrades of fixed installations, and facility construction

exceptional track record of delivering safe and compliant

and reengineering

operations from logistics to complex topside projects. Offering local expertise whilst strictly complying with the

ELECTRICAL ENGINEERING SERVICES

highest international standards, including: DNV-GL, ISO

Includes civil and structural engineering, instrumentation

9001, OSHA 18001 and MARPOL.

and control, telecommunications, and security systems

203

VIEW FROM THE TOP

SLOWER PRIVATE INVESTMENT CREATES IMPASSE

Mauricio Mondragón Managing Director of Plaka and B2B Division for PPG Comex

Guillermo Peña Mexico Director of PMC Division for PPG Comex

Q: What makes PPG Comex’s main products and services

facility specifically designed to test products in different

essential to the oil and gas sector?

simulated weather scenarios.

MM: PPG Comex has two main divisions: B2C and 204

B2B. B2B is the professional solutions division, which

Q: How has the liberalization of the market impacted

addresses large consumers with specialized needs in

PPG Comex’s PMC division?

six different sectors. This division stands on three main

GP: It is taking longer than expected for private

pillars: trained experts, quality products and specialized

investment to enter the market, which has delayed the

infrastructure. Our labor force is highly trained so they

construction of new infrastructure and left manufacturers

develop soft skills for the commercial side as well as

and suppliers at an impasse. We are trying to diversify

product and industry knowledge. One part of the training

into more dynamic sectors while the oil and gas industry

is internal and performed by PPG trainers, the other part

recovers but at the same time we want to secure our

is performed by industry experts from elite educational

position in the market so we do not lose momentum.

institutions such as ITESM. We have seven manufacturing facilities where we manufacture most of the products we

MM: History has taught us this is the best approach when

offer and four specialized centers where we showcase

facing the slowdown of a specific industry. There are new

products and invite clients or potential clients to compare

opportunities to achieve our goals. In the industrial sector

PPG Comex’s products against those of our competitors

we are growing more than 8 percent annually because our

so they can be confident with PPG Comex as their main

customers value our unique proposal and view of the industry.

solutions’ provider.

PPG Comex seeks to establish long-term relationships instead of just selling a product. Sometimes we get involved in a

2017 will be a challenging year because on one side

project as much as eight or 10 years before it actually starts,

PEMEX has announced the discovery of new fields, which

so we can work with the design, blueprints and specifications

will provide new business ventures for manufacturers and

to develop the most tailored solution for our customers. We

service providers like us. On the other hand, the US$5

reduce financial risks by subcontracting companies to deliver

billion budget cut for PEMEX for the 2016-2017 period

a whole solution for specific projects, depending on our

translates to fewer opportunities for PPG Comex to

clients’ needs and the specifications of the project.

acquire more contracts. Q: How can your products and services allow clients to GP: To tend to the needs of the oil and gas sector we have

boost their competitiveness in the oil and gas sector?

our Protective and Marine Coatings Division (PMC). What

MM: When we commit to a client we offer a long-term

differentiates this division from all others is its focus on

relationship. We strive to create durable solutions that

protecting and preserving the clients’ assets. This division

will solve our clients’ needs in the long run. To do so,

is the most specialized within PPG-Comex because it

we perform a deep analysis of the solution system. We

provides high-temperature fire-retardant roofing and

look forward to showing clients we are not just looking

flooring solutions for the industry. The Technological

to make a sale for the short-term but that we get to the

and Industrial Innovation Center (CITI) is a research

root of the problem and solve it for the next 30 years. GP: Being part of PPG allows us to have numerous

PPG Comex is US-based PPG’s branch in Mexico and is a leader

international partners that give us early notice on new

in the manufacturing, distribution and commercialization

regional developments for which they then start developing

of paints as well as industrial, architectural and specialized

solutions. We then contact the regional managers of such

coatings for heavy-duty applications

projects and start working where needed.

VIEW FROM THE TOP

UPSTREAM IN VIEW FOR MEXICAN CONSTRUCTORS ABRAHAM ZEPEDA Commercial Director of Grupo Hosto

Q: What role will alliances and mergers play in Grupo Hosto’s

Mexican market who have a relationship with PEMEX already.

plans as the Energy Reform unfolds?

This will be the key to their success as they enter the Mexican

A: Alliances and joint ventures will definitely play a big part in

oil and gas market for the first time.

Grupo Hosto’s future business plans. In fact, we are partnering with other companies to work on the block won in Round

Q: Has PEMEX’s payment slowdown improved since last year?

One and we are always open to new alliances. Grupo Hosto

A: By November 2016 PEMEX had paid us around 70 percent

benefits from partnerships with a diverse range of international

of what it owed us. In times of crisis we made sure to keep

and national companies, including a collaborative contract

meeting our commitments because we trusted it would

with Amec Foster Wheeler and a new technology contract

eventually pay us. The situation with PEMEX’s payments

with Atmos. We are also open to forming associations for

improved in 2016 because the new leadership has offered

participating in Round Two in 2017.

certainty, which is key. Now PEMEX can tell us the exact date of payment. Before the new management came in there

Q: How successful has CNH been in making the licensing

was a lot of uncertainty. Even if there is a delay, knowing the

contracts attractive for companies to diversify into upstream?

payment date is useful for Grupo Hosto’s budget and work

A: The most impressive aspect for me was the transparency

planning. It allows us to react and make internal decisions on

with which Round One was conducted. Details like video

important projects.

conferences and the level of vigilance over the awarding processes have been very good. The winners were selected

Q: How has Grupo Hosto managed to thrive financially

based on the most beneficial conditions for the country. This

despite the industry’s downturn?

level of transparency gave Grupo Hosto a lot of faith in

A: Our success in the last few years can be attributed to a shift

the process as a whole and made participation a lot more

in Grupo Hosto’s core ideology. Previously we were closed to

attractive.

associations but we have now opened our doors to partnering with private and international companies, particularly those

Q: How has PEMEX’s new leadership handled the changes at

with advanced technologies. This has allowed Grupo Hosto

the NOC in the past year?

to remain successful despite the difficulties of the industry

A: PEMEX’s CEO’s first task was to balance the NOC’s

because we have adopted the good practices of our new

finances, detect the danger zones where the NOC was

partnered companies.

losing a lot of money and optimize the company’s debt and spending. Next was to implement new ways of working, such

Q: How will Grupo Hosto develop over the next year?

as associations with private firms and the idea of macro-

A: Grupo Hosto wants to become an industry leader in this

contracts. These ends are achievable but require a lot of

sector. It has been a difficult year in the oil and gas industry

legal work to implement because they are completely new

but we believe that next year will be better. We have had eight

and innovative concepts.

decades of success, so the industry should not panic because of one bad year. There are many new operators coming to

Q: How has Grupo Hosto benefited from the fact that its

Mexico – 600 importers of gasoline are already registered.

brand is already accepted by PEMEX?

Many things are happening and we are very optimistic.

A: With 30 years working with the NOC under our belts, Grupo Hosto is a longstanding partner to PEMEX and is trusted within its ranks. This relationship is the value proposition we offer to

Grupo Hosto has over 20 years of experience in the design,

potential partners. It is difficult to introduce new technologies

engineering, construction, maintenance and development of

to PEMEX without a well-known partner to back them up. Our

heavy industrial infrastructure, serving both the government

suggestion is that these companies search for partners in the

and private sector

205

VIEW FROM THE TOP

STORAGE COMPANY DIVERSIFIES AMID DIFFICULT TIMES EMMANUEL MONTAÑO Director General of Consorcio Emcro

206

Q: How has Consorcio Emcro’s strategy developed amid

these projects and continue Emcro’s expansion. Despite

the industry downturn of the past few years?

the investment risks, we have high expectations for 2017.

A: Since our last interview, some changes have taken place

We hope to finish the construction of the fluids plant and

at Consorcio Emcro. Our core business remains the leasing

either offer it to a third party or to run it on our own and

of over 1,200 metallic containers and 30 mud tanks but

break into the fluids production business. Containers and

as we continue to diversify we started manufacturing bulk

mud skips remain Emcro’s core business, where we have

barite units. We also started the construction of a 4,000m3

around 40 percent of the market.

fluids plant, which was initially requested by a client. Unfortunately, the low oil price situation forced it to cancel

Q: How has Emcro’s competition evolved in Mexico and

the project but Emcro decided to continue constructing

what is its strategy for protecting its position in the

the plant. We expect it to be finalized by June 2017. Since

market?

it is no longer being developed for that client we can either

A: We have increased our position since 2015, after one of

lease it to an interested company or offer the services on

our competitors exited the container leasing business. Three

our own. Despite many companies being reluctant to invest

companies remain in the market, including Emcro. Although

in these uncertain times, Consorcio Emcro is willing to take

we improved our position, our sales revenue fell, with only

a risk and bet on the market.

40 percent of our containers occupied. PEMEX’s reduction from 80 to 18 operating platforms had an enormous impact

Q: How will Emcro further diversify to succeed in 2017 and

on the whole sector. The drop in oil prices forced Emcro

what challenges will it face in the coming year?

to become more competitive. Being active in oil and

A: One project we are undertaking is to develop the layout

gas summits, we discovered that incoming international

and financial projection of a solvent extraction plant for a

companies will demand safety certifications beyond those

company that owns a patent to reduce waste water in oil

of PEMEX, so we decided to focus on going beyond the

recovery to 1 percent. This process would raise the Mexican

NOC’s norms of reference and get API (American Petroleum

mix price by around US$4/b, which is hugely beneficial for

Institute) certifications, which are the highest international

operators. Our competitive advantage allows us to take on

standards for drilling equipment.

PROJECT SPOTLIGHT Another issue that needs to be addressed is

EMCRO GAINS STRICTER CERTIFICATION

that Round One-winning companies outsource

FOR MUD SKIPS

services from large fluid companies that have

As the Mexican oil and gas industry opens up to private

worked in Mexico for many years, despite those

and international operators looking to make good on the

businesses not being compliant with the highest

promise of the nation’s rich resources, equipment suppliers

international safety standards, although their

and providers need to be ready to comply with different,

prices are slightly lower. Regulators such as

sometimes much stricter regulations than those currently

ASEA or CNH must be vigilant and verify that

enforced in terms of safety and security, environmental

national content requirements are being met.

protection and proper handling and disposal of the many products and byproducts of the hydrocarbons sector.

Q: What competitive advantage does Emcro offer to incoming international companies?

Mexico City-based Consorcio Emcro, a market leader in

A: We offer cost-effective solutions with the

the supply and lease of mud skips and steel containers for

same or better quality than our international

the management and disposal of drilling muds, cuttings

competitors but with better service. We expect

and waste, has moved ahead of the curve to secure the

our capacity to grow with our fluids plant. It

American Petroleum Institute (API) certification 653 for

is challenging to acquire a potential client’s

tank inspection, repair, alteration and reconstruction. The

trust, which is the main step in building a

certification raises the bar for the maintenance and integrity

long-term relationship in the industry. We

preservation of the steel-made tanks used for the handling

have infrastructure near Dos Bocas, where we

of both hazardous and nonhazardous waste as well as

are well known, and have the transportation

drilling fluids, the company’s core business. Consorcio

capacity to develop and deliver projects on

Emcro obtained the certification in August 2016, which

time. We have the expertise and knowledge of

makes it valid until the same month of 2021.

the national market and the way it operates to The API 653 certification, which includes detailed

ensure maximum competitiveness.

checklists and equations for the revision and renovation Q: What are Emcro’s expansion plans and

of these specialized containers, is additional to Emcro’s

expectations?

compliance with PEMEX’s No. NRF-261-PEMEX-2010

A: From 2007 to 2016 we had a continuous rate

norm for transportation and logistics of oil-based fluids.

of growth over 100 percent yearly and then

This covers the specifications of 4m3 reinforced hermetic

suffered a yield decrease of 30 percent. We

containers, including anticorrosion, transportation and

think we can return to yield growth for 2017 if

impact protection standards as well as identification. It

oil well drilling increases again, as well as with

also sets welded joint verification and yearly nondestructive

the evolution of the fluids and solvents plants.

tests of equipment to guarantee the proper conditions of

We expect the next five years to be crucial

the skips, used for the safe and responsible collection and

to our development. It is a difficult process as

transportation of muds and drill cuttings.

price margins have shrunk and payment dates have been pushed from 60-day contracts to 120-day contracts. We have struggled for a couple of months but have been supported by our suppliers and have in return supported our clients. Emcro has decided to reinvest everything it earns because it has detected an opportunity in the low-price context. The opportunity to invest in steel products before any big price rise is now.

Consorcio

Emcro

Mexico

City-based

manufacturer and leaser of certified steel containers for the management and disposal of drilling fluids and waste for the oil and gas industry. It also offers expertise for the handling of hazardous waste

207

ROUNDTABLE

WHAT HURDLES DO OPERATORS FACE WHEN ADHERING TO LOCAL CONTENT RULES?

Although it is still early days for companies staffing new projects in Mexico’s upstream sector, local content rules are central to the unfolding of the reform. In February 2017, two decades after Brazil’s energy reform was passed, the country announced a 50 percent reduction in its oil and gas local content rules. The move came amid a slower-than-anticipated development of the country’s offshore sector, and stands as a stark warning for Mexico’s regulators as they decide on contractual terms. We turned to a range of players from throughout the value chain to share their views on Mexican local content rules and the challenges facing local and international companies as operators begin to adhere to them.

Local content regulations will have to be adapted according to the country’s 208

necessities and possibilities. We have seen with our clients in Latin America and Africa that countries that implement local content regulations that are too aggressive, in the hope of creating jobs, have had to relax them because of the near-death experience the industry faced under those same regulations. in the aftermath, relaxation tends to lead to either a new definition of what local content is or a new

JORGE LEIS Partner and Lead of Oil & Gas Practice in the Americas for Bain & Company

level being settled to incentivize the participation of international companies in the market. This relaxation must obey market needs and take into account the country’s infrastructure, robustness and uncertainties. Fortunately Mexico and the US have a long history of putting together a supply chain that benefits both countries.

There is certainly an already robust market for oilfield related services and we are very proud that we expect to be ahead of our local content requirements at the exploration phase on each block. However, it is critically important that our local partners know that in order for us to procure their services, we do have to do exhaustive diligence regarding their ownership and management structure, work history and any relationships regarding local government so we do not run into

TIMOTHY DUNCAN President and CEO of Talos Energy

issues with respect to our US regulators and their expectations regarding how we manage any potential corruption risk. Local companies have been receptive to our diligence, which we appreciate, and as our comfort level increases, we will continue to increase our local content.

Local content is easier to implement in the production phase than the exploration phase, where activities are more repetitive. Having said this, we will exceed the local content required by the contracts by 15 percent. Sierra is aware of the harsh conditions local companies have been exposed to because of PEMEX’s cuts. At the same time Mexico has become a very competitive environment. Sierra and its partners ran a tender for environmental studies for Blocks 7 and 2, inviting local and international

IVÁN SANDREA CEO of Sierra Oil & Gas

players but sadly, prices from local companies were three times higher than those of international companies. To solve this issue local content needs to be more proactive, ensuring it can compete both in quality and price against international companies and most importantly, make sure to promote itself because most companies are not aware of the multitude of service companies that are present in Mexico.

Many Mexican companies could not participate in Round 1.2 because they did not qualify as operators due to a lack of operational history, capital and production so they looked to companies like Fieldwood to partner with. We knew from the beginning that doing this alone was not possible. We could have tried to partner with some of the Super Majors, such as BP, Chevron or Shell, but we would have been disadvantaged by a lack of knowledge and experience with the Mexican geography and culture that only a local partner can offer. By working with Mexican company PetroBAL we got access to people who had drilled similar fields in the region 20 years ago and who could offer us the kind of knowledge that otherwise would be

MATT MCCARROLL President and CEO of Fieldwood Energy

impossible to get.

We really need to promote local companies in the new framework of the industry. Not 209

just because we are locals but because there is a huge number of local professionals who need to find jobs. The quantity of human capital in the market available right now is enormous. If big companies do not support local companies, we cannot see where the jobs will come from for the next generation of geologists and geophysicists. It is not just a matter of training and experience. The government’s local content rules are focused on money. Companies have to comply with a certain percentage of local content but it is based on invoices that they submit. We believe there should be a clause in the law that is unrelated to money, and instead focuses on know-how.

JAVIER RUBIO General Manager of Geoprocesados

For the cutting-edge and expertise-intensive areas to be developed in Mexico, such as deepwater, most of the knowledge and people will have to come from abroad. Nevertheless, the number of high-tech jobs performed by expats is nothing compared to the massive capital infrastructure investments that these companies are pouring into Mexican fields. Such investment will open up opportunities for local companies in the area of platform services, which is not knowledge-intensive but requires experience in the region as well as a local workforce. M&A will take place mainly in upstream, with the companies entering the market. KPMG sees special potential for these relationships in the services area due to the newcomers’ lack of regional experience.

RUBÉN CRUZ Partner, Head of Energy and Natural Resources at KPMG in Mexico

Although it may be considered a developing nation, PEMEX’s prevalence in Mexico means the country has a long history in the oil and gas industry, so it is a case of finding existing talent and using it. Brunel will not rule out sourcing talent from north of the border either or encouraging people who have left Mexico to return for work. Sourcing local talent wherever possible is always a priority for us, particularly in the oil and gas industry where local content requirements are common. Brunel has opened many different businesses across the globe, so we are accustomed to establishing business and finding the best talent in a new country. When expanding into new countries we often source people who have left the country for work and wish to return. Alternatively, they may have previous experience working in similar markets and are therefore familiar with the nature of specific projects.

RICHARD KIRWAN Business Manager USA and Latin America of Brunel

INSIGHT

‘ONE OF A KIND’ RISK ANALYSIS ALEJANDRO HERNÁNDEZ Director General of CSIPA

Environmental and risk consultancy agency CSIPA has a

financial capabilities so now we are in a much stronger

diverse service portfolio to suit the oil and gas industry,

position than before,” he says. Despite the advantages

some of which its Director General says are one of a kind

awarded through working with PEMEX, Hernández believes

in Mexico. “CSIPA is one of the few national companies

CSIPA can no longer depend on one client especially with

with the capability of carrying out risk analysis for

the arrival of so many international competitors.

deepwater projects,” Alejandro Hernández says. As leaders 210

in environmental matters, the company is dedicated

This will be an opportunity the company is fully prepared

to reducing the risks involved in industrial projects, and

to take advantage of. “The reality is that CSIPA can win

Hernández believes his firm has a lot to offer Mexico’s

much bigger contracts if it forms alliances that enhance its

opening petroleum market in this respect.

technological offering,” Hernández says. CSIPA is already forming an alliance with DNV-Lloyd Germanico and drawing

CSIPA displayed its capabilities during its involvement in

on knowledge from Norway and the UK to improve its

PEMEX’s Lakach project, the first and only deepwater project

deepwater capabilities. “Knowledge is not absolute or

carried out in Mexican waters. “At Lakach we worked on

exclusive and we can create extraordinary combinations

risk analysis, environmental impact, change in land use and

through the right strategic alliances,” Hernández says.

flora and fauna rescue efforts,” says the executive. CSIPA is

Their joint research includes risk analysis of accidents like

one of the few Mexican companies that fully complies with

spills, fires and other environmental disasters, which are key

the requisites demanded by PEMEX’s regulatory framework,

matters for oil and gas operators.

which positioned it to take advantage of the NOC’s first deepwater venture.

CSIPA brings a lot to the table in its partnerships with international heavyweights, Hernández adds. He highlights

The fact that the project was stopped and restarted

its compliance with international standards. Referring

by PEMEX posed a challenge for CSIPA and this was

to Mexico’s new oil and gas players, Hernández feels

exacerbated by the NOC’s drastic changes to its payment

optimistic about how CSIPA can contribute to the success

terms. But according to Hernández these challenges only

of their market entry. “New companies always arrive with

strengthened the company’s ability to overcome obstacles.

their own protocols. We help them ‘tropicalize’ to the

“The payment slowdown forced CSIPA to develop its

Mexican way,” he says.

VIEW FROM THE TOP

MARINE CONSULTANT FOCUSES ON TRAINING AND CERTIFICATION RUBÉN BENÍTEZ CEO of Integra Marine Services

Q. What was Integra’s strategy for managing the industry

country. Mexico has the talent, knowledge and experience

slowdown in Ciudad del Carmen over the past few years?

to produce the same quality the IOCs are accustomed

A: Integra is now focusing on more niche areas of the

to but it still retains a certain way of doing things that

market such as training, ship agency services and

foreigners may not be used to. 211

representation, which were not an industry focus before the downturn. We have been working to provide

Q. Is the Mexico maritime sector ready to take on the surge

administrative work for our clients, which is a main need

in deepwater activity over the coming decade?

for companies arriving in Mexico for the first time. The

A: Yes, we believe the Mexican maritime sector is ready to

company also is looking beyond the oil and gas market,

take on the challenge. PEMEX has worked as hard as any

turning to other opportunities such as the aerospace and

other company when it comes to new technologies and

automotive sectors. We could diversify because of our

regulation. In fact, PEMEX adhered to several standards

alliances and agreements with other companies like 3A

that were stricter than their international counterparts,

Composites, an American business that provides industrial

especially in security and safety. Mexico has a lot of

resins for the aviation industry. We have also approached

technical and creative talent in oil and gas, the only things

global shipping company MSC to begin expanding our

lacking are the official certificates to prove it. Training has

service into transport and logistics. Our core business

been and remains a hot topic in the Mexican oil and gas

is still in oil and gas but for smaller firms like Integra,

industry. Since PEMEX’s procurement function changed,

diversification was necessary to survive the market

contracts have dried up and the lack of projects has

conditions of 2016.

interrupted the regular training oil and gas workers were getting through this type of work. International companies

Q. What oil and gas projects is Integra involved in?

will have to pick up where PEMEX left off in terms of

A: Integra is providing administrative services to the oil

training its workers.

and gas industry such as training and ship agency services. As shipping agents we represent both international and

Q. How is Integra positioned to assist new, international

national companies. We provide more administrative

players entering the market through licensing rounds?

services to a number of clients, spanning certification

A: First, Integra must win the confidence of international

processes, boat protection plans and helping create

newcomers. To achieve this, we acquired Trace

shipping companies. We realized that the difficulties the

certification. This means we comply with Trace’s

oil and gas industry faced has caused problems between

due diligence standards in terms of financing and

some companies and Mexico’s maritime authorities. Integra

ethics, giving international clients certainty about

is well-positioned to advise these companies.

Integra’s service standards. We are still seeing good results because we have kept our doors open to any

Q. What maritime challenges are the winners of December’s

opportunity that comes our way. Before, we could not

deepwater round going to come up against?

even approach companies like Seadrill or Fieldwood but

A: The international oil and gas operators will come to

now international companies like these keep us in mind

Mexico with their own ways of working and with a more

because of our certified compliance standards.

corporate, business-oriented industrial vision. As IOCs they will require more certainty about results and more operational cost-efficiency, which are not qualities PEMEX

Integra Marine Services provides various consultancy services

always embodied. Adapting their established processes to

to the oil and gas, maritime and port industry. Integra helps

the Mexican oil and gas industry is the biggest challenge

new international and national companies to successfully enter

international companies will face when expanding in the

the Mexican market

VIEW FROM THE TOP

PREPARING THE ROAD FOR DRILLING RICARDO ARCE Former CEO of Perforadora México (PEMSA)

212

Q: How have the bidding rounds shaped Perforadora

A: The government should favor the investment

México’s E&P ambitions?

commitment. The role of the government is not necessarily

A: Our objective is still to become an E&P player and we

to attract more money but to promote the development

are carefully moving toward that goal. 2016 was a difficult

of a higher oil production environment. I do not know

year for the industry, mainly for shallow water drillers like

what percentage should be taken into account but I do

us. We are participating in the rounds but we have not

not believe a ratio of 10/90 is adequate. A greater balance

yet won a block, which is not necessarily a bad result.

should be struck and ratios like 50/50 or 40/60 would make

We tried to qualify in Round 1.2 but we could not submit

more sense. No contract has been migrated to the new

a bid because CNH ruled that our partner did not meet

system yet and one reason is that the government is used

the criteria to become the field’s operator, so we had to

to receiving a 65 percent share, which is not sustainable.

withdraw our prequalification. But this experience helped us to understand how the process works.

Q: What percentage of your fleet has been operational this year and how does that compare to the market?

We then submitted three bids for the onshore Round 1.3,

A: We have five jack-ups, four of which are new. The four

selecting three of the four largest blocks. Grupo México

new rigs were in use during practically the entirety of

is a large operation; if we win a block, we need one of a

2016. So far we have had a utilization rate of 3.9 out of

certain size. We also put together a good business case with

the four rigs in 2016. We also have two platform rigs. Our

the objective of developing the fields to their maximum

current critical point is the Tamaulipas rig, for which we

potential. One of our problems was that CNH placed little

have been waiting since April 2015 for a location. We are

importance on the additional investment criteria, which

in conversations with PEMEX to negotiate the costs for

totaled less than 10 percent, because it had a cap. In our

this waiting period. While the costs are relevant, for us it

model, we allocated six times the required investment to

is important to obtain a long-term contract to recover our

develop the fields, which was not considered in the CNH

investment. The Sonora rig is also suspended because it

criteria. Another issue was that most of the winners placed

is a relatively old rig but still in very efficient performance

high bids.

condition: a good option for the newcomers in the shallow water rounds.

These high bids do not necessarily mean they will lose money. It depends on the business model. In a model where

Q: What will happen with the Mexican drilling operators in

production rates remain the same as current levels, 99

three, four or five years?

percent can feasibly be given to the government because

A: What I foresee is alliances. Most of the Mexican

the bidder will still earn 1 percent with zero investment. For

companies have state-of-the-art equipment but many do

that company, it may have been a good business model

not have highly trained crew, which could lead to a need

but we are certain this was not the best result for Mexico.

for alliances. Grupo Mexico is already prepared for this scenario.

Q: How should the government balance the relative weight of the royalty and work plan in allocating the contract?

We are participating in a complementary vertical integration alliance with an international oil services company. We have the state-of-the-art drilling equipment and cementing

PEMSA, a Grupo México company, was founded in 1959 to

services and they provide the rest of the components

conduct exploratory drilling, development and other services

needed to offer turnkey services to the operator. We have

inherent to the oil and gas industry, including the construction

jointly approached some of the companies that have won

of oil and gas pipelines

blocks and offered them integrated services.

INSIGHT

INTEGRAL SERVICES A GROWING TREND IN SAFETY CAMILO KURI Director General of Vallen Proveedora Industrial

As the Mexican oil and gas industry works to raise standards

productive enterprise of the state. The cuts to PEMEX’s

to international levels, companies are demanding “total

budget, together with low oil prices, plunged the company

solution services” when it comes to safety, according to

into an era of austerity, while the opening of the market

Camilo Kuri, Director General of Vallen Proveedora Industrial.

demands more efficiency and productivity than ever.

To win, companies must adapt. “We are no longer just a

This means that suppliers must provide services at more

safety company. We are an industrial outsourcing company,”

competitive costs and simultaneously raise performance to

Kuri says of Vallen’s evolution over the past few years.

compete with other firms. “The market will be looking for more productive companies,” Kuri says.

Vallen is a Mexican supplier of industrial safety equipment with 31 years of experience in the country. Over the past

Along with increased efficiency, demand for high-quality

years, the firm has diversified its business to meet the

safety services is expected to surge as large, international

demands of the opening market with an integral service

companies begin operations in the country. Several high-

offering. As well as selling products such as fire equipment

profile accidents in recent years have caused concern about

and gas detectors, the firm has expanded its strategy to

how PEMEX will raise its own safety standards to meet those

also provide consultancy, training and inventory services.

of its new competitors and partners. Kuri recognizes the need

“Basically, we have gone from being a product-selling

for progress but also acknowledges a vast improvement after

company, all the way to providing services and today 90

PEMEX’s restructuring. He believes that PEMEX CEO José

percent of our sales revenue comes from providing additional

Antonio González Anaya’s “new leadership has brought a

services,” Kuri adds.

lot of improvements to their operations.” PEMEX now often approaches Vallen for feedback on how to improve safety

Mexican companies like Vallen face the prospect of tighter

processes and takes a dynamic approach focused on solving

competition if new players in the oil and gas industry turn to

problems rather than purchasing the cheapest option.

international suppliers of safety equipment but Kuri says local support will keep the domestic field in play. “International

Despite this new proactive attitude, much remains to

companies will bring some equipment for their rigs, like gas

be done in terms of safety. Kuri emphasizes that “a gap

detectors and fire equipment, but they will eventually require

still exists between international safety standards and

local suppliers to support them in their operations,” he says.

Mexican standards,” although he adds that standards have been raised in the past decades due to the presence of

Extensive local expertise and a long history serving

international companies in the country. “It is very important

PEMEX in offshore operations makes Kuri optimistic about

for management to understand safety to ensure a danger-

doing business with the winners of the licensing rounds,

free work zone,” the executive says. Safety is a management

maintaining that the company’s small size better positions

issue rather than the sole responsibility of the individual,

it to help clients. Vallen already works with international oil

which highlights the need for change to occur from the top

giants Schlumberger and Halliburton as well as Mexican firms

down, with more focus on safety in strategic planning and

Grupo R and Grupo Diavaz but for now PEMEX remains its

budget allocation.

main client. As Mexico invites private companies into its oil and gas In 2017, Vallen will adapt its strategy with PEMEX to

market for the first time, safety standards have become a

concentrate on sourcing products with the most competitive

focal point in the drive to make the country more attractive

prices, following the government’s budget cuts. This new

to foreign investors, bringing more business to firms like

strategy is a trend across the oil and gas sector born out

Vallen. The company, along with the rest of the industry, is

of necessity due to the restructuring of PEMEX into a

in a time of evolution.

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VIEW FROM THE TOP

GREEN ROBOTIC CLEANING SYSTEMS INCREASE SAFETY RAÚL ALONSO Director General of América En Triunfo

214

Q: How does América En Triunfo serve the Mexican oil and

safer results due to our remote-controlled technology. It is

gas market?

also environmentally and ecologically friendly. Our product

A: We have more than 15 years’ experience in the Mexican oil

is recyclable and does not produce polluting dust. One of

and gas market and our family was the first to introduce high-

our policies is to offer biodegradable, nonpolluting and

pressure water cleaning technology in the country. We started

environmentally friendly technologies.

out working directly with PEMEX, introducing automated high-pressure cleaning technologies.

Q: What challenges does the Mexican oil and gas industry face and how can América En Triunfo help?

In the past PEMEX used high-pressure water systems for

A: América En Triunfo is partnered with COMET-PTC Group, an

cleaning in its refineries but those were manual systems

Italian firm that has purchased several factories globally in the

that led to many accidents, some of them fatal. América En

past few years, including one, recently, in Brazil. It sells high-

Triunfo automates these cleaning and maintenance tasks so

pressure water-cleaning equipment, offering 1,500 pounds per

that workers do not face any safety risks.

square inch (PSI) to 440,00 PSI of pressure. Our equipment has many applications in the oil and gas industry, depending

Since placing our systems in PEMEX’s facilities there has not

on the area. In E&P, for example, our machines are used for

been one safety-related incident caused by high-pressure

cleaning production wells and for injecting different chemicals

water cleaning systems. The technology we use is sourced

into them. In the area of refining and petrochemicals our

from European countries such as the Netherlands, Germany

technology is used to clean tubing, heat exchangers and

and Italy.

reactors.

Q: How do the technologies offered by América En Triunfo

América En Triunfo’s partnership with COMET allows us to

help companies increase efficiency and safety standards?

offer more than our core product of high-pressure water

A: We decided to start América En Triunfo to address the

cleaning systems. We offer our clients integrated solutions

technology needs of the Mexican oil and gas market. One of

for their applications. Specifically, we provide robotic and

the first firms we worked with was Blastrac, a Dutch company

automated equipment that contributes to an 80 percent

that develops robotic solutions for surface preparation with

reduction in work time and guarantees 100 percent work

shotblast technology. Shotblasting uses metallic pieces

safety. Also, the water used in our technologies is recyclable.

Additionally, we provide the Mexican oil and gas industry

surface to remove excess paint, preparing it for repainting.

with Blastrac solutions for surface preparation, anti-corrosion treatment, robotic coatings systems and safety equipment,

We did this type of work in PEMEX’s refinery in Ciudad

such as fire extinguishing products for refineries. The latter is

Madero. Before using América En Triunfo’s technology, PEMEX

an extremely advanced technology designed specifically to

used contaminating and risky technologies that required

extinguishing fires caused by hydrocarbons. Our objective is

many workers to operate them. These types of cleaning tasks

to automate these processes so that no operator is needed.

used to take four to five months to complete but now we can

Through remote control systems we can practically eliminate

do it in seven days. América En Triunfo offers quicker and

all the risks involved in these safety processes. Q: In what other ways can your automated products benefit

America en Triunfo offers robotic, ecologically friendly

a company?

equipment to industries such as oil and gas, mining,

A: América En Triunfo is part of a global group of companies,

construction and automotive. Its portfolio includes power

called WaterJet Technology Association (WJTA), that offers

washers, surface preparation robots and high-pressure pumps

high-pressure cleaning systems. The association regulates all

the safety measures regarding high-pressure water cleaning

Q: Where does América En Triunfo expect to see the most

systems. It includes training for all operators and producers

growth in the oil and gas sector?

of waterjet equipment to ensure it is used in the safest way.

A: Historically, América En Triunfo has had the most success

High-pressure systems are useful tools but they can also be

in refining but the processes involved are going to change

dangerous. For this reason, correct training on their use is

in the near future. Instead, we expect to see more growth in

essential to ensure operators have the sufficient knowledge to

storage and distribution. Maintenance work will be needed

take advantage of the equipment with the least possible risk.

on the existing refineries in Mexico so they can continue

We are all certified and fully prepared to offer this course to

working. Exploration and production will also play a big part

our users. América En Triunfo does not only sell high-pressure

in the future of Mexico’s oil and gas industry and we see a lot

systems, we also install them, train the operator and offer

of important opportunities for our products in E&P. Due to

continuous maintenance support.

the difficult processes involved in entering the Mexican E&P market in the past, we could not fully exploit the opportunities

Q: How does América En Triunfo confront the talent gap in

for our products in this area. With private companies entering

the Mexican oil and gas industry?

the market we believe it will be easier to introduce our

A: This is an issue that has been raised with us principally

products to the E&P sector.

by PEMEX’s technicians and engineers. The problem is that experienced workers are already retiring, leaving a gap

Q: What will América En Triunfo look like in five years in an

between them and younger engineers. América En Triunfo has

ideal world?

helped to close this talent gap because our products require

A: Our five-year plan is to be the number one supplier of

fewer personnel to operate and we fully train all users. Before,

surface preparation technologies and heat exchanger

cleaning a heat exchanger may have required 20 people but

maintenance services to the oil and gas industry. We want to

now we offer solutions that require only four operators.

be the number one provider of high-pressure cleaning systems to PEMEX and new private companies in Mexico. The market

The talent gap is worsened by the fact that a lot of information

is cyclical. Around seven years ago the industry was in crisis

in PEMEX has been lost over the years due to the manual way

and it was difficult to sell our products and services but this

they used to work. Technological solutions will help protect

all changed. Our competitive advantage is that our products

data because information will be stored securely to be passed

can be offered to different industries spanning automotive,

on to the next generation of workers.

mining and construction.

215

VIEW FROM THE TOP

FLEXIBILITY, DIVERSIFICATION HELP WEATHER PEMEX STORM Daniel Zuluaga Country Manager of Tiger Engineering

216

Remigio Delfin Commercial Manager of Tiger Engineering

Q: What has been Tiger Engineering’s main area of

the market and win solid contracts before the crisis hit the

expertise since entering the Mexican market?

industry. The company decided early enough to diversify its

DZ: Tiger Engineering in Mexico is part of Summum

projects and services by working with the private sector and

Projects, the engineering services division for the energy

providing Project Management Consultant (PMC) services.

sector of the SUMMUM Group, which also consists of

We have already started working as a PMC provider on

Summum Energy, focused on oil and gas services and

projects such as the naphtha reforming plant at the Burgos

Gómez Cajiao y Asociados, focused on engineering services

industrial complex in Reynosa, Tamaulipas. Fortunately, our

for infrastructure. With this support, Tiger Engineering can

PMC services fit with PEMEX’s new model of not working on

be flexible, which is an added value for our customers.

projects that do not align with its core activities.

Tiger Engineering works primarily in the upstream

DZ: Mexico imports over 40 percent of its refining

and downstream segments, with most of our projects

derivatives, which does not match the installed capacity,

in offshore, refining and cogeneration. We also have

showing that there is opportunity to increase the conversion

expertise in segments such as onshore and storage. This

ratios in PEMEX’s plants. PEMEX has already understood

diversification has allowed us to remain in the market even

the importance of seizing this opportunity and, after stating

through hard times.

that it will only focus on its core business, has reached out to companies to take care of revamping PEMEX’s refineries.

RD: Tiger Engineering started operations in Mexico in March

New players may have strong technical capabilities in

2011. Since then we have worked over 2 million man hours in

greenfield areas when it comes to renovations it is extremely

offshore, mostly in Campeche. Just after starting operations,

important to have specific national and sectorial know-how,

Tiger Engineering won a contract with PEMEX, securing

which is among Tiger Engineering’s strengths due to a local

470,000 man hours and a US$19.2 million investment

workforce that has experience in those very same locations.

for the period 2012-2016. We also participated in the development of the Ayatsil-Tekel field, where we engineered

Q: What are Tiger Engineering’s expectations for the

the ducts, communications and electric interconnections.

coming years?

Our experience during these and other projects secured

RD: In Mexico we want to focus on the areas where we have

our involvement in the Campeche project, which involved

plenty of experience and knowledge, which are offshore,

the modernization, expansion and maintenance of 700

refining and combined cycle plants. We can see the highest

structures involving 963,000 man hours and an investment

market growth in the oil and gas industry and are expecting

of US$28.9 million. In offshore Tiger Engineering has more

to work on projects in the US that are specifically focused

experience, especially in E&P.

on meeting Mexican demand, using Mexican investments. There is also strong potential for growth in the combined

Q: How has the Energy Reform and PEMEX’s restructuring

cycle segment as Mexico considers cogeneration with

impacted the company’s activities?

natural gas as a clean energy that will help it reach its clean

RD: Budget constraints forced PEMEX to end some

power targets.

contracts. Tiger Engineering was extremely lucky to enter DZ: Besides maintaining our status as a successful engineering company, our objective is to become a Tiger Engineering is an engineering company with services for

successful PMC in Mexico. The PMC area is not completely

the entire oil and gas industry, from upstream to downstream

new for Tiger Engineering. As an example we can point to

and with over 3 million man hours of experience. Based in Mexico

the US$4 billion refining project in Peru where SUMMUM

City, Tiger Engineering is part of the Colombian SUMMUM group

Group is participating as a PMC.

VIEW FROM THE TOP

SURVIVAL OF THE FITTEST IN OIL SERVICES GERARDO TAMAYO Director General of Sumimsa

Q: What is Sumimsaâ&#x20AC;&#x2122;s strategy to remain competitive in

them including Oro Negro and some logistics companies.

the oil and gas industry?

We are ready to start providing our services to foreign

A: Our clients want more integrated services sourced

companies when they enter the market, applying the

from only one company at a lower price, so as well as

model we already use with Mexican firms. We buy products

cutting operational costs we are adding services to our

directly from manufacturers, ensuring a high level of quality.

core business to become a one-stop shop. We are also

We also train people to use the tools and services and our

expanding and diversifying our business to the mining,

prices are competitive.

automotive and construction industries. Q: How did the lower oil prices of 2015/16 impact your PEMEX is our main customer but it has reduced operations.

business model?

Despite this reduction, we need to increase our dealings

A: Our business model has not changed much as a result of

with the company in terms of products and services. In

lower oil prices. It is not always possible to cut the prices of the

2015, PEMEX had about 40 operational drilling rigs and

products and commodities we sell because they have fixed

this number has now dropped to four or five. We need to

costs. On the other hand, we have lowered the price of some of

supply more products and services to the remaining rigs to

the services we offer to maintain competitiveness. Many other

increase our sales volume. Sumimsa sells and rents handling

companies are also shaving costs. Before the drop in oil prices,

tools for drilling, consumables, drill lines and valves and also

salaries were inflated and rent for warehouse space was also

provides a trailer-homes service.

extremely high. Now both are more normalized. To survive in the new market, companies must be financially strong, more

Q: Are the conditions in Mexico ready for global oil

efficient and innovative in their business strategies.

companies to set up shop and what will be Sumimsaâ&#x20AC;&#x2122;s role? A: Mexico is a good country for international companies to

Q: What will Sumimsa do to win new contracts in the

invest in. Mexico has better conditions than some countries

coming year?

already hosting IOCs. It does not have the issues seen in

A: The key to remaining competitive is to stay close to

Angola, Nigeria, Iran and Kuwait, for example, so we are

customers and to continue offering services despite the

a better investment option. We are defining a strategy to

low level of activity in the industry. When business picks up

contact companies entering the market for the first time.

again, customers will remember who stuck by them during

If companies arrive with suppliers from other countries,

the hard times. Our company is not very large and yet we

the Mexican government must work to ensure newcomers

represent important brands and vital services. Sumimsa

contract the services of local suppliers.

knows the problems facing companies in the oil and gas market in great depth and we will be a good solution for

We can provide consumables such as handling tools, drilling

incoming businesses and those already present in the

tools, valves, shakers and many other equipment parts used

country. Our company grew around 15 percent in 2016 by

on rigs. We will be excellent partners for any new company

diversifying our business and through greater interaction

because we can offer complete solutions for the drilling

with private companies. In 2017 we expect to grow at least

services they require.

20 percent.

Q: Are you working with any of the other larger oil service providers like Schlumberger and Baker Hughes?

Sumimsa is an oil and gas service provider, offering

A: With the problems in the industry resulting from low oil

nondestructive testing, visual and electromagnetic inspections,

prices, most of the offshore oil rigs in Mexico are working

steel-wire cleaning and training services. It familiarizes itself

with Mexican companies. Sumimsa is working with most of

with its clientsâ&#x20AC;&#x2122; equipment to anticipate maintenance needs

217

VIEW FROM THE TOP

THE EXPLOSIVE SIDE OF OIL AND GAS

Vicente Cabeiro President of Hasue de México

218

Carlos González General Manager of Hasue de México

Q: How does the handling of explosive materials in Mexico

we fully comply with international standards. Hasue de México,

compare with other countries?

55 percent Mexican-owned. We created Hasue Transportes

VC: The management of explosive materials in Mexico

Especializados, which is 100 percent Mexican owned, so that

is different to anywhere else in the world. The level of

we could obtain the correct permits to transport explosives.

complexity is extremely high due to the very strict laws

SEDENA will only issue the permits when a company fully

involved in the process.

complies with Mexico’s Ministry of Communications and Transport (SCT) regulations, demonstrating the various

CG: The biggest challenge is negotiating all the regulations

hoops firms must jump through to finally be able to handle

that the Mexican Ministry of National Defense (SEDENA)

explosives.

applies to the handling of dangerous materials. This body regulates the process on a basis of permits, which

Q: How is the management of explosives impacted by

authorize companies to buy, transport, store and use

regulatory bodies like CNH and ASEA?

explosives. The permits are not transferable between

VC: SEDENA considers the products we handle a matter of

different companies and must be applied for individually

national security. For this reason, the different regulatory

and renewed each year.

bodies must adhere to the strict policies it sets. The first step to meeting its requirements is to go to the council

In the area of explosive products for seismic activity, each and every cartridge imported from the US has its own unique tracking number

for permission to use explosives in that specific area. Then the approval of the state government must be obtained. The third and final part is when SEDENA authorizes the permits. It is a complicated process but if the product we handle falls into the wrong hands, it could result in a security issue. In the past few years the regulations surrounding the handling of explosives have been constantly intensifying. Seven years

Q: How can Hasue help new companies in this regard?

ago a company could transport explosives in a two-manned

VC: When a company comes from abroad and has to use

vehicle with an escort. Now, an external armed escort is

primary explosive materials for extraction or production,

required. There are very few companies in Mexico that can

Hasue can offer a complete service. We buy the material,

function at this level of specialization.

import it, store it and distribute it. Moreover, we assume responsibility for the actual usage of the material so our clients

Q: How does Hasue interact with SEDENA?

can bypass any formalities with SEDENA.

CG: We interact with SEDENA on a daily basis as part of our operations. When transporting any type of explosive,

CG: Companies face additional challenges with the

authorized military personnel must be informed of the exact

environmental and safety regulations. Hasue has prepared to

departure and arrival times and the vehicle being used

address this need by obtaining ISO certificates and ensuring

72 hours in advance. We also renew our handling permits annually and report all outgoing material and our usage to the ministry on a monthly basis.

Hasue de México is a Veracruz-based integral provider and distributor of explosive solutions and products for the oil and

VC: In the area of explosive products for seismic activity, each

gas industry, for activities such as seismic exploration, drilling

and every cartridge imported from the US has its own unique

and well work, among others

tracking number, which is a testament to the diligence that

Perforating Charges, Hasue de México

219

goes into these operations. There is a custody chain of various

preparing for this in advance so we have enough people for

events that must be constantly accounted for in great detail.

explosive transportation when the time comes.

Q: How does Hasue manage the many risks involved in the

Q: How does Hasue find and invest in talent to deal with the

transportation of explosive materials?

challenges involved in its operations?

VC: First we have a management team dedicated to

CG: We focus on finding people with proven experience in

environmental issues, safety and security, which adheres

handling and managing the logistics of explosive material.

to all the regulations set out by the Mexican government. It

Every company has its own safety and security standards so

is undoubtedly a risky task for Hasue to manage explosive

we must train and certify our employees to be prepared for

material because of the insecurity the country faces.

every situation.

In the south, problems with land access are common, with

VC: Since we try to hire people experienced in explosives, we

farmers or community leaders often blocking entrances and

often look to other sectors such as construction or mining.

holding companies ransom for money. In the north, the drug

We also seek out ex-military personnel, such as generals and

cartels cause similar problems. Despite these risks, Hasue

captains. If we decide a person is capable, we introduce him or

has worked for seven years without one incident because

her to Hasue’s standards, which are often higher than normal.

we work to the highest standards. Carlos worked with Orica

Every warehouse has monitoring centers that constantly keep

for 30 years, so he is very familiar with the management and

an eye on what is happening.

production of explosives and with international standards. Q: How is Hasue positioning itself to capitalize on the influx Q: What are the specific challenges involved in the process

of new players that will operate Mexican fields?

of importing explosive materials into Mexico?

CG: Right now the winners of Round One are beginning to

VC: There are many bureaucratic requirements in the process.

decide which service companies to contract for the different

Additionally, it is complicated by the fact that declarations

jobs involved in operations. Operators choose a seismic

must be made every time a vehicle changes military zone. We

company, which then selects a company like Hasue to provide

move 15 tons of material at a time, which is a large quantity

explosive materials, so we do not deal directly with the new

given the nature of the product.

operators entering Mexico.

CG: Without a doubt, new players will have to face the

VC: The larger international and local businesses involved in

challenge of the differing security measures in place across

the onshore R1.2 were not familiar with the protocols involved

Mexico’s 32 states.

in moving explosives in Mexico. Through presentations Hasue answered various questions they had regarding the

Q: Is Mexico’s oil and gas market prepared for the increase

process. Their biggest concern was how long it would take to

in the complexity of drilling operations?

implement the permits and plans for transferring materials. It

CG: The truth is that there will not be enough people to cover

takes 90 to 120 days to process everything once the contract

the increase in vigilance needed for all the new operations that

is signed. Their next query was who could do this for them.

will begin, whether it is in downstream or midstream. Hasue is

Hasue was the answer.

VIEW FROM THE TOP

PREPARING FOR THE FUTURE NOW MANUEL MARISCAL Director General of O&L Offshore

220

Q: How has the Energy Reform redefined O&L Offshore’s

the correct knowledge must be sourced to help. This is

business strategy in the Mexican market?

where O&L comes in. Whether it is a particular piece of

A: PEMEX will not be the only player and we are preparing

equipment, an extra vessel or more divers, O&L ensures

for that. We are meeting frequently with incoming

that the expert satisfies the client’s needs.

companies to understand their needs and how we can help them. Right now is a good time to invest in Mexico.

We can assure companies that O&L has substantial

The main challenge for new companies is to understand

experience – around 15 years – working with large,

how business is done here in terms of regulations. It can

international oil companies. With this in mind, they can

be unclear which regulatory body to approach, since there

be assured that we are a reliable partner for their entry

is CENAGAS, CNH and CRE to choose from.

into the Mexican market. We have been in conversations with a big US company about a potential partnership. It

O&L has around 15 years' experience working with large international oil companies

chose us because it knows we have been doing business in Mexico and we have delivered. We always take care of all details of a project, ensuring everything runs smoothly. Q: How will Mexico’s oil and gas market evolve in the upcoming rounds and what role will O&L Offshore play?

Q: What factors do you take into account when deciding

A: O&L Offshore has the same strategy for the upcoming

who to work with?

rounds as we did in the previous ones: to observe which

A: We work with companies from the Netherlands and the

companies win the blocks and determine which ones we

UK and the main reason for this is our focus on quality.

wish to work with. We are not operators, so we will not

O&L strives to work with the best companies in the field to

be getting involved beyond this. We believe that now is a

ensure every job is completed to extremely high standards.

very important time for the Mexican oil and gas industry.

Recently we traveled to the UK to have a conversation with

The key is cooperation. PEMEX’s strategy is still unclear

different British companies. We believe some of the best

but there are also many doubts surrounding the upcoming

offshore technologies are found in Aberdeen due to the

licensing rounds. Companies have bid on the rounds and it

area’s extensive experience in the North Sea. We always

could take them a while to start. Some winners are waiting

strive to find new technologies and ideas, focusing on new

to see what other companies are going to do before they

companies that are experts in what they do.

begin projects in earnest. Winning the field is one thing but many issues follow. Logistics, operations, security and

Q: How do you convince new companies that O&L is a

environmental issues still need to be addressed.

reliable alternative to global oilfield service enterprises? A: When companies do construction work onshore

Q: Fast-forward five or 10 years. What will O&L Offshore’s

something is bound to go wrong. But when companies

portfolio look like?

do construction work offshore the problems are 10 times

A: In five or 10 years, we expect our portfolio to resemble

worse. When there is a problem to solve, an expert with

our current one, which focuses predominantly on shallowwater and deepwater projects, even though projects in the latter require completely different services. For

O&L Offshore is a Mexico-based engineering company

example, we assisted PEMEX with the basic conceptual

specialized

engineering for the offshore fields that resulted in

hydrocarbons offshore and onshore as well as conceptual and

farmouts. We believe O&L Offshore can be a strategic

basic engineering projects

partner for new players.

exploration,

drilling

and

production

VIEW FROM THE TOP

NEW OPPORTUNITIES ON THE MARITIME HORIZON GERARDO SÁNCHEZ President and Director General of Naviera Bourbon Tamaulipas

Q: What opportunities will the opening of the oil and gas

terms. We expect to see offshore operations in Tampico and

market create for Mexico’s maritime industry?

Altamira in no more than four years. NBT operates all over

A: We expect many opportunities as new companies enter

Mexico, with bases in Tuxpan, Tampico, Ciudad del Carmen

Mexico, whether they are winners of blocks in the licensing

and Dos Bocas. Instead of expanding, we are focusing on

rounds or new PEMEX partners through Trion’s farm-out.

the maintenance of our existing fleet and on maintaining financial health. These two conditions are the foundation for

We see great potential for Naviera Bourbon Tamaulipas (NBT)

capitalizing on future opportunities when they come. These

to do business with the new contractors and subcontractors

difficult times call for joint ventures and partnerships. Our

coming to Mexico for deepwater exploration. Importantly, we

French partner, Bourbon, is productive and financially healthy.

expect oil prices to recover by the time these opportunities arrive and we have ample experience in all the services

Q: NBT has a long history in Mexico. How does it remain

involved in deepwater drilling.

competitive? A: To remain competitive we need to be completely focused

We recently completed an anchor deployment for a semi-

on quality standards and safety. That involves being efficient,

submersible drilling platform to a depth of approximately

carrying out maintenance work and training personnel. The

1,800m using one of our tugboats, setting a new record in

industry has recently faced difficult times especially in terms

Mexico. We started doing these operations in Lankahuasa,

of human resources because of the need to suspend work on

southeast of Tuxpan, and in the Lakach field. We have

unprofitable contracts and reduce costs.

experience supplying boats for these types of services, always with a high level of performance. Because of the cost of

The key to remaining competitive in the market is vessel

drilling in deepwater, drilling companies are more demanding

maintenance. Even if the vessel is not active in a project,

in terms of performance and quality. Any problem in the

having personnel aboard is vital for its survival. Our fleet is

logistics chain could have significant financial implications

brand new, so we must preserve the quality of our computer

for a high-budget project. As a service provider, we are aware

systems. Usually we have 10 to 12 days between commissions

of these factors and manage quality accordingly.

to prepare the boat for a new project.

Q: What projects are you working on that will help NBT seize

Q: Do you think enough companies are providing marine

the coming opportunities?

services for new projects?

A: We are building a new port, called Puerto Matamoros, in

A: Yes, there are enough companies providing marine services

Mexican territory just south of Brownsville, Texas. It is being

but they do not cover all aspects. For example, geophysical

built as close as possible to the Perdido area 130 nautical

exploration vessels are not available in Mexico but we have

miles from the coast. The existing base for Perdido logistics

supply vessels and anchor handlers, which are sometimes

is in Tampico but Matamoros is twice as close. This increased

required to transport jack-ups. Our Tamaulipas fleet is on

proximity to Perdido is beneficial for any company because

average 6.5 years old and almost all those vessels are equipped

it will save fuel and time and ensure a higher level of safety if

with dynamic positioning (DP2) technology, whereas our

there is an accident. Tampico is also a good option as a base

smaller crew vessels are controlled conventionally.

for offshore operations because there are other unexplored deepwater fields east of the area, which officials say hold significant reserves.

Naviera Bourbon Tamaulipas is a Mexican company that provides miscellaneous specialized offshore vessels that

All contenders will compete on an equal playing field, with

address the oil and gas industry’s logistics and transportation

the same information available and the same contractual

requirements

221

UniformanceÂŽ Suite, Honeywell

TECHNOLOGY & AUTOMATION

Technological advances have made a mark in the oil and gas industry in a particular way. As the industry pushed through a long period of low oil prices, costs had to be cut and efficiency measures had to be enforced. Research and development departments became the stars of several industry players as innovation became one of the key elements for companies to remain competitive. The increased reliance of the hydrocarbons industry on technology includes a new universe of sensors, smart devices and wireless equipment connected via the internet at an unprecedented speed, making processes safer and more reliable. But there is a dark side as well. As technology gets ever more sophisticated, companies must also protect against cyber threats that could disrupt operations.

This chapter offers insight into the innovation, automation and monitoring solutions springing up and how they are transforming the sector by offering optimization and cost-efficiency to companies that need to cut down on expenses. It also explores the steps companies are taking to step up cyber security.

223

CHAPTER 9: TECHNOLOGY & AUTOMATION 226

ANALYSIS: The Future is Digital

227

VIEW FROM THE TOP: Craig Breese, Honeywell Mexico and South America

228

VIEW FROM THE TOP: Vernon Murray, Emerson

229

VIEW FROM THE TOP: Alejandro Lupiañez, Wood Group

230

VIEW FROM THE TOP: José Cedano, ProOil

231

INSIGHT: Ron Daley, Data Scavenger

232

ROUNDTABLE: How Will Digitalization and Big Data Impact the Oil and Gas Industry?

235

INSIGHT: Mario Salas, Petroindustrias Globales

236

VIEW FROM THE TOP: David González, Net Brains

237

INSIGHT: Hernando Gómez de la Vega, R2M

238

VIEW FROM THE TOP: Laura Schwinn, C&C Reservoirs

240

VIEW FROM THE TOP: Miguel Gama, Shockwatch

241

VIEW FROM THE TOP: Arturo Martínez, Welltec

242

VIEW FROM THE TOP: Gustavo Pastrana, SITEPP

243

INSIGHT: Ricardo Fayad, Aquipsa

244

INSIGHT: Joe Hickey, Kodiak Services International

Luis Díaz, Kodiak Services International 245

VIEW FROM THE TOP: Pedro Hoyos, GlobalSat

246

INSIGHT: Luis Cantú, Metrología Electrónica de México (MTE)

247

VIEW FROM THE TOP: Lauro Beck, Osbog

225

ANALYSIS

THE FUTURE IS DIGITAL For Mexico, opportunity is knocking. The country has opened

AT RISK ON THE CLOUD?

its doors to some of the world’s most technology-driven

While new technologies could increase safety in

companies, allowing it to lead the way in digitalizing the industry

the physical realm, they introduce new, virtual

and enhance safety, increase efficiency and drive productivity

risks, especially when it comes to how oil and gas companies store and manage their data.

Innovation in automated solutions and data management

Cloud storage is already commonplace for smartphone users

systems is transforming the way oil and gas companies

and this type of virtual architecture is quickly seeping into

work across the globe. Large mergers like last year’s

operations across many industries.

GE Oil & Gas and Baker Hughes tie-up show that large industrial players are taking a technologically focused

Its introduction into the oil and gas industry has been notably

future seriously.

slower due to the sensitive nature of the data well operators manage. Any given well has dozens of parties with interest in

226

PEMEX could be an example. Transforming into a

its data, whether for trade advantages or intellectual property.

productive enterprise of the state after its overhaul by

“Oil and gas operations will become more dependent on the

a new leadership team in 2016, PEMEX has realigned

cloud and different types of software but this will create

its strategy to focus on efficiency, profitability and

new cyber risks” predicts Sebastián Aguayo, Subdirector

productivity as it reels with the rest of the industry from

of Energy for Marsh Brockman and Schuh México, a global

the plunging oil prices that forced companies to deeply

insurance brokerage and risk management firm. His concern

rethink cost structures. It is not alone.

was echoed in GE’s 2016 annual report to shareholders, in which CEO Jeffrey Immelt highlighted cybersecurity as one

Daniel Gutiérrez, Director of Pepperl+Fuchs Mexico, says

of five key risks to strategic execution.

that his firm’s technology is helping performance at Latin America’s largest petrochemical plant, Braskem-IDESA’s

Michael Günther, Director of Energy for Marsh Brockman and

Etileno XXI project in Coatzacoalcos, Veracruz. “We make

Schuh México, points out two key areas of cybersecurity risks

it possible to maintain facilities online and survey a plant

faced by oil and gas companies. “The first is cyber liability,” he

remotely,” he says, “which allows companies to identify

says. “Companies that are custodians of their clients’ sensitive

issues before they develop into more serious problems.”

data are responsible if someone steals this information.”

Increased connectivity between decision-makers and the

Hacking to cause intentional harm to operations is another

plants becomes an additional benefit.

risk area for companies and Günther warns that it is not always covered by reinsurance policies.

CAPEX VS TIGHT BUDGETS A top challenge that threatens to outweigh the benefits

INTERNET INFRASTRUCTURE

is that it sometimes becomes difficult to promote new

While insurance companies can create contingency plans

technologies in times of tight budgets like those of recent

and teams to tackle a hacking emergency, technology

years. In PEMEX’s case, the “perfect storm” of low oil

solutions companies are ramping up efforts to keep up with

prices, a corporate restructuring and the Energy Reform

regulation surrounding the infrastructure of Internet Service

led to severe budget restrictions for the NOC. Its planned

Providers (ISPs). “All ISPs must comply with certain rules

spending for 2017 is around US$19.7 billion, 18 percent

and regulations,” says David González, Managing Partner

below the US$24 billion it had in 2016.

of Net Brains, “but after that, one must look at the specific infrastructure that will be used to decipher all the incoming

Gerardo Tamayo, Director General of engineering solutions

and outgoing data.”

distributor Sumimsa, warns against a penny-pinching mindset that could shortchange safety and maintenance

As the oil and gas industry evolves into an era defined by

and points toward the state-owned company’s accidents

digitalization, virtual platforms and automated solutions,

in recent years as a cautionary tale. In April 2015, four

some challenges and benefits are yet to become visible.

workers lost their lives in a fire on PEMEX’s Abkatún

Despite the uncertainty, it is clear the industry is undergoing

A platform and three others were killed on the same

a technological revolution that will have far-reaching

platform when another fire broke out in February 2016.

consequences for safety, security and performance. As Mexico

“It is important to highlight that safety must not be

offers countless new ventures to the private sector stretching

compromised by budget cuts or any other factor as it

across the value chain, there is an obvious opportunity to lead

will put human lives at risk,” he says.

in the digital realm.

VIEW FROM THE TOP

COMPANIES HAVE WHAT THEY NEED TO DIGITALIZE CRAIG BREESE President of Honeywell Mexico and South America

Q: How does Honeywell view Mexicoâ&#x20AC;&#x2122;s Energy Reform?

three basic pieces: human, mechanical and technology.

A: We believe that what is happening in Mexico is not a

These three elements are tightly related so no matter how

simple transformation but a reinvention. The oil and gas

much a company invests in equipment and software, if its

industry has shown willingness to evolve its business

human element is not being developed the investment

and become more efficient and productive. Honeywell

will be wasted money. That was our goal when developing

has worked in Mexico since 1936 and we believe we are

the technology center in Mexico; to have a training center

positioned to keep helping. We also have experience with

close to the customer in which human capital could develop

almost all the leading oil companies that are coming to

knowledge and skills and take advantage of the automation

Mexico and have even created specific solutions for some

technologies that we offer. The center has cutting-edge

of them. As for midstream, our technology is present in the

technology that allows us to gather information from all

operation of over 111,000km of pipeline and with so many

over the world about real processes. With that real-world

players looking for investment opportunities, we believe

information, we develop courses and training that allow

new terminals and pipelines will follow. These will also

human talent to put their knowledge into practice and gain

require advanced technology.

experience through simulations. This process will lead to safer and more productive jobs. To get those jobs, workers

Q: What is one mistake companies make regarding the

will of course need a different set of skills and abilities

digitalization of their processes?

but through our training center and other competence

A: Most companies believe that installing cutting-edge

management solutions we want to help them develop those

cyber-secure cloud-based solutions is expensive but it is

needed skills and abilities.

not. Most companies already have most of the necessary equipment to do so and only require the implementation of

Q: How is Honeywell changing together with the oil and

adequate digital solutions that gather the most important

gas market?

information, analyze it and offer it back to the operators and

A: Honeywell changed its business structure in Mexico five

decision-makers in a way that is understandable and easy

years ago to a system consistent with a high-growth region.

to digest so they can make appropriate decisions.

Under this system, Honeywell recognizes that Mexico has a lot of potential to grow on different levels and across

Q: How does Honeywell ensure that automation

various industries. Honeywell is well-established in the

technologies advance alongside the human talent of its

US, Canada and Europe and through this structure it is

customers?

looking to further develop local infrastructure and people

A: Our solutions involve competency management so

by designing solutions that are focused on the needs

companies can embrace and take advantage of the

of the Latin American market. This new system has also

possibilities that technology offers. Our goal is to avoid

focused on having a more horizontal structure for each

the need for people to work in risky places or do repetitive

of its business units, allowing each one to focus on its

and labor-intensive jobs. We would rather they be in safer

market segments. For example, our process technologies

locations where they can do the same thing in a faster and

business, UOP, reports directly to Chicago while having

easier way, while allowing them to use the saved time on

local leadership in Mexico.

activities that will bring more value to the company, such as think of ways to improve processes, increase efficiency or reduce stress, among others.

Honeywell is a multinational company offering innovative technologies for many industries. Founded in 1906 in the US and

Honeywell's Competency Management approach breaks

with offices in Mexico City since 1936, Honeywell offers a wide

down a companyâ&#x20AC;&#x2122;s industrial automation opportunities into

range of specially designed solutions for the oil and gas industry

227

VIEW FROM THE TOP

PROJECTS ON BUDGET AND TIME VERNON MURRAY Vice President and General Manager Mexico and North Latin America of Emerson

228

Q: How has the Energy Reform changed the Mexican

and is also in perfect alignment with our customers’ safety

market for Emerson?

standards. Emerson holds a strong portfolio relating to

A: The Energy Reform has been very rewarding as both

safety automation features for fire and gas as well as

national and international players are coming into the

emergency shut down. We have been very successful

market, diversifying it and opening it for new opportunities

with that portfolio in Mexico and foresee that as industry

as well as investing more capital. Companies are making big

players take a more conscious approach to safety, from

investments and have an expectation for their returns, but

producers to consumers and insurers, this portfolio will

first and foremost regarding quality, safety and reliability.

grow more in Mexico. Mexico still has some catching up to

For safety, Emerson offers automated features for fire and

do in the automated safety market compared to other more

gas and emergency shut down. On reliability, our portfolio

developed and mature markets such as US and Europe, but

for key equipment monitoring is top in the market and on

we see trends going in the right direction.

measurement the custody portfolio is one of the strongest in the market with Coriolis flow meters and pressure,

Q: How will PEMEX’s restructuring impact its use of

temperature and level measurements.

automated solutions? A: PEMEX will continue to be a primary player in the market,

Emerson can see great plans for new infrastructure

there is no doubt about it. PEMEX has a strong plan to

being built and for those projects we present potential

restructure its organization, including alliances and joint

customers with our project certainty concept. Project

ventures. This will mean PEMEX will start competing against

certainty is Emerson’s approach to ensure that projects

world leaders in automation and safety, therefore asking

are done on budget and on time. Looking at the industry

for even more of these automation technologies. PEMEX

in general, Emerson has found that 62 percent of the

is traditionally a significant user of wireless technology,

projects are not carried out on time (this is, taking more

probably one of the five top users of Emerson wireless

than six months extra to execute) nor on budget (needing

technology around the world.

a 25 percent increase on budget). These numbers are terrifying for a company that is embarking on the

Q: What trends does Emerson see in the industry for

construction of a 5,000km pipeline. Projects always have

the future?

changes, there is no way to avoid that, but to ensure

A: There are two primary trends that are affecting the

project certainty, Emerson's approach is to partner up

industry. The first one is the aging workforce. Critical

from the early design with all the stakeholders to ensure

knowledge and expertise will leave the worksite. By having a

that changes that will have to happen can be allocated

strong measurement infrastructure, processes will be more

without affecting budget nor time.

automated but that does not mean that they necessarily will be better, so Emerson is looking for ways to ensure

Q: What range of Emerson’s solutions is most applicable

that its automation equipment takes the knowledge and

to the Mexican market?

expertise from the most experienced people and allow for

A: Emerson’s most important value is safety. Our life saving

a smoother transition with the new generation, which will

behavior philosophy is fully adopted by our employees

have a knowledge base to work with and to build on top of. In this regard Emerson is also taking action to ensure that newer generation familiarize with STEMs and get better

Emerson is a global industrial automation company founded

opportunities in the industry. Second one is environmental

in 1890 in the US. With offices in Mexico City, its product and

stewardship. In the past, factors like GHG emissions and

services for the oil and gas Mexican industry focus on the

water quality were not important, but they have become

upstream and midstream area

extremely relevant.

VIEW FROM THE TOP

MAC-BASED SOLUTIONS HELP LOWER COSTS ALEJANDRO LUPIAÑEZ Vice President of Mexico Operations for Wood Group

Q: In a new and dynamic Mexican environment, where can

the customers’ needs and how to best attend them in a

Wood Group’s strongest expertise be found?

bespoke way. Our solutions solve the customers’ problems

A: Mexico is seeing a number of companies coming to

and comply with the highest quality and safety standards

the Gulf of Mexico supporting offshore and deepwater

to protect workers and the environment, help to improve

projects. Here, Wood Group’s strongest expertise within

project ROI and extend the assets’ useful lives. 229

automation is as Main Automation Contractor (MAC) throughout the whole life cycle of the asset. Included

Q: Automation has brought savings in both occupational

in MAC services are telecommunications, advanced

safety and costs. How is Wood Group achieving excellence

applications, modeling and simulation projects, as well

in cybersecurity?

as training and learning for operations. These services

A: Cybersecurity is an issue that is at the forefront of

generally start with engineering studies and continue

the oil and gas industry, given the increasingly advanced

through design, procurement, manufacturing and testing

technologies being developed. Wood Group promotes

of equipment, followed by installation and commissioning.

using established architecture frameworks that are tailor-

MAC-based automation solutions have been acknowledged

made to fit our customers’ needs. Vendor independence

across multiple industries to provide overall lower costs

allows Wood Group and the customer to find the best

while ensuring the startup and normal operations are

solution for each project. Ensuring the integrity and

completed with minimal to no upsets due to the holistic

security of the asset is critical. Providing functional safety

view of the automation system.

and cybersecurity consulting, we support compliance with ISA84 and security of process control systems.

Q: What cost advantages can Wood Group offer to the industry with automation projects?

Q: How can Wood Group help to modernize the aged

A: Automation has been instrumental in helping to

refinery infrastructure in Mexico?

achieve up to 10 percent production increases in shale

A: Modernizing infrastructure tends to be difficult, mainly

wells. Another very important advantage of our well

because of the lack of information regarding its current

integrity tools is that they also can be used to increase

status, making it almost impossible to have a common

the asset lifetime via monitoring and analysis in order

understanding of the problem between all the project’s

to detect pressure losses and perform preventive

partners. If each partner on a modernization project

actions that contribute to significantly increasing the

understands a different problem, then each one will also

well lifetime. In this cycle of low oil prices, shale wells

set a different roadmap that does not align with the client’s

in the US have particularly benefited from these tools

goals. Wood Group uses cutting-edge technology such

by helping to extend their typical one-year lifetime to

as laser diagnostics and 3D scanning that enables us to

up to ten years. This technology has a strong market in

retrieve a solid and live picture of the infrastructure’s

mature wells in the US, and we are proud to introduce

status that can be used as common ground among all

it to Mexico, thereby helping our clients to increase

the project members. Once common ground has been

the expected return on investment (ROI) from their oil

established, real and effective milestones that will meet

exploration and drilling projects.

the client’s goals can be proposed.

Q: How can Wood Group support the winners of past and future oil tenders to operate more safely and efficiently?

Wood Group is an international energy services company

A: Wood Group is recognized as a vendor-independent,

with around US$5 billion in sales and operating in more than

full-service company, allowing us to be customer-focused

40 countries. The Group designs, modifies, constructs and

instead of product-oriented. This means that we focus on

operates industrial facilities mainly for the oil and gas sector

VIEW FROM THE TOP

GET RID OF OLD PRACTICES TO BOOST PRODUCTIVITY JOSÉ CEDANO Director of ProOil

230

Q: What new lines of business are emerging from the

There is also an urgent need for a change in mentality. The

market’s opening and what approach is ProOil taking?

Mexican market needs to be able to quickly adapt and

A: For ProOil the main business opportunity is in services.

provide more competitive solutions through the acquisition

Private and foreign companies are most likely to bring

of knowledge, skills and funding. It is not an easy transition

equipment and infrastructure but they are reluctant to bring

because we are not used to addressing these problems.

foreigners to operate in Mexico. We need to invest in human

To boost our competitiveness we need to get rid of old

resources and develop a highly capable labor force to meet

practices that hinder productivity.

the needs of incoming players. ProOil is fully capable of providing these services. We are focused on oil and gas

Q: How is ProOil dealing with technological advances?

control valves and field Instrumentations. The products we

A: Everything is automated now. Staff is no longer required

offer are needed at every level of the production chain, in

along the process so there are fewer employees working

oil platforms, refineries and petrochemical plants, so our

in the plant, just in the control room. New technologies are

work impacts every sector in the industry.

absorbing the process and eliminating the need for human presence in the industry. We need to adapt all personnel

Q: How has the entrance of private technology and services

to these new technologies to ensure they remain relevant.

providers over the last three years impacted the industry? A: Companies that used to belong to PEMEX received

We are constantly investing in human resources. Every

investment from the private sector and their responsiveness

couple of months we invite international providers to

and payment capacity improved greatly. Petroquímica

Mexico to train our labor force and share the market’s latest

Mexicana de Vinilo (PMV) was owned by PEMEX but Mexichem

trends. We need to be prepared for the new customers that

invested and immediately boosted its supply chain process.

will be coming to the country. 2016 was a difficult year. The industry had to adapt to new market rules, new business schemes and the industry’s overall evolution. 2017 will bring

ProOil is a leading Mexican company in the automation and

opportunities for the Mexican oil and gas industry. All the

industrial services sector, representing several top national

companies that won in Round One will start operations,

and international brands specializing in a range of fields from

so companies providing services to the winners will have

instruments to hardware

major developments.

INSIGHT

DATA HABITS AND THE PROMISE OF THE CLOUD RON DALEY President and CEO of Data Scavenger

Data storage and information management in the oil and gas

is now on a mission to replicate this market presence in

industry is a complex subject since companies frequently

Mexico by working directly with PEMEX, new operators and

vie for the same information while regulators, analysts

CNH for their well data management processes. “We are

and planners all demand access to timely information to

focused on becoming the standard to help Mexico’s new

perform their own analysis of fields. Well operators and

energy industry manage its data effectively and efficiently,”

service companies face the challenge of collecting and

Daley says.

making the data available to all, which can become time consuming and take away from core activities.

Data Scavenger arrived in Mexico over two years ago as part of an Alberta trade mission aimed at promoting

To solve this problem in Mexico, Canadian company Data

Canadian technology overseas. But translating its solution

Scavenger is introducing a cutting-edge solution for the

into the Mexican market has not always been easy and

storage and controlled sharing of critical data on a cloud-

challenges are to be expected in a newly opened market,

based system, says its President, Ron Daley.

Daley says. “Right now, Mexico has a unique blank sheet to work with, much like Canada did 20 years ago,” he says.

Conceived in the field of Canada’s oil patch in 1999, Data

“The advantage is that global technology has already been

Scavenger’s premise is simple: take the task of collecting

developed, refined and is ready to be applied in Mexico.”

and sending well data off the hands of operators and service companies. Through simply logging into Data Scavenger’s

Data Scavenger’s approach affords its clients with several

platform, interested parties can view the well data they

advantages that allows companies to easily integrate with

need, on a real-time basis, to make critical decisions for their

a diverse set of partners. This is an especially pertinent

organizations. In essence, the Data Scavenger platform is a

factor taking into account that with many new industry

cloud-based storage and information sharing solution that

participants, a need to implement a change of process has

eliminates the substantial time-consuming administration

taken place. As well as the ability to be flexible to client’s

that comes with managing information between partners,

needs, Data Scavenger provides the utmost security for all

service providers and regulators.

the data it handles on behalf of its clients. Data Scavenger uses the latest cloud security systems to safeguard the data

But in a newly opened market such as Mexico where until

it manages. “It is both our biggest expense and biggest

recently only one player held sway, the challenge of detailed,

value,” Daley says, adding that cloud storage is commonly

daily data transmissions is now being recognized. “When

used by many companies to store financial data so it is

the market was dominated by PEMEX, they did not concern

among the securest on the market. Building faith in cloud

themselves with measuring every well because there were

storage is something which takes time. Data security and

no additional partners who needed the data,” Daley says.

integrity is the prime objective and it is essential that only

“But as new entrants come into the Mexico energy market

authorized users access the confidential information within

and partner with PEMEX and other operators, the need to

the Data Scavenger platform.

store and share critical information is set to rapidly expand.“ “Our motto is: keep it simple,” Daley says. Although the vast Data Scavenger’s ambitions for Mexico are backed up by

amount of data held by the company could be used for

its success, with over 90 percent of oil and gas producers

data analytics and the like, Daley is convinced that sticking

in Canada securely hosting and sharing their information

to what it knows best is the company’s saving grace. “Put

on the Data Scavenger platform. Essentially, Canada has

simply, we take data for where it is created and provide it

created a central clearinghouse for oil and gas information

securely to whoever has been authorized to access it,” he

that has added efficiencies throughout the industry. Daley

says, “and that is what we will keep on doing.”

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ROUNDTABLE

HOW WILL DIGITALIZATION AND BIG DATA IMPACT THE OIL AND GAS INDUSTRY?

Big Data, the Internet of Things (IoT), automation and cloud storage should be more than simply buzzwords for the oil and gas industry. Companies are increasingly turning to digital solutions to enhance their performance in safety, efficiency and productivity in an industry facing more and more financial and operational challenges. As Mexico’s petroleum sector moves into a new era funded by foreign and private investment, it has the opportunity to seize the latest in technological advances. But with the potential benefits of digitalization also come risks. Mexico Oil & Gas Review asked a range of industry players for their opinion on how digitalization is shaping the oil and gas sector.

Safety is the main advantage offered by automation in any industrial sector. Without automation, operators need to be present for any kind of job, which in the oil and 232

gas field should be avoided as much as possible due to the dangerous nature of the activities and surroundings. For example, pipeline facilities tend to be remote and in dangerous places. Sending a pair of engineers to travel for four or more hours every time maintenance is required involves danger, cost and time and trying to

ALEJANDRO LUPIÁÑEZ Vice President of Mexico Operations for Wood Group

reduce the last two usually translates into an increased safety risk. Revenue-wise, one of the main advantages of automation is its usefulness as a well integrity tool to increase production, mainly in shale wells where production increases can reach 10 percent. These tools can also be used to increase a well’s lifecycle via monitoring and analysis to detect pressure losses.

If the cloud storage and data management opportunities arising from Mexico’s Energy Reform are truly grasped, the country could become a global leader in this area. Innovations such as glass floors with a complete collection of geographical well data are being pooled, among other revolutionary ideas pitched by industry players. This would collate seismic data and allow users to view the earth’s surface collectively, visualizing each well they are interested in and whether they are vertical or horizontal,

RON DALEY President and CEO of Data Scavenger

for example. The power that viewing all this data at once would give a drilling team is unprecedented. Nowadays, this process is done by large committees, the size of which always introduces human error into the mix. If this process is integrated into one solution, it would be a great step forward.

Cloud services and storage are hot topics in the oil and gas industry but none of the big providers such as Google, Microsoft Azure or Amazon offer a truly secure platform for oil and gas companies to host their data. Secure means being able to sign nondisclosure agreements and having the accumulated trust of other oil and gas companies. Net Brains has contacted around 10 ISPs (Internet Service Providers) in Mexico, which are the entities that will host the infrastructure and

DAVID GONZÁLEZ Managing Partner of Net Brains

provide connectivity for companies to host their data. We decided to reach out to these providers in response to the needs of our clients, who no longer want to build their own internet infrastructure or invest in their own software.

Everything is automated now. Staff is no longer required along the process so there are fewer employees working in the plant, just in the control room. New technologies are absorbing the process and eliminating the need for human presence in the industry. We need to adapt all personnel to these new technologies to ensure they remain relevant. We are constantly investing in human resources. Every couple of months we invite international providers to Mexico to train our labor force and share the market’s latest trends.

JOSÉ CEDANO Director General of ProOil

At the moment Enersoft is brainstorming how to best implement IoT. We believe that IoT will be very important in solving security problems. Technologies allowing 233

cloud connection and data mining have already been developed by Amazon and Microsoft. This is also known as Big Data implementation and allows us to better understand our clients’ behavior. If a company knows how customers consume energy, when they consume it and how much they use it for, then it understands how customers behave, allowing it to improve its business model. Understanding market behavior allows the understanding of customer behavior, which is essential

ALBERTO ROJAS CEO of Enersoft Consulting

for any company.

Honeywell is a global leader in the digital enterprise concept and IoT and Mexico has a lot of opportunity for improvement in the energy sector through cyber-industrial grade automation solutions. ‘The Power of Connected’ is Honeywell’s new branding vision and we believe in that concept. This connected ecosystem, including people, assets, plants, building and homes, is the next disruption in the market, which will enable problem-solving considered impossible before. ‘The Power of Connected’ means taking businesses to a higher level through cloud-based secure connectivity and analytics across industries. We are a company that improves productivity and decreases costs through a range of connected solutions.

CRAIG BREESE President of Honeywell Mexico and South America

Industrial automation creates more efficiency but it also creates risks. Oil and gas operations will become more dependent on the cloud and different types of software, increasing cyber-risks. Marsh Brockman and Schuh has already developed cyber-risk solutions specifically for oil and gas companies, including addressing the danger of malicious intervention in scanning systems. Moreover, we develop solutions for the risk of operational interruption due to cybersecurity failures. At the World Economic Forum 2017 world leaders produced a map showing the main risks the world is facing. One of the main concerns of world leaders is the rise of extreme political views, including protectionism and nationalism, which could lead to more cyberterrorist attacks. Marsh Brockman and Schuh has a group of experts working on these security issues and they are now ramping up their efforts.

SEBASTIÁN AGUAYO Subdirector of Energy, Marine and Aviation for Marsh Brockman and Schuh

Centenario, Gulf of Mexico, Veracruz, PEMEX

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INSIGHT

AUTOMATED SOLUTIONS TRANSFORM INDUSTRY MARIO SALAS Director General of Petroindustrias Globales

From improved safety standards to greater streamlining,

to our customers,” Salas says, drawing on Petroindustrias’

automated solutions and technology will help companies

dedication to educating its clients about the many

face a growing range of operational and strategic

applications and advantages of upgrading their current

challenges throughout the supply chain, while tackling

software solutions.

inefficient practices as the oil and gas industry comes back from the recent downturn, says Mario Salas, Director

This educational aspect is particularly relevant when

General of Petroindustrias.

considering the future use of automated solutions, due to the expected talent gap. “It is no good just having the

The company is dedicated to the integration and

software installed,” warns Salas. “If there is no one who

application of technology to improve operations in

can use it, it will be useless.” This problem, Salas adds, is

industrial plants, with extensive experience helping EPCs

already rearing its head in the oil and gas industry.

implement new technological solutions. Salas points to a project carried out for the Southwest Research Institute,

“We often speak to companies that have these

a nonprofit science and engineering center based in San

technologies available but never use them,” he says.

Antonio, Texas, as an example of how technology can

Whether the problem is a lack of knowledge, a lack of

generate gains.

perceived value or a hesitance to break with the status quo, Petroindustrias says it is doing its part to tackle the

“(The institute) requested a study exploring the reasons

issues. “We offer our clients demonstrations to showcase

why PEMEX’s crude was contaminated with chlorine, a

the true benefits of our technology,” he says.

problem that was damaging its installations,” Salas says. To do this, Petroindustrias created a simulation plant to

“Petroindustrias trains its staff to know PEMEX’s refineries

discover the root cause of the problem and as a result

more than anyone who might come from abroad,” Salas

PEMEX Refining saved approximately MX$150 million

says. This in-depth knowledge of Mexico’s NOC is an

(US$8 million) from PEMEX E&P’s insurance.

advantage for his company, distinguishing it from the international heavyweights that know the global industry

Inefficiency is a key target for technology applications

well but which may lack local knowledge.

and Salas sees how solutions like those provided by Petroindustrias can help improve industry practices.

“Our relatively small size is also a great benefit,” he

“Historically there has been no way to correctly document

adds, because Petroindustrias can work more closely

the quality of gasoline imported from the US to Mexico,

with Mexican companies such as operators entering the

as different grades get mixed in together,” he says. “With

country’s oil and gas industry for the first time. While large

the use of automated measurement technology, there

IOCs will bring state-of-the-art technology with them, the

will be more certainty as to which grades have gone into

many new Mexican players may be daunted by the scope

the mix.” This in turn provides the whole industry with

of implementing automated systems in their first-time oil

more security.

operations. “Petroindustrias is passionate about providing these new Mexican companies with added services so they

Salas believes education is a factor in bridging the

can enter the oil and gas market successfully,” Salas says.

industry’s tech divide. Together with its commercial partner OSIsoft, Petroindustrias worked on a symposium

Salas is keen to continue partnering with industry

for PEMEX during 2016 that brought together industry

heavyweights such as SGS and Thermo Fisher, with which

players to discuss automation technologies. “We do not

Petroindustrias already works. “We want to continue being

just provide a product, we provide an integrated service

a leader for PEMEX in automated solutions,” he says.

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VIEW FROM THE TOP

FROM DATA TO INFORMATION TO KNOWLEDGE DAVID GONZÁLEZ Managing Partner of Net Brains

236

Q: How can Net Brains’ methodologies and technologies

Q: What new methodologies or technologies is Net Brains

help operators raise their well performance, efficiency

developing to meet the trend of real-time data collection?

and productivity?

A: We are involved in the development of dashboards, which

A: The first important step for companies is to identify the

have been present in the market for a few years. Dashboards

correct technology to improve their reservoirs’ performance,

are electronic boards where data is conflated to show trends

since the technique required differs depending on its

in oil and gas operations, allowing the user to take action over

specific characteristics. Net Brains offers a methodology

whatever is being communicated by the system. They present

that allows its clients to map which technologies will be

data in a user-friendly way, which makes it easier to manage,

more applicable to different kinds of reservoirs. Next,

perhaps through the use of red, yellow and green lights to

the operator selects the best service company to deploy

alert operators to any problems in drilling areas.

this technology in its reservoir to maximize hydrocarbon recovery. Net Brains can also facilitate this process.

Q: How much progress has Net Brains made on its ambitions to develop “on-demand” services?

Q: How are real-time data solutions changing operational

A: Cloud services and storage are hot topics in the oil and

processes?

gas industry but none of the big providers such as Google,

A: Everyone wants to measure the heartbeat of an entire

Microsoft Azure or Amazon offer a truly secure platform

operation in under a minute but the key lies not only in

for oil and gas companies to host their data. Secure means

collecting reservoir data but also in correctly managing it.

being able to sign nondisclosure agreements and having

Net Brains is well known for its capabilities in transforming

the accumulated trust of other oil and gas companies.

the data oil and gas companies gather into useful

Net Brains has contacted around 10 ISPs (Internet Service

knowledge. For a long time companies collected data but

Providers) in Mexico, which are the entities that will host the

failed to put it to good use. Net Brains follows a process

infrastructure and provide connectivity for companies to

that sees data transformed into information and information

host their data. We decided to reach out to these providers

into knowledge. This process is vital for daily operations in

in response to the needs of our clients, who no longer want

any reservoir right now.

to build their own internet infrastructure or invest in their own software. The services we offer obviously have to

Q: What is the difference between data, information

match market demand. Net Brains has interacted with new

and knowledge, and how can this differentiation help

operators like Sierra Oil & Gas, Grupo R and Grupo Diavaz

companies?

and has seen clear interest in these kinds of technologies.

A: Data is simply numbers and often comes in large quantities. It becomes information when the interpretation

Q: What are Net Brains' goals going forward?

process begins. When a company takes action on this

A: It has been difficult for companies working for PEMEX to

information, it transforms into knowledge. With this, the

adapt to the changes in the oil and gas market, particularly

interpretation becomes a reality. Even if the initial findings

on a price level. Large service companies have borne the

were wrong, it still teaches the company a lesson that it can

brunt of this but Net Brains’ relatively smaller size has

take forward to improve its operations.

actually protected us. We believe one of our people can do the job of many with the right technology. Technology is our key into the market and we take new developments

Net Brains is a specialized consultancy firm focused on

and make them work for whatever the market is facing.

optimizing corporate investment through the acquisition

One thing we are working on for the future is providing

of hi-tech solutions, ensuring the quality of the selection,

services on iPads and smartphones because this is how

implementation and start-up processes of new technologies

people expect to consume data.

INSIGHT

OPTIMIZE PERFORMANCE IN UNCERTAIN TIMES HERNANDO GÓMEZ DE LA VEGA President of R2M

Success in a challenging and shifting industry requires

To apply this stochastic model to oil and gas, Gómez de

many components, one of which comes down to a single

la Vega takes the example of drilling oil wells. To ensure

word: optimization.

operational optimization, firstly the oil company must make sure the design of the well is adequate. Then, to

“Given the current industry circumstances, optimization has

address tactical optimization, the sequence of drilling

become a major factor for success in this environment,” says

must be defined to strike a balance between the highest

Hernando Gómez de la Vega, President of consultancy R2M.

level of net present value and lowest level of risk. Last, strategic optimization can be achieved by outlining the

R2M (which stands for Reliability and Risk Management)

strategic objectives that need to be fulfilled, such as

has carried out optimization services for PEMEX and is

increasing production, reducing risk or reducing costs. “This

counting on the increased business brought about by

model takes into account production, risk and economic

the Energy Reform to apply its highly complex stochastic

indicators,” he says. “It can also be applied to a portfolio

methodology for risk management and asset optimization

analysis of investment and operations so it goes to the

to oil and gas players, both local and international. The goal

highest levels.”

is to help them improve performance in a newly opened industry at a time of lingering uncertainty related to a long

The methodologies can be applied at different levels, he

period of low oil prices, says Gómez de la Vega.

explains, because they can be adjusted to the complexity of the project. “We can offer reliable engineering and

The consultancy can work with NOCs, IOCs and independent

improvement based on common standards, which may

oil companies and Gómez de la Vega says that the risks change

appeal to small companies arriving in the market,” he says.

depending on the individual challenge of each organization.

More sophisticated tools like stochastic analysis of field

“The risk run by a company that is going to work on a mature

development and exploration and optimization tools may

field, in which all factors are known, is completely different

be more suitable for bigger oil companies.

from the risk run by a company entering deepwater, where there is no information and variables can change,” he says.

R2M can also take existing technology, optimize it and

“The big difference is the dimension of the risk.”

tailor it to individual client needs. “Reliability center maintenance is a very common methodology known

To guarantee the successful optimization of an asset, the

worldwide,” he says. “When maintenance plans need to

company operates over three levels: strategic, tactical and

be developed for equipment in a refinery, a lot of time

operational. The executive explains that these factors are all

and effort will be required with the traditional approach

interconnected and equally important. “When companies

and often the results are disappointing.” R2M has a

attempt to optimize at a strategic level without accounting

specialized methodology for installations like refineries in

for operational and tactical optimization, the results are

which the company can develop the entire maintenance

bound to be disappointing,” he says.

plan in six months.

R2M’s tools are based on a multicriteria environment.

Gómez de la Vega says that R2M has traversed four

“When we perform optimization processes, we include

energy reforms – Venezuela, Colombia, Brazil and now

various measurements in the analysis like the hierarchization

Mexico – and he believes that the Mexican process is

index, which includes profit, investment, production, reserve

bound to be highly successful. “I believe Mexico’s Energy

replacement and risk,” he adds. This approach takes any

Reform will be the most successful to date because

company’s individual needs into account and assigns the

the authorities have used best practices from different

correct weight to each aspect included as criteria.

jurisdictions.”

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VIEW FROM THE TOP

KNOWLEDGE IS POWER, AND A BIG ADVANTAGE LAURA SCHWINN CEO of C&C Reservoirs

Q: What is the extent of C&C Reservoirs’ activity in Mexico?

a decision with confidence while eliminating confirmation

A: We have extensive experience with NOCs and IOCs.

biases, the better off it is against other bidders.

We understand that NOCs want to protect their national

238

endowment, which is a country’s hydrocarbon resources.

Q: What added value do the company’s DAKS™ and DAKS™

They also want to work with IOCs that have the experience

IQ products and services provide?

to find, explore and produce hydrocarbons. Both have the

A: C&C Reservoirs is a knowledge-based company started 22

ultimate goal of producing the most out of reservoirs. We

years ago with the introduction of DAKS™ (Digital Analogs

have worked in Mexico for about 10 years, mainly with

Knowledge System), a product that can be leveraged at

PEMEX, but after the Energy Reform we also began working

almost any step in the E&P value chain. During those 22 years

with IOCs coming to the country. Before the Energy Reform,

we have been defining the key field and reservoir attributes

we trained 300 to 400 people at both PEMEX and CNH

to consider when performing reservoir analog comparisons

and right before the reform we assisted them in capturing

and benchmarking. We have been gathering information

information from PEMEX’s fields and helped CNH build a

about the world’s most important mature reservoirs, which

tool with which they could rank the assets to be put up for

at the moment number nearly 2,000. We have written

auction. This was all so that PEMEX and CNH can continue

comprehensive reports and collected knowledge on more

to protect Mexico’s hydrocarbon endowment.

than 400 parameters for 1,500 of these reservoirs and will continuously add more knowledge so that our customers can

NOCs and IOCs that use our platform in the Mexican bidding

compare the most relevant criteria across reservoirs. Such

rounds will have added value and a tactical advantage

comparisons are really hard to do in this industry because

against those who do not. By having data from global

geologists tend to see things differently according to their

analogs they can make comparisons with the reservoirs

experience and often use different criteria but the standard

in the bidding rounds and gain information that other

classification system we have developed makes this easier.

bidders do not have. They improve their chances to better understand the opportunity and get those contracts that fit

DAKS IQ, introduced last year, is the latest version. It extends

best with their objectives. The sooner a company reaches

our capabilities for gathering knowledge and generating in-

depth reports to analytical tools and knowledge-capture

is a classification system and knowledge base. For more

know-how. To put in perspective the value that DAKS and

than 20 years we have developed a classification system

DAKS IQ provide, it would take nearly 150 years to gather

that clearly defines each of the more than 400 parameters

and synthesize the knowledge and experience reflected in

in our knowledge base. In addition, we have documented

our system.

the guidelines for the entire classification system. When data is entered into our knowledge-capture tool by the

The basis of the knowledge in DAKS is publicly available

analysts who write our reports, they know what the

information from institutions, such as the Society of

parameter means and how to apply it. Our quality assurance

Petroleum Engineers (SPE) and the America Association of

program for all knowledge capture includes clear steps to

Petroleum Geologists (AAPG), investor presentations and

eliminate errors and the rigorous quality-control program

operator discussions. The reports consist of a set of very

ensures we catch them in the event they do happen.

detailed images with a well-documented and synthesized life story of the fields. DAKS IQ is also an analytical tool

The second is The Field Evaluation Reports. Over the

that enables customers to make comparisons between

past 20 years we have written about 1,500 of the worldâ&#x20AC;&#x2122;s

reservoirs â&#x20AC;&#x201C; they begin by collecting and synthesizing their

most important reservoirs and fields. All of our analysts

own reservoir information and then benchmarking it against

go through a rigorous training program and follow a

proven global analogs in DAKS IQ through cross plots,

standard format for all our reports. While writing the

histograms and characterization tables. Such a process

reports analysts must reference all of the information used

would usually take geoscientists weeks without DAKS IQ.

and each report is checked by an editor and then by a publisher before it is made available in the C&C Reservoirs

The classification system we have developed, and which

Platform. Our research team is always looking for new

many of our customers have adopted, enables them to easily

information and when a report is updated the process is

input their data into the system. Their reservoir information is

the same. Many of our reports have been updated with

stored securely and separately from all other publicly available

new information many times, ensuring we are capturing

information. This capability has been popular with NOCs and

new improved recovery methods or new reservoirs in a

we believe that for Mexico it would be very interesting to use a

field, for example.

standard classification and knowledge-capture system such as the one in DAKS IQ, especially with the large number of IOCs

The third is the development of our Analytic Tools. We have

interested in new opportunities. For government agencies this

developed tools using agile software development methods

system can help them know whether operator development

that ensure we deliver what customers want and as quickly

plans make sense because they can compare those with

as possible.

success cases from analogs around the world. Q: How does C&C Reservoirs ensure the quality of its

C&C Reservoirs is a global software and services company

solution?

with over 20 years of upstream oil and gas experience with

A: The C&C Reservoirs solution is three different things,

operators, national oil companies and government agencies. It

each with quality assurance and control programs. The first

has offices in America, Asia and Europe

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VIEW FROM THE TOP

GIVING LATAM THE ATTENTION IT DESERVES MIGUEL GAMA General Manager for Latin America at Shockwatch

240

Q: As Shockwatch expands into Latin America for the first

Q: As PEMEX transforms into a productive enterprise of

time, what is your perception of the Mexican market?

the state, do you view it as an ally?

A: Mexico is a fundamental market in our Latin American

A: Since we are just beginning to do business in Mexico,

business strategy. Historically, Shockwatch focused on

having access to PEMEX would be a dream, but initially

the US and European markets and more recently on Asia.

our goal is to work with its suppliers. We also want to reach

But our strategy changed in 2015 when Tony Fonk was

out to CFE, which will need to monitor many variables in

appointed as CEO and we will now pay the Latin American

its transmission and distribution operations. We are experts

market the attention it deserves. Many of our customers

and market leaders in vibration and impact monitoring, so

across different industries are based in Mexico, so it is vital

we strive to offer these particular services. Although we

for us to expand our business here.

won’t work with CFE and PEMEX in the early stages of our expansion in the country, we are certain that we will

Q: Which type of companies would be your ideal partner

eventually do so.

in the Mexican market? A: Shockwatch already has extensive relationships with end

Q: Which segments in the oil and gas industry could most

clients across several sectors globally, including the oil and

benefit from your product?

gas, transformer and electrical, chemical, manufacturing

A: Any process involving pressure or vibration could

and automobile industries, so the benefits of our products

benefit from our products. We therefore expect growth

are well known and excel in two areas. First, they can

across the whole industry. Our OpsWatch is perfect

process Big Data, enabling users to proactively and securely

for active operations, allowing engineers to generate

monitor infrastructure. Secondly, they ensure the proper

predictive maintenance. We also have several products

delivery of goods through supervision of the logistics

in the design stages, with releases planned for 2017. This

process. All these sectors benefit from our products and

product line will allow information to be accessed online,

experience.

enabling the Internet of Things in the sectors where we are present. Our products allow data to be accessed

Q: Shockwatch’s OpsWatch is an innovative technology.

remotely. Our clients can have a control center with

How is it being adapted in the oil and gas market?

visibility of the points they are monitoring or integrate

A: Our OpsWatch is a new product that has been

the data into actual operations.

successfully accepted by the market. We are testing this product in fracking facilities in the US, in the transportation

Q: Why should local Mexican companies choose

of a certain type of sand. This heavy material is transported

Shockwatch’s monitoring solutions for their business?

in large quantities and operators must comply with strict

A: Our portfolio covers impact and vibration monitoring

deadlines to fulfill contractual terms. Our OpsWatch is

and cold chain solutions. Shockwatch solutions not only

central to this mission-critical operation. The device can

help prevent serious accidents but also reduce downtime

monitor for failures in the moving, generator and rotating

situations when critical aspects of the business must

devices of sand pumps. This enables the operators to avoid

continue. There are many players in cold chain solutions

any economic and legal risk.

but when it comes to vibration and impact, we are the global leaders. With 30 years of experience in the sector, we can assure companies that Shockwatch is a manufacturing

trustable partner for their operations and infrastructure

of condition-based monitoring devices. Its technology

maintenance. The control our products offer over data

solutions and resources help customers deter mishandling

can be used to make the right decisions and ensure

and reduce costs

nonstop production.

Shockwatch

leading

company

VIEW FROM THE TOP

CORNERSTONE BUILT ON RELIABILITY, SIMPLICITY ARTURO MARTÍNEZ General Manager Mexico of Welltec

Q: How do your technologies facilitate higher recovery rates

tension before cutting. The cut is made quickly, on any state

without raising costs?

of pipe (tension, compression or neutral), leaves a clean,

A: Welltec’s technology is based on simplicity and reliability,

machined cut and can make more than one cut on each trip

allowing us to accomplish the customer’s objectives using

to the well. This technology won the OTC Spotlight on New

smaller tools and fewer personnel. Having a smaller footprint

Technology as well as a number of other awards because

enables us to be nimble and more efficient to mobilize, rig

of its novel capabilities. Coming in 2017 is a whole host of

up and the like, without reducing capabilities. Since we

new technologies including a nonexplosive punching tool to

are smaller and faster, our services can be run more often,

complement the casing cutting, new tools that will help fish

allowing customers to truly maximize the production from

dropped tools and objects from wells, easily retrievable plugs

their assets, gaining a higher ROI. Also, our tools are diverse.

that can be set multiple times in the same run, improvements

We have a wide range of sizes and capabilities to bring to

to real-time outputs and a new tool for scanning subsea

bear, not ”one size fits all.” And since we build our own tools

risers. We are always busy.

they can be redesigned or customized for a specific purpose. We can offer a tailored fit to the client that can provide a huge

Q: How do Welltec’s robotic solutions help raise safety

impact on recovery over a shorter time.

standards in the industry? A: A specific example is our ability to work — cutting pipes,

Q: How does Welltec persuade PEMEX and similar companies

for example — without using explosives. This immediately

to invest in preventive services?

reduces risk of injury or accident on the wellsite or while

A: Right now, most of the senior operations executives at

traveling to the wellsite. Another important factor is that

PEMEX are seeking new solutions. It is difficult to change

a military presence is required when using explosives. Our

the culture in companies like PEMEX because to adopt a new

products do not need these kinds of additional precautions,

technology the NOC needs to be sure that it works. Our first

which increases our efficiency to get to the job and get it

approach is to provide technical discussions and workshops.

done. In general terms we only need to send three pieces

We invite clients to Mexican projects or to our HQ in Denmark

offshore: a container, a tool basket and a generator. Less

so they can see the tangible benefits of our tools. Ultimately,

equipment means there is less movement of equipment,

everything is down to numbers. Especially with the budget

which reduces risk. With fewer people involved in the process,

cuts and PEMEX’s recent difficulties, the NOC must be acutely

communication and responsibility also are clearer, decreasing

aware of any investment and be certain of the return this

the risk of human error.

will provide. We have the ability to help design and analyze the interventions with PEMEX to demonstrate the benefits

Q: Looking forward, how will Welltec balance its services

of what our technology can achieve and how that can be

between PEMEX and new private players?

converted into direct savings over more traditional methods.

A: At the moment we work exclusively for PEMEX. But we see some opportunities with the upcoming rounds to begin

Q: What new technologies are you developing?

working with IOCs. We are already working for many of them

A: Welltec traditionally develops a new tool on a yearly basis.

elsewhere in the world so it makes sense for them to employ

In 2016 the main development was casing cutting. Normally,

us in Mexico.

these types of cuts are made by explosives and chemicals but Welltec has developed the ability to cut from small pipes all the way up to large pipes of different diameters without

Welltec is a technology and solutions provider for the oil

explosives, providing a safer environment and much faster

and gas industry, focusing on reservoir optimization, well

mobilization. The technology is unique in that it can cut the

completion technology and intervention solutions, with the

pipes without having a rig on location to pull the pipe into

stated goal of making the industry safer and more sustainable

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VIEW FROM THE TOP

PUMPING INNOVATION INTO THE MARKET GUSTAVO PASTRANA Director General of SITEPP

242

Q: How was SITEPP’s strategy influenced by the evolution

To respond to PEMEX’s new strategy we first changed fixed

of the Mexican oil and gas industry?

costs to variable costs and promoted spin-offs so people with

A: We have a clear and comprehensive insight on the

skills and knowledge could become independent. Finally, it

new market in Mexico and our position in it. For instance,

was important to take on less risk in our projects because

now that PEMEX has shifted from investing in assets to

the relationship with new players will be different than the

procuring services and is just another player in the market,

one with PEMEX.

we have adapted our commercial strategy to offer integral services and solutions rather than just selling equipment.

Q: How have companies that won fields in Round 1.3

The Energy Reform brought new opportunities. We have

responded to SITEPP’s multiphase pump technology?

been successfully collaborating with private companies

A: Round 1.3 winners have reacted positively. We have

that won in the bidding rounds and we expect to continue

several proposals from different companies that are seeking

this initiative.

different products and services like those of SITEPP. Some want to operate the equipment themselves while others

Q: What are SITEPP’s main strategic alliances and what do

require leasing schemes including a stock of spare parts,

you look for in future partners?

maintenance and operating services. The company’s nature

A: We have a diversified portfolio of services and we have

will determine its needs and we expect to address them all.

developed other strategic alliances in several areas of the

We are ready for any request.

industry. Now that our skills and scope are wider and we can offer more integral solutions, we have found that through the

Q: What is the main difference between working with private

correct alliances and joint ventures we are better positioned

operators versus working with PEMEX?

in the market. These alliances are improving SITEPP in areas

A: We had plenty of experience working with private

such as electronics, automation and control, water treatment

companies before the Energy Reform. The difference now is

technologies, oil field operations, oil field integral services and

that these companies own fields and are better positioned

others. There are a lot of international companies interested in

to negotiate the final terms. The challenge for small and

doing business in Mexico but they lack insight on the Mexican

medium companies is funding. Many of the new players

way of doing business and that is where SITEPP plays a very

cannot finance services and operations. SITEPP already has

important role.

adequate financial alliances ready to face this challenge.

Q: What is your view of PEMEX’s new strategy and how has

Q: How different are the technologies used at onshore,

it impacted SITEPP?

shallow water and deepwater fields for the Multiphasic

A: I think PEMEX has been awarded with the best fields in

Pumping Systems?

the rounds and it is on the right track. The problem is that

A: The technology used depends on the volume of gas being

it is trying to follow the Norwegian model where private

pumped, while there are other types that allow for larger

companies compete with state-owned companies and even

amounts of gas. It also depends on the field’s characteristics.

though PEMEX has a comparative advantage in shallow water

We are very selective and only venture where success is

production, it will not have that in deepwater operations.

assured and only when we have made accurate studies and analyses. Offshore pumping presents additional challenges resulting from the complexity of their geographical location.

SITEPP is a Mexican company devoted to bringing new and

We have to perform technical visits to ensure we have enough

innovative technological solutions to the country’s oil and gas

space to develop a project on the platforms. The fields that

industry in areas such as pumps, pipeline integrity, automation

can benefit the most from our technology are those that need

and enhanced recovery systems

rather large pumps, such as Abkatún and Ku-Maloob-Zaap.

Q: How has SITEPP’s leak detection systems for pipelines

We are also proud of our multiphase pumping systems

been deployed for PEMEX?

projects, such as that developed for PEMEX in the

A: PEMEX realized that it is more efficient to hire a monitoring

Samaria-Luna field near Villahermosa, which increased

service rather than buy assets to secure its pipelines, so now

production in some of the field’s areas by more than 200

we provide that service and in case of a security breach

percent. Now we are working with PEMEX to develop

SITEPP has procedures in place to contact PEMEX’s pipeline

this project to a higher capacity. These solutions are

operations staff. We control several pipelines for PEMEX and

providing big value to oil companies and are consolidating

we provide monitoring services and keep a daily logbook.

our prestige as an innovative company that can provide excellent production results not only for PEMEX but for

Q: What elements do you expect to drive SITEPP’s future?

the new companies that are betting on oil production in

A: SITEPP’s future will be defined by acquiring integrated

Mexico. SITEPP is not only ready for the challenges, we

service projects that offer permanent cash, rather than the

have developed our own patents registered in the US and

common procurement processes that we were accustomed

Mexico, which are giving us better competitive value in

to. This will give us the opportunity to better manage risk so

the market.

we can invest more in R&D and training. We have 11 years’ experience and we offer guarantees to ensure investments in

Q: What is SITEPP’s core value?

SITEPP pay off. We have the knowledge and relationships to

A: The core value of the company is the love employees

develop any project and are confident that the company will

have for their work. We have developed the company

grow three times over the next five years. We are investing in

around the people who work here in such a way that they

the Mexican oil and gas business and we are sure that with the

have evolved with the company. We believe in procuring

alliances we have already developed and our skills, we have

the talent that works here, we offer them spinoffs and let

the knowledge and training to meet future challenges. We are

them find their own company in some cases. Our people

well-known and recognized for our ethics and professionalism

have the chance to work here and somewhere else at the

and are seen as a reliable technological company.

same time.

INSIGHT

CUTTING-EDGE TECH A TOP DIFFERENTIATOR RICARDO FAYAD Director General of Aquipsa

Water usage and treatment is one key element in almost

Innovation will be key to solving any issues, such as

every industry in the world and as new companies begin to

efficiency and the need to reduce downtime. Plants can lose

eye the liberalized Mexican oil and gas sector, leading water

millions of dollars every day they do not operate because

solutions’ business Aquipsa says expertise and cutting-edge

of unscheduled maintenance activities driven by lack of

technology will make a difference in attracting incoming

upkeep to the infrastructure. Aquipsa has partnered with

entities. Aquipsa, says Ricardo Fayad, the firm’s Director

ITW to develop a cleaning system to provide maintenance

General, is in position to take advantage.

services to PEMEX’s plants over two days without production stoppages, a breakthrough for the Mexican

The products and services Aquipsa offers cover a vital area

market. The usual time for this service is around 30 days.

regarding the environment and industrial services. Industrial

Mechanical cleaning can also hinder the productivity of the

applications represented around 4.3 percent of total water

infrastructure but Aquipsa’s chemical solutions can clean

usage registered in Mexico in 2015, according to the country’s

the infrastructure without generating abrasion. Years of

water regulator CONAGUA, with a growth of 51.3 percent

working for Mexico’s state-owned oil giant PEMEX will

between 2005 and 2015 for underwater sources. And the

ensure new entrants will look to Aquipsa as a source of

country processed 70.5m3 per second of industrial wastewater

insight and partnership on the challenges for operating in

through 2,832 water-treatment plants during that year.

Mexico, Fayad adds.

243

INSIGHT

OPENING DOORS THROUGH INNOVATION

Joe Hickey President of Kodiak Services International

Luis Díaz Country Manager Mexico and Colombia of Kodiak Services International

When an emergency strikes and tools urgently need to

owned company we can really cater to the client’s needs

be retrieved from a well-bore, companies require a quick

and customize the service we offer them.”

and efficient response from slickline providers. Canadian

244

wireline and slickline company Kodiak hopes that its

As well as its ability to tailor technologies on a case by case

innovative and flexible approach to technology will aid its

basis, Kodiak adds speed to its competitive advantages.

ongoing transition into the Mexican market, so it can start

Citing its good relationships with machine suppliers, Hickey

fulfilling this industry need as soon as possible. Pointing

says Kodiak can “skip the line if there’s something pressing,

out his company’s aptitude for designing pioneering

allowing us to be very efficient when needed.” As efficiency

solutions, President Joe Hickey is keen to discuss the range

becomes more and more important in the industry, the

of ventures Kodiak is undertaking in Mexico to capitalize

downtime Kodiak can help companies avoid is critical.

on the opening market, among them trialing their Quad Neutron product with PEMEX.

“Another efficiency-enhancing product we provide are combination units, which have electrical and slickline

“The Quad Neutron is a tool for defining formation in relation

technologies together,” Hickey says. “This means that in the

to a pipe,” Country Manager for Mexico Luis Díaz explains.

event of a blockage there is no waiting on additional crew

Additional features of the new product such as real-time

or extra equipment, because it is all in one.” Kodiak’s focus

data collection, memory mode and the ability to function

on efficiency and time-saving extends to the way they train

on several pipes simultaneously gives the Quad Neutron a

their staff. “Supplying well-rounded personnel, who are not

distinct advantage, he adds. Obtaining certification for the

just loggers but also know completion, means the need for

product’s use in Mexico involves working with a technology

sourcing additional staff for different tasks is greatly reduced,”

scalability department, procuring nuclear licenses and

he adds. “Integrating different skills in a combination unit is a

executing wells to validate the data, a lengthy process that

great benefit for companies,” Díaz says.

demonstrates Kodiak’s dedication to growth in the Mexican oil and gas industry.

In light of the technologies Kodiak is investing in, their intention to grow their business in Mexico is clear, and this

As the Quad Neutron undergoes trials with the NOC,

is further supported by their enthusiasm for developing local

Kodiak is also interacting with Mexico’s technology board

talent. Hickey assures Mexican nationals will be Kodiak's

CONACyT, together with partner Scarlet. “We are waiting

main recruitment focus. “Typically, we draft in an ex-pat

for funding from CONACyT, from its Innovation Stimulus

to oversee how we run business but we always focus on

Program,” Díaz explains. “It has the resources we need for

training local people,” he says. Although they want to keep

our R&D efforts, such as project management specialists, 3D

the Canadian culture of the business, both executives hope

printing machines and manufacturing experts.”

to employ Mexicans as they move toward their vision for Kodiak in the country, which Hickey hopes will be a well-

Although Kodiak is making its first step into formal research

diversified wireline service company, with lots of local talent.

and development in Mexico, coming up with innovative ideas is nothing new to the wireline service providers. The firm has

Kodiak is one of the largest privately owned wireline

a track record of quickly developing tailored technologies

companies in Canada, with operations spanning its native

for clients struggling to find a solution, and often tells clients

country as well as the US, Colombia, Ethiopia and soon

to come to them when they’ve tried everything to solve a

Mexico. The global wireline logging service market exceeded

problem. “We change the solution to match the needs of

US$16 billion in 2014, and gains in real-time data gathering

the client,” says Hickey, highlighting the flexibility of Kodiak’s

and more global E&P activity are predicted to inflate this

product line and service portfolio. “Being a large, privately

figure even more.

VIEW FROM THE TOP

SATELLITE LEADER OFFERS INVULNERABILITY, RESILIENCE PEDRO HOYOS CCO of GlobalSat

Q: How has GlobalSat’s relationship with the oil and gas

Q: How are innovations in telecommunication technologies

industry developed?

affecting the oil and gas industry?

A: GlobalSat mainly works in the gas transportation and refined

A: New services in the Ka band are expected to boom

products segment of the oil and gas industry. With liquid and

in the coming years but although it is a more affordable

gas transportation, we monitor what is being transported by

technology with a larger bandwidth, companies must

the pipelines. This service is available for companies receiving

be aware of its limitations in availability compared to Ku

the liquids and gas and for those transporting them. We also

bands. Under unstable environmental conditions such as

have services in E&P but they are mainly for fixed onshore rigs

rain and fog Ka band loses connection quickly. Furthermore,

because those adapt better to our business model. Offshore

locations where Ka would be most useful, such as the

communications need facilities for maintenance and support

Mexican south-east, have the harshest environments,

at the ports where the platforms are docked and are therefore

making Ka even more unstable. For companies that depend

serviced by local companies. We plan to start offering these

on live, reliable connectivity, Ka band is not an option, it

services in the future, possibly through a joint venture with a

is best suited to residential purposes. That is why all our

support company that manages installation and services while

services involve Ku band, providing our customers with the

we provide capacity but that is yet to be decided. We are in

most reliable and secure connection possible.

the planning stages for offshore business; we are not in a rush. Of course, once Ka band achieves the level of reliability Q: What services does GlobalSat offer its customers?

that KU band offers, we will consider changing to it. Many

A: Our service can be associated to a public or private

companies are short on budget and would therefore be willing

network. At our satellite hub we decide which kind of access

to try Ka band to reduce expenses but it is important that they

is offered, be it open or private, according to each client’s

understand that this technology is not yet mature enough to

needs. Most of our large corporate clients have monitoring

provide the reliability they need.

activities and they often want to receive training from us on how to install Multiprotocol Label Switching (MPLS)

Q: What are GlobalSat’s expectations for the coming years?

routers and Very Small Aperture Terminals (VSATs). They

A: With the Energy Reform everyone expected the market

are therefore the only ones who know the physical location

to suddenly grow but that did not happen. Instead, 2016

of their instruments. This makes their information as close

brought a fall in oil prices and a devaluation of the peso

to invulnerable as possible.

against the dollar. This affected the companies we serve so it also affected us. We expect market demand to

This invulnerability also offers resilience. All our hubs have

rebound in 2017 and 2018. GlobalSat is preparing for

a backup system both in the software and hardware as

this by getting the best prices for our customers while

well as in the power input. Software and hardware backup

ensuring that our services remain personal and reliable.

is achieved through a 1-to-1 redundancy received from our

We are also aware that technology markets change

service provider, ensuring all systems are always available

rapidly, so there is the possibility of opening a new branch

and in optimal condition. As for power input, our facilities are

for mass consumers in the future but that is not part of

backed up by two power plants with the capacity to produce

our current five-year plan.

electricity for 16 hours straight. If either plant starts running out of gas we also have a contract with a gas provider that ensures a resupply in just two hours. Our installations are guarded and

GlobalSat,

monitored by private security and a CCTV system running

communications leader with a core supported by over 20 years

24/7. We have all these systems in place because we are aware

of experience in the integration, operation and exploitation of

that our clients’ information is extremely sensitive.

satellite technologies

with

headquarters

Tijuana,

satellite

245

INSIGHT

WHEN LOCAL ADVANTAGE IS NOT SO ADVANTAGEOUS LUIS CANTÚ Director General of Metrología Electrónica de México (MTE)

No matter the excellent results obtained with the

client a guarantee: if he or she does not like it, it can be

innovative services offered by disruptive technology

returned,” says Cantú.

companies, implementing industry 4.0 technologies is no easy task. When it is a local company doing the work, the

Local companies must also be humble enough to

task is even greater.

recognize their strengths and, most importantly, where

246

they offer a higher added value that turn them into strong In a market where big players tend to eat alive the small

competitors against international companies. “Our main

ones, cost-effectiveness and time reduction are true

strength is software development for tailored solutions.

game-changers that local companies can bring to the

The sensors we use are from recognized companies but

table. Man hours in Mexico can reach a fourth of the

the electronics and software are a result of our local R&D

cost in developed countries such as Germany, France

efforts,” says Cantú. Having a wide and specialized range

or the US, which in turn becomes a big differentiator

of products and tailored solutions that can be integrated

in the final price of technology and services, says Luis

into a competitor’s solutions is a must in a competitive

Cantú, Director General of Monterrey-based MTE, which

market like that which the Energy Reform is harvesting,

provides measurement and automation services and

adds Cantú. “Due to the Energy Reform and the openness

products for gas installations. If transportation costs and

of the market, we incremented our range of products for

times are added to the equation, solutions end up being

the energy sector, mainly for the measurement and control

much more economic when working inland. Cantú says

of gas. Our software is compatible with standardized

that local advantage should be exploited by companies

products and solutions, making it fully embeddable, which

working in Mexican territory. “When a customer asks us

is what clients are asking for. We follow their needs.”

for a tailored solution, it is available right away because we are always anticipating industry needs. If customers

One other hurdle local companies must overcome is the

ask for the same service from international companies it

cultural predisposition of their compatriots. “We fight

will take much longer not only because of importations

daily against the stereotype that small Mexican companies

but also communication problems and cultural barriers.”

are less capable than international ones. Having plenty of resources but lacking an R&D tradition in Mexico,

Quality is a factor that, no matter how fast and cheap a

people tend to distrust local companies working on

technology or service can be provided, cannot be pushed

innovation. It is not enough for them that we have all the

to the background when it comes to making a decision. It

accreditations and follow all the standards,” says Cantú.

is important for local companies to rise to the challenge

Ironically, international companies are more willing to give

and become accustomed to meeting international

it a chance, says Cantú “Most of the companies we serve

standards, Cantú says. Considering clients as partners

are international.”

with which long-lasting relationships are being created is another plus for local companies because they can offer a

Fighting against this obstacle will take time but Cantú

more personalized service focused on the client’s needs.

believes that supporting local talent is the first step. “Mexico

“We see clients as partners, and want to have a win-win

has plenty of talent studying technology and science. Many

situation with them,” says Cantú.

of them have come to work with us as interns and end up staying.” On its own, Cantú has high hopes for local content

MTE, a 100 percent Mexican company with over 25 years

in Mexico. “For us intelligence and hard work is everything

in the market, is so sure about its technology that it even

for getting ahead. Adding honesty and character, we

offers the customer extra security. “We are so confident

believe that Mexico can create a technological revolution

about our locally developed technology that we offer the

and become an international power.”

VIEW FROM THE TOP

TELEMETRY TO ENSURE COMPLIANCE WITH NEW REGULATIONS LAURO BECK Director General of Osbog

Q: How does Osbog, as a new local company, offer added

Q: Where does Osbog see the biggest business opportunity?

value to its clients?

A: Due to new regulatory schemes that adhere to international

A: Osbogâ&#x20AC;&#x2122;s business is to take measurements that would

practices, companies will have to declare the amount of oil

traditionally be difficult for a variety of reasons, be it

that is both being produced and transported. The easiest and

because of safety or for economic reasons, as is the case of

most economical way to comply with such regulations is by

gathering data from remote locations. Our communication

implementing telemetry, and because of that Osbog sees a

solutions gather and transmit the required data to us, which

business opportunity in all of the companies that produce

we then personalize and deliver to our customers. But the

and transport oil, be it big or small, national or international.

greatest benefit for our clients is the advantage brought

These services will be of special interest for PEMEX and CNH,

by a local company that can offer immediate information

as knowing real-time information about production and

at lower prices.

transportation will allow for a more efficient and transparent oil and gas industry in the country. Most importantly of all,

As a young local company, we have worked hard over the last

these services are no longer cost prohibitive. Mexico should

few years to create a strong R&D department to develop our

able to measure its real-time national production in the near

own systems, software and electronics so we can continue

future, this could prove to be very valuable information for

supporting the development of local technology. We are

high level decision-making.

seeing a big opportunity opening up now that more and more local and international oil companies are coming to

Q: Where does Osbog see itself in the future?

the Mexican market.

A: We want to become a promoter of local talent in Mexico and creating strong relationships with Mexican engineering

Q: Which main challenges has Osbog encountered in its

schools to acquire the best talent is a short-term goal we

business development activities?

have. We have already started to work on this goal by

A: One of the main challenges we found from telemetry

communicating with UNAM. We have seen that Mexican

providers is the reluctance of companies to adopt new

engineers have strong capabilities and are able to achieve

technologies that would involve large capital investments

incredible goals, and want to keep pushing for the industry

in their infrastructure. We like to consider this challenge as

to recognize that.

a tactical advantage because our business model allows companies to introduce our information systems without

As for market goals, Osbog has invested a great deal of time

the need for large capital expenditures.

and resources in order to develop several versions of our data acquisition system, so we are not starting from scratch.

This means customers do not have to absorb the up-front

Our focus for the next few years is to create a strong market

investments necessary to start working with information

presence. It would be impossible to talk about market share

technologies. In case that equipment gets damaged or

because the market for telemetry services in the Oil and

stolen, we take full responsibility as full-service providers

Gas sector is still in its development stages in Mexico, but in

and the customers can have the peace of mind that the

the future, we want to be a strong and recognized player in

process will always run smoothly without them having to get

telemetry services, as well as achieving cross-border growth.

involved. Our objective is to create a long-term relationship, not to just sell a piece of equipment, instead, we offer a solution with immediately available and reliable information

Osbog

that allows our customers to focus in their core business

management technologies for oil and gas, including electronic

activities enriched by the valuable information that our

and mechanical design, equipment manufacturing, installation,

solution brings to their operation.

maintenance, transmission, processing and publication of data

offers

real-time

telemetry

and

information

247

Employee, McDermott

ENVIRONMENT & SAFETY

As new regulating authorities come to grips with their roles and existing ones adapt to new demands, the Energy and Environmental Safety Agency (ASEA) has taken on the oversight of environmental issues related to hydrocarbons. It has proven itself a strict watchdog in an area where technology keeps making waves by helping companies automate and monitor processes. It has set the industry on a path well-traveled in other large sectors like automotive and electronics: to employ the internet and increasingly powerful remote tools to reduce the human risk and cut unnecessary costs, while at the same time helping to protect the environment.

This chapter offers a glance into the evolution of regulations and the authorities in charge of devising and enforcing them, as well as an analysis of new technologies and the impact they are having on the protection of the environment and the enhancing of safe practices across the industry.

249

CHAPTER 10: ENVIRONMENT & SAFETY 252

ANALYSIS: Certainty in an Uncertain Time

254

VIEW FROM THE TOP: Carlos de Regules, ASEA

256

VIEW FROM THE TOP: Renato Urresta, ERM

Jaime Martínez, ERM 251

257

INSIGHT: Rafael Parrilha, Bureau Veritas

258

VIEW FROM THE TOP: Eckhard Hinrichsen, DNV-GL

260

ROUNDTABLE: What Does Mexico Need to Do to Reach International

Safety Standards in Oil and Gas?

262

VIEW FROM THE TOP: Hermann Saenger, SGS Mexico

264

VIEW FROM THE TOP: Mike Bethea, Offshore Technical Compliance (OTC)

265

INSIGHT: Rogelio Verdugo, Northwest Technical Solutions

266

VIEW FROM THE TOP: Arturo Flores, Hempel

267

INSIGHT: Pedro Arjona, DEISA

Salvador Segovia, DEISA 268

VIEW FROM THE TOP: Francisco Rincón, Dräger Safety Mexico

269

INSIGHT: Héctor Domínguez, SAMSON Control

270

VIEW FROM THE TOP: Yazmín Rodríguez, Dorot Mexico

271

Hugo Sánchez, Dorot Mexico

INSIGHT: Horacio Fajer, KDM Fire Systems

ANALYSIS

CERTAINTY IN AN UNCERTAIN TIME Oil and gas is perceived as environmentally unfriendly and

in the past two years. The first resulted in the

its harsh conditions mean workers are often placed in risky

deaths of five workers, after a fire broke out in

environments. Now, the industry is keen to build a better

April 2015. Less than one year later, in February

reputation by focusing on the environment and worker safety.

2016, another fire struck the same platform, killing three workers and injuring six more.

Marred by a series of high-profile accidents in recent years,

In April 2016, a large explosion rocked PEMEX’s Pajaritos

and following the creation of ASEA, Mexico’s Agency for

petrochemical complex in Coatzacoalcos, killing 32 people

Safety, Energy and Environment, more and more focus is

and injuring dozens more. The incident was blamed on a

being given to how Mexico can optimize industrial safety

leak at the plant.

and environmental protection performance across the oil and gas industry. With the number of operators rising

“Lessons need to be learned from disasters like Pajaritos. A

from one to 48 and new operators introducing international

special focus on safety is key for PEMEX to attract private

standards, ASEA has acted to clear the field of uncertainty.

investors who will refuse to participate if maintenance is not at sufficient levels,” points out Daniel Gutiérrez,

The agency had released all regulation for upstream

Director of Pepperl+Fuchs Mexico. PEMEX now faces the

operations including the deepwaters of the Gulf of Mexico by

paradox of needing to raise its safety standards to attract

the end of 2016, which Carlos de Regules, Executive Director

foreign partners, while grappling with a lack of funding for

of ASEA, says contributed to the active participation in

maintenance work and compliance investment.

Round 1.4. His comments highlight the commercial aspect of robust safety and environment regulations because

Prevention and a proactive approach is one solution,

they play a part in attracting the world’s largest IOC’s to

according to Horacio Fajer, General Manager of Kidde

the Mexican market through increased certainty about

de Mexico. “When a near-miss is considered equal to an

what they need to comply with in terms of safety and the

accident, the analysis allows prevention of future accidents,”

environment. “In the past two years, we have published

he says.

close to 30 different technical regulations that are risk-

PEMEX SAFETY RECORD

based and nonprescriptive,” says De Regules.

Despite the accidents in recent years, PEMEX’s safety record Robust regulation or not, PEMEX’s past safety record still

has improved dramatically over the past two decades, with

casts a shadow over ASEA’s evolution. PEMEX’s Abkatún A

the number of disabling injuries occurring during 1 million

platform has featured in the news for two deadly accidents

man hours, falling around 90 percent from 1996 to 2015.

PEMEX WORKER ACCIDENTS

Better performance in the frequency index* throughout Mexico

2.68

——PEMEX

0.97

0.32

0.31

0.3

2019

2020

2021

0.29 2015

0.34

0.36 0.38 2014

2018

0.45 0.57 2013

0.36

0.48 2012

2017

0.43 0.54 2011

0.39

0.42 0.42 2010

0.47

0.45 0.42 2009

2008

2007

0.61

Goals

0.67 2005

2004

2003

2002

2001

2000

1999

1998

2006

1.09

1.17

1.5

1.88

1.19

2.67 1997

Twelve zero tolerance directives

1.39

2.68 1996

2016**

Safety, health in the workplace and environmental protection program (PEMEX-SSPA) initiated

3.92

4.92

Frequency

252

——Reference***

*Reference indicator used internationally to account for the number of disabilitating injuries occuring in one period per million man hours with risk exposure **Estimated data at the close of 2016 ***The international reference is obtained from the avarage of the companies in the International Association of Oil and Gas Producers (IOGP)

APROVECHAMIENTO DEL GAS (MMPCD) GAS FLARING

GAS USE (MMcf/d) 750 91.14%

91.2%

89.8%

92.4%

94.6%

100%

Investment is also necessary to ensure environmental goals stay within reach but here, too, the country has some work

600

80%

to do. A prime example in the oil and gas industry is gas flaring. Mexico flares millions of cubic meters of natural gas,

450

60%

greenhouse emissions and wasting a valuable natural resource.

599

300

simultaneously contributing significantly to the country’s

40%

525

502

Gas flaring results from the need to resolve dangerous

420

150

288

20%

pressure peaks as well as relieving pressure safely during planned downtimes, such as maintenance work, startups

1Q16

2Q16

3Q16

4Q16

1Q17

Envío de gas Aprovechamiento to the atmosphere (MMcf/d)1 Gas asent la atmósfera de gas/Total de ——Gas use/ Total gas produced gas producido Source: PEMEX Source: PEMEX

Not including nitrogen

or shutdowns of oil and gas operations, in the absence of the necessary infrastructure to process or evacuate the gas. According to The World Bank, thousands of gas flares at oil production sites around the globe burn around 140 billion cubic meters of natural gas annually, causing more than 300 million tons of CO2 to be emitted into the atmosphere.

Following a downward trend for 20 years, PEMEX’s safety

In January 2017, the same organization called upon nations

index rating stood at 0.29 per million man hours in 2015,

to support and follow the “Zero Routine Flaring by 2030”

which was significantly below the average global rating of

initiative, which aims to eliminate the practice in the next

0.47. PEMEX’s 2016 performance has not been released

13 years.

yet, while global performance dropped to 0.39 disabling incidents per million man hours. Key developments include the introduction of a safety, health in the workplace and environmental protection program in 2005, since which the index has never topped 0.61, and prior to which the average index was always

Gas flaring increased more than fourfold from 2013 to 2016, when it reached a daily average of 504.5MMcf/d

above 1 since 1996. In 2015, PEMEX introduced 12 zerotolerance directives, the results of which remain to be seen.

Mexico is far from reaching such a target and has not been heading in the right direction after it made significant

In its 2016 year final report, PEMEX attributes its better

improvements during 2010-2012. Compared to 2012 and

safety record for the year to its “Binomio” program, which

2013 when flared gas was approximately 2 percent and 1.9

consists of carrying out auditing and technical consultancy

percent of the country’s annual production, a dramatic rise

activities in critical work centers in PEMEX’s Exploration

since the introduction of the Energy Reform is clear. Gas

and Production and Industrial Transformation segments.

flaring increased more than fourfold from 2013 to 2016,

It involves detecting risks and establishing actions to

when it reached a daily average of 504.5MMcf/d, which

immediately solve them.

was approximately 8.7 percent of the country’s natural gas production for that year.

Maintenance is another area of concern with the NOC. PEMEX has seen its budget slashed in recent years as

ENVIRONMENTAL PROTECTION

a result of budget cuts and low oil prices. As a result it

Gas flaring leads to the emission of sulphur into the

is investing less in maintenance work. Gerardo Tamayo,

atmosphere, so it is no surprise that PEMEX reported higher

Director General of engineering solutions distributor

sulphur emissions for 2016, which were 22.8 percent higher

Sumimsa, warns against deprioritizing safety in light

than the same period in 2015. In its yearly report PEMEX

of squeezed finances. “It is important to highlight that

cited three reasons: an increase in shipments of sour gas

safety must not be compromised by budget cuts or any

to burners in Kumaza, Abkatún Pol-Chuc and Litoral de

other factor as it will put human lives at risk,” he says.

Tabasco, the burning of acid gas for the maintenance of

Hugo Sánchez, Oil and Gas Sales Manager of Dorot

sulphur plants in CPG Poza Rica, Cd. Pemex and Nuevo

Mexico, agrees. “PEMEX needs to begin seeing safety as

Pemex, and finally the increase in the volume of gas sent

an investment because until now they have seen it as an

to burners in the Minatitlan and Salina Cruz refineries, due

additional cost.”

to maintenance.

253

VIEW FROM THE TOP

SAFETY THROUGH SELF-DECLARATION CARLOS DE REGULES Executive Director of ASEA

254

Q: How does ASEA spring into action when there is an

A: Because our regulations are performance-oriented

accident in the industry?

rather than prescriptive, we face the bureaucratic burden

A: In April 2015, one month after ASEA came into operation,

of having to analyze projects on a case by case basis,

a series of accidents occurred offshore. They were accidents

as opposed to one-size-fits-all. We also face the risk of

involving natural gas, not oil, eliminating the risk of a spill.

creating a bureaucratic bottleneck because of this so

But people died. Once we understood that the accidents

we had to design new mechanisms. This mechanism is

were recurring events, we stopped natural gas transportation

third parties.

operations in the Gulf of Mexico, a first for Mexico. The other aspect of providing flexibility to the industry We made sure that at-risk operations could not continue

through this kind of regulation involves making

until we were comfortable that the conditions allowed for

accountability undiluted and unequivocal. This is not

safety. The way we did that was simple but effective. Instead

achieved through self-assessment but self-declaration. Self-

of requiring all kinds of analyses and engineering information

declarations are where the regulated entity signs a sworn

from the operator, which would have certainly lacked depth,

oath that conditions have been met to ensure safety. In

we asked for a self-declaration instead. An entity declaring

dealing with any future issue or even litigation, this self-

to the authorities that its safety conditions are sufficient to

declaration is very powerful in terms of the operator’s own

reinitiate operations is very powerful in technical and legal

accountability.

terms because they are self-declaring that safety has been personally verified. This declaration was signed by the head

Q: Even if a company self-declares safety, what if something

of PEMEX E&P, the head of the region and the head of the

goes wrong? And if it does, how will ASEA protect its own

Environment, Health and Safety (EHS) department. After

public image?

this, operations were reinstated.

A: Trying to define a more modern and efficient framework bears reputational risk for the regulator. However, we are

Q: What measures are in place in the event of a large

convinced that this is the way to do things because in

accident?

the end better performance in safety and environmental

A: We have a framework for dealing with large environmental

protection can be accomplished through this method. We

accidents, in particular oil spills. Our regulation for financial

are aware of the PR risks for ASEA but we hope we can

guarantees requires not only high-level coverage but also

demonstrate that sound, efficient and risk-based regulation

recognizes there is no sufficient coverage in the world

is the answer to a risky industry. Zero-risk does not exist

to handle an event the size of Deepwater Horizon. What

and would mean no industry.

is needed is the technical execution capacity to react immediately, which is now a requirement in Mexican

Q: How has ASEA cooperated with the insurance sector

regulation. Operators must prove to the authorities prior to

to ensure the risk is structured properly in regulation and

operations that they have the response capabilities to cope

that it is insurable?

with an incident of this nature. This may be the operator’s

A: We work closely with the insurance industry and

own capacity or capacity shared with another company.

authorities not only in Mexico but also abroad. Our specialist

It is no longer a question of “if,” it is mandated as part of

team spent time in London and in talks with key players

our regulation.

in New York to find out what was insurable and to what degree. The talks were complex and have resulted in us

Q: Should private companies also expect to self-declare

defining a high level of coverage. In the end our technical

their safety standards to ASEA in the future, as PEMEX

criteria for defining this high level of coverage prevailed

did in April 2015?

and that is the regulation in place today.

Our unconventional field regulations were published last

contract model throughout the various legs of Round One.

March. Their development was enhanced by what Canada

This is obvious when the contract involved in Round 1.1 is

has been doing nationally, particularly in the province of

compared with that for deepwater Round 1.4.

Alberta. The International Energy Agency (IEA) has also produced reports on the best practices for natural and shale

Recently the OECD performed an analysis of the three

gas development. Best practices and international tendencies

oil and gas regulators in Mexico, marking the first time

have been in our DNA from the beginning. We understand

they have analyzed a system of regulators rather than an

this is a global industry and we need to be a global agency.

individual entity. Most of its recommendations focused on having the regulatory system work in a coordinated manner

Q: How much dialogue is there with the supply chain?

to gain efficiencies and provide certainty that risks are

A: This issue is one of the first subjects we discussed

being correctly addressed.

with our colleagues at the US Bureau of Safety and Environmental Enforcement, which is the equivalent of

Q: What was the OECD’s recommendation to improve

ASEA north of the border but only for the offshore industry.

ASEA’s coordination with other regulators?

In their experience, contractors were among the elements

A: One recommendation was to raise ASEA’s level of

that needed to be managed correctly. The operator takes

autonomy to similar to that of CNH and CRE. Another

center stage in our regulations because it has the sole

suggestion had to do with using the existing counsel to

responsibility for an activity’s safety. However, the operator

coordinate the efforts in the energy sector as a planning

needs to make sure that contractors and subcontractors are

hub. From that type of integrated planning we could

also operating according to the same philosophy.

derive specific work programs for each agency. A further recommendation was to seek common ground in the area of

Q: What lessons did ASEA learn as a regulating agency

attracting and retaining talent among the three regulators.

throughout Round One? A: The first lesson is that working together with our colleagues at CNH is key to delivering sound regulation.

ASEA, Mexico’s National Industrial Safety and Environmental

Only when a project is well understood can it be adequately

Protection Agency for the hydrocarbons industry, is in charge

regulated. Collaboration between the two agencies has

of disseminating regulations and enforcing compliance of public

been intense and includes working on enhancing the

and private-sector companies involved in the oil and gas industry

255

VIEW FROM THE TOP

A TWOFOLD CHALLENGE FOR SOCIAL LICENCES

Renato Urrest Principal Consultant of ERM

256

Jaime MartĂnez Business Development Director of ERM

Q: What do you consider to be the greatest challenge

Private banking institutions go one step further with their

regarding social responsibility in Mexico?

traditional risk analysis. They no longer consider solely the

RU: Regarding corporate social responsibility I believe

technical and viability aspects and include nontechnical risk

that the challenge is twofold. The first challenge is in

variables such as social and environmental impact. We help

obtaining the social license, a permit that encompasses the

our clients in considering these standards and sometimes

governmental authorization and community consensus to

help financial institutions in due diligence processes.

develop projects. Second comes land access. A good social management system complies with land access without

Q: How can we ensure private companies efficiently

generating population displacement or negative outcomes

manage the social and environmental components if not

for the communities.

through regulation? JM: There are two factors: collaboration between all parties

Q: What hurdles do foreign companies entering the

involved, particularly the public and private sphere, and

Mexican market face and how does ERM assist them?

trust. For example, in the oil industry there are thousands

RU: The main challenge for foreign companies is knowledge

of oil wells in the northern part of the Gulf of Mexico.

of the territory, community idiosyncrasies and understanding

The facilities and technology used there are authorized

Mexicoâ&#x20AC;&#x2122;s political, economic and local context. We are

and operating. We are not dealing with an industry that

experts in different national and international locations

is inventing or designing new things. There should be a

and we have experience operating social management

certain amount of trust in what we already have. Sometimes

projects. Our role lies in facilitating dialogue and mutual

I am under the impression that we want to start from

understanding between private companies and local

scratch, which I do not think is necessary. About 20 years

communities, with a particular emphasis on generating

ago, independently from regulation, companies started

transparency between the involved parties.

thinking in terms of systems not because it was imposed but because companies were driven by the need to obtain

Q: How does ERM collaborate with the World Bank and

better, cheaper and more efficient processes. That is how

other international institutions?

we developed environmental quality systems. Now there

RU: The World Bank and IFC (International Finance

is much talk about sustainability because companies

Corporation) have designed a lot of guidelines and

recognize business opportunities in being sustainable,

standards to develop investment projects. Those include

backed by modern legislation that is simple and clear.

social and environmental management components. These guidelines are meant to safeguard investments and

Q: How can the public sector have a more efficient role

establish clear rules of the game so invested money does

in this?

not generate social or environmental conflicts that result

JM: Collaboration, flexibility, outreach, dialogue and

in investment losses. We have had the opportunity to work

teamwork with the authorities and above all, trust. We are

with these institutions by absorbing their policies, providing

not enemies, we both have the same objective: protecting

feedback and adjusting those policies according to Mexicoâ&#x20AC;&#x2122;s

people and the environment at the lowest cost and with

specifics and our empirical experience with on-site projects.

pragmatic and efficient regulations. RU: More often than not, the private sector possesses more

ERM (Environmental Resources Management) is a leading

technology and know-how than public institutions, so if you

global provider of environmental, health, safety, risk, social

are trying to regulate or generate a new practice, you need

consulting services and sustainability-related services, with

to listen to the experts, to invite the people dealing directly

more than 160 offices in over 40 countries and territories

with these subjects to the discussion.

INSIGHT

GLOBAL EXPERTS KEEP WORKING THROUGH UNCERTAINTY RAFAEL PARRILHA Country Chief Executive of Bureau Veritas

Since the Energy Reform transformed the country’s

the environment and encourage safety while being flexible

hydrocarbon sector in 2013, regulators, lawyers and

toward promoting business, he adds.

consultants have been collaborating to formulate a new oil and gas regulatory and legal framework for the

And it certainly would not be the first time his company

country. Backed by 35 years of experience helping PEMEX

has done this in Mexico. As well as helping standardize

standardize its own regulation, global regulatory evaluation

PEMEX’s regulations and auditing some of its assets to

company Bureau Veritas is not afraid to get more deeply

evaluate compliance, Veritas won a contract with the NOC

involved in the task but has had trouble making its voice

in 2011 to establish a normative structure for deepwater

heard with safety regulator ASEA. “The way of working

ventures. “PEMEX is still evaluating how this will progress

today is much more through written comments and

but we submitted a proposal based on our international

no direct contact,” says Rafael Parrilha, Country Chief

experience,” Parrilha says. “We proposed the standards we

Executive of Bureau Veritas. “I believe more could be done with conversations.” Putting it down to ASEA’s concern with transparency, Parrilhas says Mexico’s safety and environment regulator has devised a new model of requesting written comments and feedback but in his eyes more could be achieved through direct, hands-on discussions. ASEA has pumped out new regulations at an unprecedented rate since its inception two years ago, including the pivotal deepwater regulations released in the run-up to Round 1.4.

“

believe to be the safest while remaining practical.”

With the change of party in the last election, there was little impact on the macro economy, suggesting a great deal of stability”

“ASEA is new so companies are still trying to negotiate the new ways of doing things,” says Parrilha. “Now we have

PEMEX is prepared for the challenge of adopting

gathered a lot of knowledge on how we can work with

international standards in its farm-outs because it has had

these agencies.” Indeed, according to the Country Manager,

time to study models in other countries, both successful

a main area of doubt is whether agencies like ASEA and

and unsuccessful, he says. This shows in the way that the

CNH will be willing to receive guidance from international

Mexican company wants to learn from investors and even

companies when working on farm-outs, given their

use them as technical advisers.

centrality to the eventual success of the Energy Reform. “We also need to wait to see how flexible PEMEX will be in

All in all, Parrilha believes that Mexico remains a stable

accepting international standards,” he says.

country for investment in oil and gas. “The main concerns companies have are in terms of regulations and politics,” he

With 1,400 offices and laboratories spread across

says. “With the change of party in the last election, there

140 countries, 66,000 employees and over 35 years’

was little impact on the macro economy, suggesting a great

experience directly helping PEMEX with its regulations,

deal of stability.” In 2017, he says, the landscape will remain

Bureau Veritas has the credentials to be of great help to

difficult but the industry will begin to see an improvement

Mexico’s regulators in their endeavor to create robust,

due to the difficult decisions already made by PEMEX.

industry-friendly regulations, Parrilha believes. By helping

“I want to see the results of the farm-outs, partnerships

develop the best structure of standards and regulations

and JVs,” he says. “I hope that in the short term this will

depending on each client, Bureau Veritas looks to preserve

compensate for the crisis PEMEX experienced.”

257

VIEW FROM THE TOP

POSITIVE AND NEGATIVE IN NEW REGULATIONS ECKHARD HINRICHSEN Country Manager Mexico of DNV-GL

258

Q: Where does Mexico fit into DNV-GL’s portfolio, both

felt by the reorganization of PEMEX. Since José Antonio

globally and in Latin America?

González Anaya’s appointment as CEO in February 2016,

A: In Latin America an important market for us is Brazil,

most projects were put on hold and this has had the

but it has faced its own problems recently. Attention is

greatest impact on us. Oil prices are affecting the bidding

being drawn back to Brazil and a lot of companies like

rounds and the speed at which the fields are developed. If

Chevron and Statoil are coming back to that market. Apart

oil prices were more attractive the operators would apply

from Brazil, Mexico is certainly one of our most important

more pressure for faster development.

markets with great growth potential. Q: How does DNV-GL convince PEMEX to invest in its Q: How does DNV-GL interact with CNH, ASEA and

services, especially given its historic lack of focus on safety?

CENAGAS?

A: We carry out root-cause analyses for PEMEX and we offer

A: Right now we are working directly with ASEA, helping to

services to evaluate the safety and integrity of facilities. In

shape regulations. We also have close and regular contact

some cases we work directly with PEMEX but often we work

with CNH and CENAGAS. ASEA has an extremely difficult

with contractors. PEMEX requires certification for a great

task and the new regulations are being pushed forward very

deal of activities and as one of the leading certification

quickly, which is positive in one sense but negative in the

companies we can provide these. We also perform risk

sense that oversights can happen. Now ASEA is a lot more

analysis. We have two major process-risk analysis contracts

organized and has recruited the appropriate personnel to

in the southern region and offshore in the Ku-Maloob-Zaap

carry out these tasks. There are still some overlaps in terms

field. These were among the last big PEMEX tenders to be

of the responsibilities of each regulatory body but this will

released, one lasting three years and the other five years,

be sorted out over time. CNH and ASEA have capable

so this provides us with some added stability. Generally,

leaders and by working alongside the Ministry of Energy,

one can say that our services make good business sense for

this is really coming together.

PEMEX because we are lowering the risk of its operations and increasing reliability and availability.

Q: Why do you think ASEA chose to interact specifically with DNV-GL, given that other companies struggled with this?

Q: Can you elaborate on the risk assessment you are

A: It was ultimately a tender process and I believe we

carrying out with PEMEX for deepwater drilling at depths

had the best proposal technically and could demonstrate

of over 500m?

worldwide expertise in working with regulators. Additionally,

A: PEMEX was tendering its reinsurance contract to the

we won as a consortium so the expertise of the other strong

international market and wanted to know the possible

companies within this group played a significant role in

financial impact of a worst-case scenario. This was also

our being awarded the contract. We were also in the same

shortly after the Macondo incident so this may also have

position initially, where it was difficult to get meetings with

influenced PEMEX’s desire to perform this assessment.

the regulators but now that we are coming to the end of

We developed a probability model to estimate such costs,

the contract we are seeing a lot of progress. We see this as

integrating CNH requirements, and applied that to all of

a positive experience and potentially a stepping stone for

PEMEX’s deepwater exploration wells. In each case we

involvement in future projects of a similar nature.

take all specific data into account, such as type of drilling rig, water depths, well design and oil spill modeling,

Q: How has the low oil price impacted your business and

and calculate the cost impact by applying advanced

the regulatory bodies in general?

probabilistic methods. ASEA will publish new insurance

A: While oil prices have had an impact on the Mexican oil

regulations in which minimum coverage amounts will be

and gas industry in general, the most impact has been

established and operators must be in compliance. Those

259

DNV-GL

amounts can be lowered if justified through risk analysis

We have used this system in pilot programs with an

techniques. Our method is ideally suited for that.

international oil company in the UK. We also host “pipeline days” because the company is very strong on subsea and

Q: To what extent are you sourcing national talent or

onshore pipelines. We are the leading technical adviser in

outsourcing this to your international talent pools?

this field so we invite our clients, PEMEX and regulators and

A: We try to build up local talent with Mexican engineers

bring our colleagues over from Norway, the US and Brazil

but we also have Mexican engineers that studied in Norway.

to provide a full day of technical talks free of charge. New

Apart from that we send our engineers for training and

technologies and research in the field are presented there.

technology exchanges at our Houston or other overseas offices. And yes, we have supported international projects

Q: What would be your ideal positioning for next year?

with our personnel for many years, for example Asset

A: We want to continue to work with ASEA and other

Integrity Management Projects in Saudi Arabia.

regulators but these will always be niche projects. The big projects where we can really contribute our expertise

Q: What kind of research and development are you

will be the large deepwater development projects with

carrying out in Mexico?

Statoil and other similar companies. The Texas-Tuxpan

A: In Mexico we are starting joint industry projects (JIPs),

subsea pipeline project worth US$2.1 billion is also of

including one on dynamic barrier management. Features

great interest to us. It will be developed by Transcanada

that are considered at the design and project stage,

and IEnova.

such as wall thickness, corrosion control and operational procedures are the barriers that prevent accidents. But those barriers can be breached without the proper

DNV GL provides classification, technical assurance, software

maintenance and can cease to function. The dynamic

and independent expert advisory services to the maritime, oil

barrier management continuously monitors the state

and gas and energy industries. It also provides certification

of the barriers to prevent a breakdown of the system.

services to customers across a wide range of industries

ROUNDTABLE

WHAT DOES MEXICO NEED TO DO TO REACH INTERNATIONAL SAFETY STANDARDS IN OIL AND GAS?

A string of deadly accidents looms over Mexico’s oil and gas industry and the stakes are only getting higher with the arrival of international companies and foreign investors demanding world-class standards. With severe budget cuts and a new market to navigate, PEMEX’s attitude to maintenance has been hotly discussed, with much agreement that there is room for improvement. Steps forward are being taken, as fledgling safety regulator ASEA enters its third year of existence and PEMEX partners with some of the world’s most advanced IOCs. But much still needs to be done. We asked a range of industry players: how can Mexico raise its oil and gas safety standards?

PEMEX needs to begin seeing safety as an investment, because until now they have seen it as an additional cost. Refineries growth in the past 50 years has been impressive, but it is important to consider modernizing their fire safety systems. 260

Robust systems are vital to guarantee safety in any type of accident. The bestcase scenario is that that a big company like Shell or BP comes here to fund the safety systems of these plants. Not meeting safety standards puts PEMEX at risk of

HUGO SÁNCHEZ Oil and Gas Sales Manager of Dorot Mexico

several negative circumstances. It risks falling short of insurance company’s minimum requirements in order to maintain their insurance premium. The company could negate the premium rate for not complying with its safety requirements. Additionally, it risks a significant accident occurring.

Mexico has a great record regarding the development of safety regulation; the issue has been their implementation, which in many cases does not happen due to lack of resources or awareness. Mexican regulations are based on European and US regulation so the content and quality are actually outstanding, but budgetary restrictions cause investment deviations to other, lesser important elements. There is no use in creating more regulations because the quality of the framework is already

FRANCISCO RINCÓN Director of Sales and Service at Dräger Safety Mexico

excellent, the solution would be to make the implementation of the regulations more strict and create consciousness of the importance of this implementation.

The new regulatory approach implemented by CNH and ASEA is a hybrid between goal-setting and prescriptive. Especially with international mayors entering the Mexican market, they will bring the same technologies and corporate procedures that are being used in the US and Europe so we should be able to get to a high standard quickly for new projects. The biggest issue will be the existing PEMEX assets that are not always well-maintained. A lot of the platforms are 30-40 years

ECKHARD HINRICHSEN Country Manager Mexico of DNV-GL

old and much of the pipeline system is even older so they are beyond their design life but continue to be operated.

PEMEXâ&#x20AC;&#x2122;s safety records are already aligned with international standards. To maintain this level of performance PEMEX takes the following into account: strengthen supervision and promote an industrial safety culture when operating its facilities to keep up these high international performance standards; ensuring regulatory compliance and applying international best practices in safety to reduce the impact on its facilities and on the community, thus increasing profitability; and avoiding undesired industrial incidents that could jeopardize the integrity of workers during their every-day activities.

CARLOS MURRIETA Director General of PEMEX Indrustrial Transformation

Mexico now has an up and running regulator. The next step involves ensuring that this remains in the long run, because today this agency has three vulnerabilities. The first has to do with the nature of our institutional framework. As opposed to CRE and 261

CNH, we do not have an internal corporate governance where decisions are taken between different individuals and analysts and discussed in boards of directors. Also, the agency does not have a long-term appointment for commissioners or board of directors, meaning that the director of the agency can be removed any time with no questions asked. Since the current head of the agency is making decisions under

CARLOS DE REGULES Executive Director of ASEA

the current institutional framework, that is a vulnerability in terms of continuity of regulatory policy. We need to work on that and make sure we take steps to become more similar to CRE and CNH.

First I think it will take time and effort to reach international standards. On the design front, we can adopt international practices like NFPA or ISO, for example, as well as incorporating best practices from experienced companies. Now that we have an agency dedicated to safety, it can take the initiative to coordinate training efforts in this direction. When it comes to safety, steps must be taken to avoid budget cuts and shortcuts which lead to malpractice. On the operational side, we need the agency to somehow incentivizes implementation and follow up. It must also be active in the field. Asking companies to satisfy paperwork requirements will not suffice; the agency must carry out inspections and certifications, perhaps through

HORACIO FAJER General Manager of KDM Fire Systems

third party entities. A no tolerance policy should be in place regarding maintenance and safety plans.

We believe that the weight attributed to regulation in general, not only in relation to fossil fuels, is overemphasized. The content of a law is only as good as its implementation. Agencies like ASEA, which is two years old and arose from nothing to currently employing 450 professionals, is doing very well and its implementation rhythm is satisfactory. The risk is that if we focus too much on detailed, complex and unclear regulation there is no guarantee that the results will be on par. Many resources could be spent in trying to cover everything, with poor results. This is why the industry has been adamant in demanding clear, sound, responsible and pragmatic rules. It should be noted that we are living intense times. Very few people deny the success of the Energy Reform in all of its aspects, particularly technical and financial.

JAIME MARTĂ?NEZ Business Development Director of ERM

VIEW FROM THE TOP

PLANNING IS CRUCIAL, TALENT GAP A WORRY HERMANN SAENGER Managing Director of SGS Mexico

262

Q: As new companies enter the Mexican oil and gas market,

A: We are studying the market entry strategies of new

what can SGS offer to these new players?

companies so that we can offer the appropriate services

A: SGS has been in Mexico for 65 years and there are

while guaranteeing SGS’ worldwide quality standard. The

few companies besides PEMEX that have such extensive

services on offer will be a continuation of those we have

experience in the country’s oil and gas industry. We have

been offering to other public companies so far, as well as

been working with PEMEX for many years on its certification,

some added value such as operations in our facilities in the

consulting with the NOC on its growth and researching

main border cities and ports.

what goes on in Mexican land and oceans. We are excited to share this experience with all the new companies entering

We are examining which investments to make and we are

the market that are looking for opportunities. They will need

meeting with different key players in the industry to survey

partners who can guide them through this process, with

where it makes sense to start working together. We detect

knowledge of Mexican oil fields and infrastructure. SGS

hunger to enter the market but unfortunately this eagerness

participated in the construction of many of these sites and

has waned and companies have become more cautious

in their operation, certification and testing.

about which projects to participate in.

As well as our local experience, we have had close contact

Q: What are the critical factors for successful entry into

with the biggest oil players worldwide from our oil expertise

the Mexican market?

center in Holland: Horizon Services. Horizon is a leader

A: No one wants to be the one to take the first step in

in researching and developing knowledge, software and

a changing industry but when things start happening,

expertise for the oil industry. What SGS offers today is the

everyone will want to participate at full capacity. SGS

combination of our international experience and Mexico-

knows that a slow start can turn into a very demanding

specific knowledge. For that reason, we believe we are

market in a couple of weeks. It is coming to the point where

going to be key players in the new chapter that began with

the flow of information is crucial, because if incoming

the reform.

companies wait until the last minute or decide to have everything ready from one day to the next, they are not

Q: How do inspection, certification and quality control

going to be able to follow their plans. Therefore planning is

processes here compare to other countries?

crucial. If the oil price continues to recover companies will

A: Since oil is an international commodity all companies

want to react quickly but those that did not plan enough

must adhere to the same international standards. Even

are going to fall behind. It might not be the best of times

though there are many aspects still to be developed in

but companies must prepare for better times now. This is

Mexico the foundation of the business is already here. SGS

how SGS is preparing to offer its services: by increasing

provides the same quality, testing and certification for

our capabilities, training people, having more and more

products in Mexico as in other countries.

coordination in different sites and networking to be prepared for the market's opening.

Q: How can SGS assist companies entering the Mexican oil and gas market for the first time?

Q: A lack of preparation for Brazil’s boom caused companies to scramble for skilled foreign labor. Could this happen in Mexico?

SGS is the world’s leading inspection, verification, testing and

A: Gaps in talent and certification are pressing issues

certification company, recognized as the global benchmark

that we are definitely worried about. Since SGS covers

for quality and integrity. With more than 90,000 employees, it

other sectors such as aerospace and automotive, we

operates a network of more than 2,000 offices and laboratories

tend to see what is happening in other industries and we

often perceive a lack of experienced and highly trained

A: The legal framework remains a challenge for new

personnel in Mexico.

companies as the majority are new to the region. We need more legal support and guarantees that goods, products

Infrastructure can be built and equipment can be imported

and personnel will be kept safe. That being said, a high

but if there are no trained people it will create a bottleneck.

level of quality is guaranteed in Mexico since it participates

That is one of the reasons why we are taking action now

as a major player in the global oil industry and has done

by bringing one of our highly successful business areas to

for many years, both as an exporter and importer. We are

Mexico. SGS’ academy offers first-class, specialized courses

integrated in the markets with the same standards as the US

in training personnel across a range of industries and levels.

and Europe. The international players will come with their international standards, which will be the same in Mexico

Q: Are there enough service providers to help IOCs

as anywhere else. It is more a matter of establishing the

entering the market or will they turn to foreign entities?

correct flow and infrastructure to provide services without

A: Major international players have been serving the Mexican

any major interruptions.

market for many years but more dedicated services will be needed as more than 25 new companies enter the market.

Q: What do you see as the company’s main competitive

Until today the same company was working on the whole

advantages, especially given the market’s changes?

chain, from extraction to production and distribution. Now

A: SGS has been in Coatzacoalcos for over 35 years so we

that the market is going to be split into different companies

have a real footprint in the area besides being present in

there are going to be missing links in the supply chain. This

other important ports. We have been able to train people,

is an enormous opportunity for smaller companies to start

many of whom have been with us for 15 to 20 years, so our

providing their services to new players. The problem is that

brand is recognized. Our expertise, way of working and

these companies will not know their services are required

developing people are all advantages. Having that footprint

until the time comes. There are also several possibilities for

helps us fine-tune the new necessities by providing new

the provision of services that were not needed in the past

services for different companies. We know the companies

because PEMEX was doing everything in-house.

in Mexico and also some international shareholders. An advantage is that they already know SGS’ reputation and

Q: How will the rapid growth of the sector benefit the

services and they know we provide the same standard here

overall legal framework and quality standards?

as in any other country worldwide.

263

VIEW FROM THE TOP

EXPERIENCE IN US WATERS TRANSLATES TO MEXICAN GULF MIKE BETHEA CEO of Offshore Technical Compliance (OTC)

264

Q: How is OTC applying its experience on the US side of

We are trying to figure out what the regulatory landscape

the Gulf to Mexico?

in Mexico will be like. We have done a fair amount of

A: OTC is a full-service offshore oil and gas regulatory

international work representing the interests of various

compliance company. On April 1, we acquired Northwest

countries. For example, in Angola, we were basically a third-

Technical Solutions (NWTS), which further enhances

party regulatory representative. We also issue engineer-

our scope. Our services include compliance inspection,

stamped approvals for permit modification. The company

compliance training and with NWTS, well control

actually began with a handful of former inspectors carrying

verification for compliance as well as digital pressure

out market inspections. We are as skilled if not more skilled

testing. These areas translate well from US waters to the

than regulators in reviewing or auditing operations.

Mexican side of the Gulf, and anywhere in the world for that matter.

Q: What challenges do you foresee in complying with standards for the new operators in Mexico?

Many operators maintain internal policies that require third-

A: We are still in the process of trying to understand

party verification regardless of where they are operating,

exactly how Mexico will implement, regulate and enforce

particularly in deepwater operations. OTCâ&#x20AC;&#x2122;s digital pressure-

its standards and regulations. Our understanding is that the

testing service is applicable to other areas and has really

authorities are trying to adopt best practices from other

taken off in the Gulf of Mexico and US waters. The reason,

jurisdictions. We get the impression that Mexico may not

partially, is because of rule changes regarding well control

be as restrictive as some other places because some of

but prior to that it had already become popular due to the

the restrictions are too onerous. Mexico is taking the right

significant time savings associated with the high-pressure

approach in wanting to come up with sensible and practical

blowout preventer (BOP) test. Using digital pressure testing,

regulation that encourages exploration and production but

our system can use its predictive algorithm to predict when

also protects people and the environment. We want to be

the required five minutes to flatline will be reached. We can

that link for our customers as they expand into Mexican

save as much as 50 percent in time spent on BOP testing

waters. OTC can help them interpret the regulations and

and that translates into hundreds of thousands of dollars

ensure they are in compliance.

in rig-time savings. Q: How do you go above and beyond integrated solutions Q: In Mexico, where do you see the best opportunities,

to be a part of your clientsâ&#x20AC;&#x2122; long-term vision?

given the recent deepwater rounds?

A: We can combine data that we collect through our combined

A: Prior to the new well control rule, our primary focus was

inspections, our verification of compliance work and through

deepwater. But after the well control rule was introduced, all

our digital pressure-testing service and analyze that data

the shelf operators have turned to digital pressure-testing

for our clients. For instance, in regulatory compliance, we

techniques. Time savings are still significant, somewhere

can help our customers by detecting the same potential

between 30 to 40 percent, and we can map when the

noncompliance occurring in multiple locations, for which

digital pressure testing is proving to be a good resource

we can then carry out training. If we see trends in the BOP

for operators.

testing, we can figure out whether excessive time taken is an indication of poor communication or whether it could be a sign of the variables in play, like water depth or the type

OTC is dedicated to providing industry-leading regulatory

of fluid being used for testing. Because we are providing

compliance inspections, training and other related services

all these services and collecting all this data in one location

to the global oil and gas E&P community of operators and

without using three different vendors, we can truly help our

contractors

customers become more efficient and safer.

INSIGHT

NEW US STANDARDS CREATE OPPORTUNITY IN MEXICO ROGELIO VERDUGO President of Northwest Technical Solutions

In July 2016, the US Bureau of Safety and Environmental

Northwest also offers workshops to share its regulatory

Enforcement (BSEE) implemented new well control rules

knowledge. “Our workshops open a casual conversation

including updated requirements for blowout preventers,

with clients, potential clients and interested industry parties,

third-party reviews and real-time monitoring for users

specifically about the new well control rules and also API

of drilling equipment. Houston-based verification and

Standard 53, which concerns blowout preventer equipment

engineering firm Northwest Technical Solutions believes

maintenance,” Verdugo adds. 265

the development, which raised international safety standards for operators and drilling contractors, is creating

In the coming years, Mexico’s oil and gas industry faces the

opportunities south of the border as the country comes to

double challenge of adopting new international regulations

grips with its own evolving oil market.

while absorbing its own new regulatory framework set out by CNH, ASEA and the Ministry of Energy. As compliance

The US changes, which are being phased in over the next

and safety becomes a hot topic, Verdugo identifies an

several years, come on the back of the probes into 2010’s

ensuing shift in responsibility, which is altering the way

Deepwater Horizon oil spill. The disaster resulted in the

certain companies function. “Maintenance and compliance

deaths of 11 people and an estimated release of 4.9 million

of specific drilling equipment used to be the sole

barrels of crude into the Gulf of Mexico, prompting US

responsibility of the drilling contractors and manufacturers,”

regulators to take a hard look at well safety standards.

he says. But under the new BSEE rules, more of it falls on the

The new rules demand well operators comply with more

shoulders of operators, drilling contractors and verification

detailed safety, maintenance and monitoring processes.

companies to guarantee the quality of each component. “In fact, drilling contractors are now using these regulations to

As a company with a trained team of engineers and technical

win contracts with operators, citing 100 percent equipment

inspectors, Northwest is well-positioned to disseminate its

compliance as a competitive advantage,” he adds.

knowledge of BSEE’s new regulations and to issue companies with the necessary inspections and certifications to assure

More responsibility has also shifted onto third-party

their compliance. According to company President Rogelio

verification firms like Northwest because the new well

Verdugo, “the previous rules focused on the well as a whole,

control rules mean more input will be needed from

not specifically on the pressure control and containment

independent firms to issue nonbiased compliance

equipment used in both drilling and remedial operations.”

certificates. The fact that the new rules focus specifically

Additionally, BSEE’s guidelines require users to implement

on well control equipment is also advantageous for

real-time monitoring for all drilling equipment, a standard

Northwest’s transition into Mexican territory. “It means our

that will raise compliance responsibilities considerably,

knowledge is easily transferred across the border because

Verdugo adds.

we are dealing with the same manufacturers and equipment here as in the US,” the executive says.

Northwest Technical Solutions has employed various strategies to help the industry adjust to this new regulatory panorama,

Verdugo believes the regulatory challenges Mexico

beginning with a partnership with a well-recognized

faces could present an opportunity for the country to

automated solutions provider. The alliance looks to develop

put new technologies and methods to use, such as data

real-time well equipment monitoring systems and Verdugo

collection and analysis processes. “With our headquarters

highlights the product’s impartiality as its main competitive

being in the oil and gas hub of Houston, Northwest is

advantage. “Our real-time monitoring is completely third-

always exposed to new technologies, regulations and

party. What you see is what you get, giving our clients the

developments in equipment and we intend to bring this

best chance to identify subsea issues before they worsen.”

knowledge to Mexico.”

VIEW FROM THE TOP

PROTECTIVE COATINGS FOR THE ENTIRE VALUE CHAIN ARTURO FLORES Mexico, Central America and Caribbean Sales Director of Hempel

266

Q: As a company that invests heavily in R&D, what new

Q: How can Hempel assist in renovating and expanding

product lines are you introducing to the market?

the country’s existing midstream and downstream

A: We have introduced Avantguard, a product line designed

infrastructure?

for more aggressive environments where maintenance costs

A: We have developed a user-friendly digital app called

can be significant. This development prolongs anticorrosive

Trusted Asset Protection Survey (TAPS). It works as

galvanic protection. We developed this technology with

an electronic survey that monitors facilities as a whole,

continuous improvement in mind. One of our comparative

detecting maintenance, repair or replacement priorities

advantages is that our product lines are not solely aimed at

and generating proven recommendations that have a one

the Mexican market since the reform will bring new global

to five grading scale for risk level. We are providing this app

players into the mix. We are working with them, conducting

to plant operators and managers. We have also developed a

experimental tests and engineering schemes. They have

paint color-range app that allows users to scan a bucket bar

noticed Hempel’s technological trends and discoveries.

code and download the paint’s technical sheet in various languages. Another digital development we launched is

We have worked with Europe’s main oil operators and

the MyHempel B2B platform for clients that prefer using

drillers in aggressive environments and conditions, such

the internet for the majority of tasks like security sheets,

as the North Sea, with fast-paced cyclic temperatures

invoices, shipment tracking and inventory. At the moment

that accelerate hazardous facility corrosion. We are also

only three companies located in Jamaica, Panama and

working with the University of Copenhagen to design and

Guadalajara use this platform but it can be rolled out to

develop new products and technologies. We incorporate

the rest of our clients.

the most promising ones into our R&D department for further development. Companies that are open to these

Q: What can Hempel offer the upstream market?

kinds of ventures, guaranteeing a space for research and

A: For the upstream sector, we are focusing on

imagination, designing tailor-made business plans for a

construction. In the last 10 years, we have demonstrated

client’s specific requirements regardless of the company’s

that our systems are top performers globally. Our

size, are the ones meant to succeed.

experience in painting platforms spans 50 years. Regarding maintenance, PEMEX is engaged in a slow-

Q: How does Hempel go beyond being a supplier to truly

paced investment attraction process. It is looking for

impacting its clients’ strategies?

energy partners to inject the necessary capital. At the

A: We want to be considered a strategic partner in terms

moment, Mexico’s maintenance project for PEMEX’s oil

of services and consultancy before, during and after

platforms is stalled. Drilling is also stalled. Many companies

application. We also focus on working with different paint

had to leave and we are waiting for their return. Some

schemes and propose technological alternatives when

of our main partners in the US — Schlumberger, Baker

required. In some cases, we have to provide solutions to

Hughes, Halliburton — are drilling offshore and sending

groups of global directors or segment managers who assist

us maintenance purchase orders.

us with references or opportunities that have worked in other markets.

Q: What are Hempel’s priorities going forward? A: Our priorities lie in supplier trust and credibility. If we generate and demonstrate a cutting-edge technological

Hempel is a global coatings supplier for the decorative, protective,

development, showcase a credible company in relation

marine, container and yacht markets. From wind turbines and

to raw materials, user-friendly products and industry

bridges to hospitals, ships, power stations and homes, its coatings

innovation, we can attain a larger market share with the

protect structures from the corrosive forces of nature

newcomers that know our brand.

INSIGHT

A GUIDING HAND FOR INDUSTRIES AND REGULATORS

Pedro Arjona President of DEISA

Salvador Segovia Director General of DEISA

For Mexico’s hydrocarbons sector to fulfill the promise of

of adding value to the change process by coordinating with

the Energy Reform, it takes more than just capital and

the authorities,” Arjona adds.

the ingenuity of companies willing to face the risks of a still little-known business environment. The regulatory

Without the participation of experts such as DEISA helping

framework must ensure that those entrepreneurs are

to smooth out regulations from different authorities and

following the best practices and complying with the

pointing out the commonalities of each, new industries such

requirements to ensure safety and proper operation of

as Mexico’s hydrocarbons sector risk overregulation and the

their present and future assets.

slowdown of investments, as well as an overlapping of power hierarchies. “One body is not above the other, they simply have

Both the experienced hands and the newest entrants into

different roles to play,” Segovia says. Despite their warnings,

an industry that was closed to strangers for the best part of

both executives agree that CRE has been doing a good job

a century can help guide the drafting of new rules and help

of regulating the industry for several years. The newer official

players comply with them, says DEISA President Pedro Arjona.

entities could definitely take a page from CRE’s book since it has been overseeing the sector for longer. Following in CRE’s

“The speed at which the Energy Reform unfolded meant

footsteps could also help to create a more solid market, with

the new regulatory bodies did not have enough time to fully

a balanced advisory board, they add.

establish themselves and implement the new regulations and standards that such reforms require,” says DEISA Director

DEISA inserts itself in the evolving scenario as a robust and

General Salvador Segovia. This, adds the Mexico-based

reliable answer to these problems because it can act as an

company’s President Pedro Arjona, can cause uncertainty

independent adviser. In such a role, transparency is the key

for players in the market “because they do not know who

to preserving trust between the firm and its clients, Arjona

to turn to for what.” The industry, he says, is still waiting for

says. If any conflict of interest arises within the organization,

regulatory clarity.

it will be reported immediately. “As well as undergoing annual external and internal audits, DEISA sends quarterly reports

DEISA turns 50 in 2017 and with that many years of assessing

to the Mexican accreditation authorities and bodies to prove

mainly Mexican natural gas standards under their belt, the

our objectivity, transparency and impartiality,” he adds. The

company believes it is perfectly positioned to continue

group’s commitment to objectivity is paramount given the

contributing to the authorities’ efforts to develop and shape

power of its role and the co-responsibility bestowed upon it.

new market regulations. Besides a commitment to advancing the Mexican regulatory Entities like ASEA, CRE and CENAGAS, three of the sector’s

framework, the company also has a strong focus on talent

main regulators, “have not managed to communicate with

development and retention as part of its success strategy. “In

each other adequately.” Players in the verification industry

an ever-evolving market, we need to constantly update our

could be drafted in to help smooth out the differences and

staff’s training,” Arjona says. The group established several

improve communications, Arjona says.

years ago an agreement with Mexico’s IPN technical college to sponsor groups of engineers.

Verification units help industries speed up the adoption of new regulations and compliance with the old, reducing the

Growth and change are on DEISA’s agenda, with plans to

workload of usually understaffed and overworked official

expand their base of qualified technicians and promote

regulators around the world. DEISA often participates

collaborative agreements with more academic institutions

in committees where its specialized technicians impart

or related organizations. “Our promise is not just with the

knowledge on the sector. “We were born with the philosophy

industry, but with Mexico,” Segovia says.

267

VIEW FROM THE TOP

RENT-BASED CONTRACTS COMING FRANCISCO RINCÓN Director of Sales and Service of Dräger Safety Mexico

Q: What does Dräger offer the Mexican oil and gas

American countries tend to have lower safety standards

industry?

than the rest of the world, which is why we have

A: Dräger works with up to 60 percent of the European oil

campaigned to increase awareness here. Training in

and gas market and has a remarkable presence in the US and

safety is also an important consideration when hiring a

Latin America. We are striving to boost our visibility in Latin

local workforce.

America, especially in Brazil with Petrobras and in Colombia 268

with Ecopetrol. In Mexico we want to position ourselves at

Our strategy is to prove the importance of investing

the top of the market and seize all opportunities resulting

in safety and increasing safety standards, which has

from the Energy Reform. Dräger is well-known because of

an immediate tangible return on investment (ROI).

its participation along the safety cycle: detection, protection

Each company has a duty to ensure the well-being of

and control, which represents an interesting set of services

its employees and that cannot be achieved without an

for the Mexican oil and gas industry. We are introducing rent-

investment in safety.

based contracts to Latin America, which include providing all the safety systems required for a project. This type of

Q: What are Dräger’s main expectations for 2017 in the

contract could be interesting for the market due to the

Mexican oil and gas market?

capital restrictions in the country.

A: We want to be a strategic ally in safety for all industries but especially in the oil and gas sector in Mexico. This

Q: What is ASEA’s role in improving safety standards and

means implementing all safety processes with smart

how can a company like Dräger help?

designs, new technologies, innovative processes and high

A: Mexico has a great record regarding the development

levels of technology transference. Our German partners visit

of safety regulations; the issue has been implementation,

our offices here every month, when we promote knowledge

which in many cases does not happen because there is a

transference and look for new ways to implement best

lack of resources or awareness. Mexican regulations are

international practices here.

based on European and US regulation so the content and quality are actually outstanding but budgetary

Mexico has great potential in the oil and gas industry. It

restrictions cause investments to be diverted to other,

is no coincidence that it is among the 15 most productive

less important elements. There is no use in creating

countries for oil in the world, with 2.3 million b/d. The

more regulations because the quality of the framework

Mexican market is certainly atypical due to the importance

is already excellent. The solution would be to strengthen

of offshore production, which represents over 50 percent

the implementation of the regulations and to create

of all national production.

consciousness of the importance of this implementation. Q: Who will be Dräger’s most important clients in Mexico Q: What are the main elements to consider when hiring a

besides PEMEX?

local workforce?

A: Our most important industries are the oil and gas and

A: The main quality employees must possess for a

mining industries. We want to participate with all the new

company like Dräger is an awareness of safety. Latin

players coming to Mexico. Our great advantage is our international presence, which has allowed us to develop relationships in all the countries we are in and also with

Dräger is a leader in the fields of medical and safety technology,

new companies that are entering the Mexican market for

offering hazard management solutions including stationary

the first time. We expect PEMEX to be our ally and referral

and mobile gas detection systems, respiratory protection,

for appealing to new Mexican companies with which we do

firefighting equipment and professional diving gear

not yet have a relationship.

INSIGHT

SEEKING GREATER POSITIONING THROUGH CUSTOMER SERVICE HÉCTOR DOMÍNGUEZ Director General of SAMSON Control

The old saying “lo barato sale caro” (the cheaper option

“Traditionally SAMSON has not been positioned in the oil

turns out to be expensive) has been felt more and more in

and gas sector,” says Domínguez. “In 2000, our products

the oil and gas sector in recent years. As oil prices drop,

were not positioned in the refining sector and much less in

operators are trying to drive down costs and often end up

upstream.” After modifying the R&D vision at the company’s

choosing the least expensive option, which can turn out to

headquarters in Germany, it began to re-evaluate its

be costlier due to higher maintenance costs and increased

positioning and tried to crack the oil and gas market. 269

downtime. Domínguez does not expect a smooth road ahead for Héctor Domínguez, Director General of SAMSON Control,

SAMSON because it is not characterized as one of the big oil

believes there are also occasions where too much

and gas players. Although the company has a great deal of

investment is destined for a product that can be obtained

ground to cover in Mexico, with 42 subsidiaries and a range

at a lower cost and work just as well. “It is a fine balance,”

of brands including Vetek, Pfeiffer and Longe, Domínguez

he says. When SAMSON presents a product to its customers

believes it may not be long before the SAMSON name

it is backed by a careful analysis of what tangible benefits

becomes more prominent in oil and gas and eventually

the product can offer. However, problems can arise when

makes its way into PEMEX’s list of preferred vendors, an

a customer insists on an specific component despite

essential step for any company willing to do business with

SAMSON’s recommendations. “On occasion, we have

Mexico’s oil and gas giant.

refused to sell a product because we know this will not be the most efficient option,” Domínguez says. This expertise

A SAMSON Group subsidiary, Ringo Válvulas, has already

is a reflection on the company and is an important boost

made it and has attracted much more brand recognition.

to the reputation of a global firm like SAMSON, he adds.

Ringo Válvulas was acquired three years ago in Hermosillo and has vast experience in upstream and midstream. “I am

As SAMSON moves to offer more personalized and tailored

optimistic the SAMSON line can also achieve the same level

services, Domínguez says that companies sometimes

of renown,” says Domínguez. “In our strategy, providing

overlook crucial aspects. “Many companies do not offer

necessary technical support is priority number one.”

guarantees and simply act as equipment suppliers,” he says. “A company cannot just supply a component and

SAMSON will look to the advantages of its products to gain

abandon the customer when technical difficulties arise.”

market growth. Its products, known as eccentric shutter

Even for a company with the most advanced products

valves, differentiate from the competition by their internal

and lowest prices, this attitude can close a great deal

construction and size. “There are so many different valves for

of doors in the industry, especially in Mexico. “This kind

so many different applications so these valves have a niche

of support should not be seen as added value but as

application,” Domínguez says. The large, 16-20 inch valves

mandatory,” he says.

can be used for certain functions required by PEMEX. “The NOC uses a very expensive valve almost double the price of

Having worked with companies like ICA Fluor, Petrobras

ours,” he says. “We offer half the price, half the weight and

and PEMEX, SAMSON draws on its local and international

excellent functionality.” He also foresees a market for the

knowledge to provide a holistic service to clients. But

SAMSON valve in electric systems for offshore platforms.

although the company has a breadth of experience in chemicals and petrochemicals with clients such as BASF,

Despite the challenges ahead, Domínguez remains

Bayer and Henkel, Domínguez admits that when it comes

optimistic. “I am 100 percent sure that if we can negotiate

to refining and upstream, US and UK EPC companies can

these tough times, we can emerge as one of the future

often overshadow a lesser-known company like SAMSON.

industry leaders.”

VIEW FROM THE TOP

MEXICO’S SAFETY RULES NEED A COMPLEMENT

Yazmín Rodríguez Director General of Dorot Mexico

270

Hugo Sánchez Oil and Gas Sales Manager of Dorot Mexico

Q: Given Dorot’s oil and gas R&D and innovation, what new

Q: What kind of expertise can Dorot provide to new

technologies can we expect to see in the coming years?

companies here in Mexico?

HS: Dorot was founded in the late 1940s and we have

HS: The most useful expertise we have is our knowledge

always developed new devices and tried to reach the

of almost all of PEMEX’s facilities, including their refineries,

best standards of compliance and efficiency according to

petrochemicals and offshore platforms. We have been

market demands. We also work to comply with international

following the growth of these installations and we know

standards. The company has a specific focus on emergency

exactly what service they require to ensure low cost and

processes. In an emergency, teams must close all valves

high performance.

to ensure that petroleum products do not keep spilling, boiling or escaping into the atmosphere. In the case of fire

YR: Dorot is part of Mat Holding Group. It is important to

safety, the opposite is true. Valves must be opened and the

note that despite the recent oil-price crisis in the industry,

team must act in the safest way possible. We are looking

we have not reacted by closing or reducing facilities.

for better solutions to these problems. This does not mean

Instead our answer has been to conserve human capital

our current solution is incomplete but the world never stops

as a way of betting on the future. Also, we know that

and we have to keep working to advance.

trying to replicate this level of knowledge and experience in the future will be impossible. We have many years of

Q: How has PEMEX’s transformation impacted the required

experience in PEMEX’s facilities and this is an advantage

certifications in Mexico?

we wish to keep.

HS: PEMEX has one of the largest documents in terms of standardization, called the Normas de Referencia. It is a very

Q: How are you preparing to work with new companies

important endeavor that has been constantly worked on

after working primarily with PEMEX?

for almost 20 years and it is one of the richest documents

HS: We have close relationships in many segments of the oil

in the global oil industry. It is a unique and complete

and gas industry and we have a clear vision of who the key

collection of specialized rules for all aspects related to the

players will be in the new market. We are open to forming

oil and gas industry, including pipelines, pumps, pressure

alliances with any company dedicated to safety that wants

recipients, hoses, plants and concrete structures. Essentially

to begin operations in Mexico. We hope to announce new

everything related to the construction and design of an oil

alliances with key companies very soon.

plant already has a standard in Mexico. Q: What are Dorot’s targets for 2017 and how do you see The current rules in the Mexican oil and gas industry require

the company changing in light of the Energy Reforms?

a complement, above all due to the imminent participation of

HS: We are committed to maintaining and investing in

private foreign companies, most of whom are used to working

human resources, research and in our presence in the

to very high levels of safety. Today, one of the struggles we

Mexican and global oil and gas sectors alike. Oil is a global

have in the Mexican oil and gas industry concerns the need

asset and we are all interested in protecting it and reviving

for maintenance work at all levels, to update teams and

the industry. Dorot wants to be an active participant in

systems, as much in production as in safety.

finding the solutions to turn the situation around in the wake of the crisis.

Dorot Control Valves is a world leader in the development and

YR: Dorot is aware of PEMEX’s huge transformation into

supply of sustainable technologies for water control systems.

a productive enterprise of the state. Its new focus on

Dorot offers advanced hydraulic control valves, air release and

profitability is a common language for all businesses, so

vacuum break valves for a range of industries

we are more in tune now with their objectives.

INSIGHT

FIRE SAFETY: ON TIME; ON BUDGET AND ON SPEC HORACIO FAJER General Manager of KDM Fire Systems

The Energy Reform brought relatively rapid changes

KDM’s extensive experience in the Mexican market, new

to the oil and gas industry but one lagging area is the

innovation-focused strategy and dedication to the highest

implementation of technology, particularly with regards

international safety standards, he says.

to safety. Budget restraints at PEMEX, for example, are keeping the NOC from turning its words on safety into

KDM Fire Systems, formerly Kidde de México, has

action, says Horacio Fajer, General Manager of KDM Fire

transformed beyond a new name. “Whereas before we

Systems.

were a product-driven company, now we assess the risks a company faces, engineer tailored solutions and offer

“The adoption of new technology in Mexico is very slow,

installation and maintenance services too,” Fajer says.

especially with gas compression systems,” Fajer says. This lack of speed is contributing to PEMEX’s lack of

Bought in 2016 by Mexican private equity fund EMX Capital,

investment in fire safety, which is also a result of the NOC’s

the firm originally provided fire protection products such

stringent budget cuts. Fajer says KDM, which is a partner

as flame and gas detection units and suppression systems

to PEMEX, has not provided the state company’s offshore

but has now adopted a more integrated service model.

rigs with maintenance work for at least two years and for

“Kidde has not disappeared,” Fajer says. “We changed but

this reason the status of the NOC’s fire systems remains

the same brain-power is behind our new model.”

unknown to KDM. Fajer highlights that KDM is fully involved in the many Safety is a main topic of sector discussion as Mexico’s oil

aspects of a project rather than simply providing products.

and gas industry opens up to international players and

The change has altered much of the firm’s strategy and

Fajer knows all too well the importance of fire safety on

he is optimistic that it can offer its clients a better service

offshore rigs, drawing on the two deadly fires at PEMEX’s

than ever. “KDM can now assess risk, determine the best

Abkatún platform in past years as a stark reminder. “The

way to deal with it, engineer a solution, then install and

top management at PEMEX tells us that fire safety is a

maintain that solution,” he says. “Our mantra is on time,

priority but unfortunately we do not see this translated

on budget and on specification.”

into action.” Fire safety programs are approved at all levels until they hit the last hurdle, namely budget

The company continues to provide its core product line

approval, he says.

and will retain the rights for the products, which according to Fajer made them a “partner of choice” for PEMEX.

Problems arise when companies stop counting near-

As well as KDM’s success with the NOC, the company

misses. Recording near-miss accidents is key to preventing

supplied the fire suppression systems for the El Encino-

further incidents and when this proactive approach is

Topolobampo pipeline.

lacking it is a big red flag for safety, Fajer says. “When a near-miss is considered equal to an accident, the analysis

KDM’s new structure has not only helped its clients but

allows prevention of future accidents,” he says. Oil rig

also allowed the firm to introduce novel technologies

workers are concerned because this potentially lifesaving

into the Mexican market. Since its transition from being a

approach is not being implemented, he says.

product mover to a fire safety-service provider, KDM can offer its clients certain technologies that Fajer says are

This is exactly where KDM Fire Systems can come into

not always locally available. Those include an innovative

play to help its clients. “We want to become the partner

explosion-protection technology, which mitigates the

of choice and take care of a company’s entire fire safety

danger of combustible dust causing fires, and foam fire-

needs,” Fajer adds. Oil and gas companies can rely on

protection systems.

271

Hermanos CO3 and H2S removal plant including gas conditioning, Poza Rica, Veracruz, Enerflex

NATURAL GAS & POWER GENERATION

Natural gas hogged the spotlight in 2016 as the dropping price of the molecule and the surplus in the US sent companies scrambling to invest in pipelines, logistics and other transportation infrastructure, with others looking at investing in Mexican gas fields. CENAGASâ&#x20AC;&#x2122; consolidation and the successful completion of its first natural gas open season stands as yet another milestone left behind on the road to the industryâ&#x20AC;&#x2122;s liberalization. On the other hand more players are entering the gas commercialization sector and cost efficiency is becoming the key factor for competitiveness.

This chapter discusses the openings in natural gas commercialization and infrastructure investments. The national capacity is beginning to expand as a result of the governmentâ&#x20AC;&#x2122;s natural gas infrastructure plan even as the country is increasing its connectivity with the huge US natural gas resources just north of the border, planning a vast network of pipelines to supply the industrial areas of the nation.

273

CHAPTER 11: NATURAL GAS & POWER GENERATION 276

ANALYSIS: Focus on Oil Fuels Natural Gas Conundrum

278

MAP: Natural Gas Pipelines

281

INSIGHT: David Madero, CENAGAS

282

INSIGHT: Rogelio Montemayor, Strata BPS

283

VIEW FROM THE TOP: Alberto Rojas, Enersoft Consulting

284

VIEW FROM THE TOP: Jan Frowijn, The Rosen Group Mexico

286

INSIGHT: Alejandro Gutiérrez, United Pipeline de México

287

INSIGHT: Donato Santomauro, Bonatti

288

VIEW FROM THE TOP: Herwig Bachmann, Evonik Industries Mexico

290

VIEW FROM THE TOP: Mario Chávez, GE

291

ROUNDTABLE: Could Digital Solutions Help Mexico Upgrade Its Aging Natural Gas Infrastructure?

292

VIEW FROM THE TOP: Juan Hernández, Industrias Energéticas

293

INSIGHT: Frank Kluwen, Allseas USA

294

SPOTLIGHT: United Breathes New Life Into Aging Pipeline Infrastructure

296

INSIGHT: Lina Márquez, Enerflex

297

INSIGHT: Felipe Echavarría, Gazel

275

ANALYSIS

FOCUS ON OIL FUELS NATURAL GAS CONUNDRUM With Mexico’s COP21 commitment to reduce emissions by 22

interest in investing in upstream natural gas

percent by 2030, the country is focusing more and more on

opportunities. Strata BPS, winner of three of

cleaner energies like natural gas. But the problem is producing

the eight fields that contained natural gas

enough to meet national demand.

without condensates in Round 1.3, put its daily average production for these blocks

What does a country do when demand steadily climbs

during February 2017 at around 8MMcf.

higher while production goes in the other direction? Such is the natural gas scenario Mexico is grappling with. From

Mexico’s gas demand is satisfied with a pipeline

2010 to 2016, demand for the fuel rose by 18 percent to

infrastructure measuring 15,755km, of which 10,068km

7.457Bcf/d but production declined by 24 percent to

belongs to SISTRANGAS and 5,687km belongs to

4.834Bcf/d in the same period.

private companies, according to the Natural Gas Forecast. Following the liberation of the midstream

276

So far, a big part of the answer has been to import the

sector, Mexico established an open season procedure to

in-demand fuel from Mexico’s largest commercial partner,

assign the 6.2Bcf/d of transportation capacity belonging

the US. In 2010, natural gas imports covered only 23

to SISTRANGAS to the different players in the market.

percent of the national demand, while by 2017 the number

Open season Round Zero involved only the state-

had increased dramatically, to 56 percent. The fact that

owned companies PEMEX and CFE. CFE, PEMEX and

Mexico focused predominantly on oil production in the

IPPs with pre-existing contracts assigned by CRE were

past caused the country to fall behind in natural gas

assigned assets amounting to 658MMcf/d, 1.392Bcf/d and

production and infrastructure development compared to

1.592Bcf/d during Round Zero. On May 8, 2017 the results

other nations, says Felipe Echavarría, Director General of

of Round One were published by CENAGAS, assigning

natural gas provider Gazel México.

a total of 2.236Bcf/d of the 2.563Bcf/d that was not included in Round Zero.

According to the Ministry of Energy’s Natural Gas Forecast 2016-2030, in an optimal scenario national natural gas

With all the optimism surrounding the new market, there

production will decrease by 16 percent by 2030 compared

continue to be major hurdles stopping more projects

to 2015 production. Worst-case estimates for the same

coming to fruition in Mexico, says Donato Santomauro,

period put this number as high as 51 percent. Round 1.3

Mexico Country Manager of international general

saw 100 percent of the oil and gas fields up for grabs

contractor Bonatti. Operators evaluating the feasibility

assigned. Although natural gas production from these

of projects face two main issues: firstly, securing anchor

fields will not have a substantial impact on Mexico’s natural

contracts in a market that is becoming established but

gas production, it serves as an indicator of private-sector

lacks proven rules and regulations as well as consolidated players, and secondly, obtaining the required permits and rights of way. “Permits are becoming more difficult to

PERFORMANCE IN NATURAL GAS PRODUCTION PRODUCCIÓN DE GAS NATURAL (MMcf/d)

acquire and sometimes their absence can delay projects for months,” says Santomauro.

6,000 5,174

5,000 27.3%

4,946

26.5%

4,000

4,770

24.9%

Meeting Mexico’s growing natural gas demand requires a 4,580

23.9%

4,367

23.7%

modern, reliable and extensive network of pipelines and storage infrastructure, as Rogerio Mendonça explains: “The pipeline network is a critical part of the energy

3,000

infrastructure, evolving over time to reflect shifting patterns of supply and demand.” Some players have

2,000

72.7%

73.5%

75.1%

76.1%

76.3%

were foreseen in the Ministry of Energy’s Fifteen Year

1,000 0

already started working on infrastructure projects that Plan 2016-2030. The south Texas-Tuxpan pipeline to be constructed through the JV between IEnova and

1Q16

Associated

Asociado

Source:PEMEX

Source: PEMEX

2Q16

3Q16

4Q16

Non-associated

No Asociado

1Q17

Transcanada is the longest and most capital intensive of all, measuring 800km and requiring an investment of US$2.1 billion.

Project

Beneficiary States

Length (km)

Expected Investment (US$ million)

Expected Start of Operations

Status

Strategic Projects I

Tuxpan-Tula

Hidalgo Puebla Veracruz

263

458

2017

Awarded to TransCanada

La LagunaAguascalientes

Aguascalientes Zacatecas Durango

600

473

2017

Awarded to Fermaca

III

Tula-Villa de Reyes

Hidalgo San Luis Potosi

295

554

2017

Awarded to TransCanada

Villa de ReyesAguacalientesGuadalajara

Aguascalientes Jalisco San Luis Potosi

355

294

2017

Awarded to Fermaca

San IsidroSamalayuca

Chihuahua

109

2017

Awarded to IEnova

Samalayuca - Sasabe

Chihuahua Sonora

650

571

2017

Awarded to Grupo Carso

VII

Jaltipan- Salina Cruz

Oaxaca Veracruz

247

643

2018-2019

Postponed

VIII

Sur de Texas-Tuxpan

Tamaulipas Veracruz

800

2,111

2018

Awarded to IEnova and TransCanada

Colombia-Escobedo

Nuevo Leon

Public bidding cancelled. CFE decided to participate in an open season instead, awarding US-based Howard Midstream Energy Partners a US$1.6 billion contract to supply natural gas to Escobedo and Monterrey, representing savings of around US$998 million for the state-owned utility.

Los RamonesCempoala

Nuevo Leon Tamaulipas Veracruz

855

1,980

2020-2024

Postponed

2018-2019

Postponed

2018

Awarded to TAG Pipelines. The project is now developed at the risk and expense of the private sector. It is no longer considered a project of social interest.

Projects of Social Interest XI

XII

Lazaro CardenasAcapulco

Salina CruzTapachula

Michoacan Guerrero

Chiapas Oaxaca

331

440

456

442

Ojinaga - El Encino Pipeline, Owned by Gasoducto de Aguaprieta (IEnova), EPC contract belonging to Bonatti

277

MAP: NATURAL GAS PIPELINES

4 5

b 10 c

7 14

15 16

8 278

33 d

Natural Gas Processing Facilities Compressor Stations Combined cycle gas station under 500MW

Combined cycle gas station above 500MW Steam gas station under 500MW Steam gas station above 500MW Turbogas gas station under 500MW Natural gas transmission pipelines Transmission pipelines under construction Private transmission pipelines CENAGAS

Source: CENAGAS, CFE and the Ministry of Energy

Compressor Stations

Natural Gas

a. Naco

l. Valtierrilla

Processing Facilities

b. Gloria a Dios

m. El Sauz

I. Burgos

c. El Sueco

n. E. Zapata

II. Arenque

d. Chávez

o. Cempoala

III. Poza Rica

e. Santa Catarina

p. Lerdo

IV. Matapionche

f. Los Ramones

q. Jáltipan

V. Área Coatzacoalcos

g. Estación 19

r. Chinameca

VI. La Venta

h. El Caracol

s. Cárdenas

VII. Nuevo Pemex

i. Los Indios

t. San Isidro

VIII. Cactus

j. Soto la Marina

u. Dr. Arroyo

IX. Cd. Pemex

k. Altamira

v. Villagrán

279

18 e

21 24 I h 23 22

f i u

j k

28 26 25 27 34 35

38 37

44 43 42

39 l

III

49 50

n IV

45 p

V VI q

IX VIII

VII

MAP: NATURAL GAS PIPELINES TABLE

280

No.

Central

Total Cap. (MW)

Technology

Presidente Juárez

320

Conventional Thermoelectric Combined Cycle

Presidente Juárez

773

Tijuana

345

Turbogas

Mexicali

489

Combined Cycle

Termoeléctrica de Mexicali

680

Combined Cycle

Puerto Libertad

632

Conventional Thermoelectric

Hermosillo

270

Combined Cycle

Guaymas II (Carlos Rodríguez Rivero)

484

Conventional Thermoelectric Combined Cycle

Naco-Nogales

300

Caridad I and II

500

Combined Cycle

Samalayuca

316

Conventional Thermoelectric

Transalta Chihuahua III

259

Combined Cycle

Samalayuca II

522

Combined Cycle

Chihuahua II (El Encino)

619

Combined Cycle

Norte II

433

Combined Cycle

Francisco Villa

300

Conventional Thermoelectric

Huinalá

378

Combined Cycle

Huinalá II

471

Combined Cycle

Monterrey III (Dulces Nombres)

1,000

Combined Cycle

Dulces Nombres II

300

Combined Cycle

Río Bravo (Emilio Portes Gil) U3

300

Conventional Thermoelectric

Río Bravo II (Anáhuac)

495

Combined Cycle

Río Bravo III

495

Combined Cycle

Río Bravo IV

500

Combined Cycle

Altamira

500

Conventional Thermoelectric

Altamira II

495

Combined Cycle

Altamira III and IV

1,036

Combined Cycle

Altamira V

1,121

Combined Cycle

Topolobampo II (Juan de Dios Bátiz)

320

Conventional Thermoelectric

Mazatlán II (José Aceves Pozos)

616

Conventional Thermoelectric

Norte Durango

450

Combined Cycle

Lerdo (Guadalupe Victoria)

320

Conventional Thermoelectric

La Laguna II

498

Combined Cycle

Villa de Reyes

700

Conventional Thermoelectric

Tamazunchale

1,135

Combined Cycle

Salamanca

550

Conventional Thermoelectric

Cogeneración Salamanca

393

Turbogas

El Sáuz-Bajío

495

Combined Cycle

El Sáuz

591

Combined Cycle

Tula (Francisco Pérez Ríos)

489

Combined Cycle

Tula (Francisco Pérez Ríos)

1,606

Conventional Thermoelectric

Tuxpan II (Tres Estrellas)

495

Combined Cycle

Tuxpan III and IV

983

Combined Cycle

Tuxpan V

495

Combined Cycle

Dos Bocas

452

Combined Cycle

Manzanillo (Gral. Manuel Álvarez Moreno)

1,300

Conventional Thermoelectric

Manzanillo (Gral. Manuel Álvarez Moreno)

1,454

Combined Cycle

Valle de México

450

Conventional Thermoelectric

Valle de México

549

Combined Cycle

San Lorenzo Potencia

382

Combined Cycle

Nuevo PEMEX

367

Combined Cycle

Cantarell

363

Turbogas

Transalta Campeche

252

Combined Cycle

Valladolid III

525

Combined Cycle

INSIGHT

INTERNATIONAL COMPANIES TAKING NOTE OF PIPELINE PLANS DAVID MADERO Director General of CENAGAS

To achieve a really competitive natural gas market, Mexico

and Lazaro Cardenas-Acapulco pipelines have been

needs to build infrastructure to transport the fuel in an

postponed, according to the recommendations of the plan’s

efficient and cost-effective way. The government believes

annual revision performed in mid-2016 by the Ministry of

the time to construct is now and it is counting on the private

Energy, CRE and CENAGAS. But the possibility for private

sector as never before to come through — and international

companies to invest in pipelines unrelated to PEMEX or CFE

companies are taking note.

is also an attractive option for the industry to expand the transportation system, particularly as the liberalization of

“The natural gas market has been in a liberalization process

the natural gas price in the north is expected to increase

for 20 years,” says David Madero, Director General of

demand for capacity.

CENAGAS, the country’s agency in charge of managing the natural gas transportation system. “We have had large

As the independent operator of the National Natural Gas

companies participating in the sector for a long time such

Transportation System (SISTRANGAS), CENAGAS also

as Fermaca, IEnova and TransCanada. But now we are

foresees new investments to maintain the existing system in

seeing some new faces. The factor that has contributed

optimal condition. “We need to invest in revamping natural

to the increase in the number of international companies

gas compression stations because their numerous mobile

entering the market is the unprecedented massive build-out

parts increase their vulnerability. We will also be investing in

of the national natural gas transportation system.”

the integrity of the pipelines and repairing all the vulnerable spots we can identify through an intense analysis of the

Mexico’s five-year plan to expand its natural gas pipeline

existing infrastructure.

system includes the construction of 10 new strategic pipelines, two social interest pipelines, seven new

Finally we need to invest in natural gas measurement

interconnection points with the US and one with Central

and safety technology. The process of itemizing the

America. All these projects represent a total estimated

infrastructure we received from PEMEX is still ongoing and

investment of US$16 billion. “The federal government

our main challenge will be to provide maintenance for the

expects to have private companies fund the expansion

existing pipelines inherited from PEMEX. We plan to invest

of the pipeline network through bidding processes. We

in 2017 over the required level to improve the operationality

are sure our US$16 billion invested to double the pipeline

of the pipelines,” says Madero.

network will continue to grow. Therefore, there are opportunities to build, own and operate new pipelines and

“The first steps that we need to work on for the next three

to provide services to CENAGAS and other existing and

years to achieve those goals are to consolidate CENAGAS,

newly built pipelines,” Madero says.

gain operational control of all our administrative and field activities, acquire all the operational technology and

“The tenders for new projects have already created a

knowledge remaining and invest in Supervisory Control and

center of attraction for national and foreign investment.

Data Acquisition (SCADA) systems, simulation systems and

Additionally, the liberalization of the market has created a

other technological tools,” he adds.

highly competitive environment. For instance, in pipeline bidding processes we have identified very tight rates

CENAGAS’ already complex responsibilities get even more

of return and increased standards in transportation,”

challenging due to the novelty of the center and other

he adds. Most of the projects contemplated in Mexico’s

governmental entities with direct responsibilities over the

expansion plans had been already awarded by the end of

pipeline system. “There is still pending regulation for us as

2016 and are expected to start commercial operations by

a technical manager. CENAGAS’ role is new and a direct

2017. The Jaltipan-Salina Cruz, Los Ramones-Cempoala

result of the Energy Reform," Madero says.

281

INSIGHT

BUILDING OWN INFRASTRUCTURE A ‘NO-BRAINER’ ROGELIO MONTEMAYOR Director General of Strata BPS

As production begins in earnest on the 25 blocks awarded

of 2017. His goals align with wider industry efforts to

in onshore Round 1.3, those operators could be considered

reverse falling production, which stood at an average of

something akin to test subjects of the reform as CNH,

4.35MMcf/d in February 2017, a 16 percent drop from the

PEMEX and the rest of the industry come to grips with its

same period in 2016.

newly liberalized status. Despite the opening, operators

282

are still required to sell their natural gas production to

Along with his aggressive production goals, Strata

PEMEX’s existing system at prices lower than the market

BPS’ CEO says he wants to change PEMEX’s mindset

and at the cost of efficiency, says Rogelio Montemayor,

regarding its natural gas processing system. Since Strata

CEO of Strata BPS.

BPS produces wet gas, it must be processed into dry gas to be sold on the wholesale market. The system in

Because of this, PEMEX’s processing plants risk being

place means that they must sell the rights to the gas to

forced out of business as private operators turn to building

PEMEX to access its processing system so it can reach the

their own infrastructure as an alternative, he adds. “Right

wholesale market.

now, the price we pay to process our gas production through PEMEX’s plants would pay for construction of our

“We only want to use the processing system, rather than

own infrastructure in a year and a half,” Montemayor says.

selling our raw material,” Montemayor explains. But the

“It is a no-brainer for us.”

payment rules within PEMEX are unclear because the NOC has never offered this service before and there is

Dry gas has little to no condensates or liquid hydrocarbons while wet gas contains complex hydrocarbons that can be liquefied

a general hesitance toward change for fear of breaking rules, he says. The short-term incentives are few and far between for PEMEX to change its current natural gas processing system but Montemayor believes there are significant mid and long-term risks for the NOC if it fails to change its ways. “One of the Energy Reform’s objectives was to raise capacity usage of PEMEX’s processing plants. It is in its best interest to open up in the long term, before additional infrastructure pops up and it loses clients.”

Selling natural gas production to PEMEX may have been

More reforms are not necessary to achieve this, says

convenient at the beginning of field operations but now

Montemayor. The rules set out by the Ministry of Energy

that Round 1.3’s winners want to be serious market

and CRE are clear on PEMEX’s role in the market as

players they need competitive market prices and efficient

another competitive player but more should be done

processes.

by these institutions to push the NOC to change. After nearly eight decades of market dominance, change will

Strata BPS has been feeding natural gas into PEMEX’s

be a process requiring knowledge-sharing and patience,

system since production began at its Peña Blanca,

he adds. “Higher executives within PEMEX are aware of

Carretas and San Bernardo fields, which are producing

the importance of opening up, but the lower you go in the

the second-highest amount of natural gas from Round

ranks, the more afraid people are of making decisions and

1.3’s fields. Current production stands at around 8MMcf/d

getting in trouble.” For this reason, a lot of pushing from

but Montemayor hopes to almost double this by the end

the top is required.

VIEW FROM THE TOP

BUSINESS SAVVY CAN GO A LONG WAY ALBERTO ROJAS CEO of Enersoft Consulting

Q: How did Enersoft come to give its course to CENAGAS

A: Natural gas trading is divided into two parts, one physical

on natural gas transportation?

and the other financial. Both react to spot prices. In Mexico,

A: Our main advantage is that we brought in an instructor

as in the beginning in the US, there is a physical trading

who has written a book on natural gas transportation to

market where natural gas is bought and sold. The financial

design and develop the course with us. We trained around 50

trading market has not been developed due to the lack

people with two specially designed courses. The first course

of trading hubs and exchanges, since this market evolves

explained the basics of natural gas transportation, offering

around financial derivatives. 283

insight on how the business runs but without having a strong focus on Mexico, because that would have made the course

Nevertheless, I detect a lack of human resources for business

too complex and unfocused. It provided an introduction to

management. The circle of people who really know how the

contracts, nominations, confirmations, scheduling and other

natural gas trading business works is closed. The majority

common processes. The second course covered the simulation

work for PEMEX and are about to retire, unless retirement

of transportation processes on an actual pipeline, going

laws change. Maybe a small number of experienced people

through the entire process of decision-making, confirmation

will join the private sector after they retire.

and problem management, including some examples. This can be solved by either training people already working Q: How far along is Mexico in developing regulations for

in private companies or by bringing in people who have

the natural gas sector?

experience in the business management area from the

A: Mexico is trying to push forward more robust regulations

US. The problem with the first option is that it is not an

but we still cannot see a clear and concrete action plan that

immediate solution. It takes two to three years at best for

will allow it to reach the kind of proper regulatory scheme

a worker to gather enough knowledge in the business. Even

that exists in other countries. An approach might be to base

then, they will lack the mindset and abilities that come with

regulations on those in the US and adjust them to meet

real-world experience.

Mexicoâ&#x20AC;&#x2122;s needs. We have to work on these issues to tune up the regulatory scheme.

The latter option has the disadvantage of US workers being more expensive and unfamiliar with Mexican decision-

Q: How can Enersoft help the Mexican industry?

making and implementation processes. US processes in the

A: We carried out a clear and concise analysis of the

gas transportation business are extremely easy, consisting

advantages and disadvantages of what we can offer the

of simply sending invoices. In Mexico, an invoice has to

market and found that our biggest strength is our experience

go through several steps before being accepted. Enersoft

in natural gas transportation, as well as in physical and

can help companies solve both problems by either offering

financial trading due to our global presence and the

training courses like the one we gave to CENAGAS or by

international projects that we have worked on, especially

helping companies with our consulting services in software

in the US. Our personnel developed a project in Colombia

selection, implementation or development, pipeline

with Ecogas and Ecopetrol in software development and

transportation business and natural gas trading in the

installation, modifying an existing software according to

physical and financial markets.

their specific needs. We are looking for a way to collect the knowledge our human capital has gathered during these projects and implement it in Mexico.

Enersoft Consulting offers solutions for the natural gas and electricity transportation and commercialization business.

Q: What challenges has Enersoft identified in the

Established in Mexico City in 2016, the company has

development of the Mexican natural gas trading business?

international experience with projects in the US and Colombia

VIEW FROM THE TOP

ADOPT HOLISTIC APPROACH TO PIPELINE MANAGEMENT JAN FROWIJN Director General of the Rosen Group Mexico

Q: Which international best practices for pipeline integrity

and operators what they want to get out of an asset. We

and management have yet to be introduced to Mexico?

then use their answer to showcase the benefits of early

A: One approach that still needs to be introduced is the

intervention in pipeline integrity management and present

integration of all the available data on pipeline systems.

the long-term effects of cost-cutting on the safety and

In the US and Europe there is a more holistic view of

reliability of pipelines.

pipeline integrity in which the entire life cycle of an asset 284

is considered. In Mexico the process is broken down into

Q: How could Rosen’s services help companies achieve

different parts that are viewed as separate entities. This

higher efficiency and productivity standards?

holistic approach could be adopted in Mexico.

A: The reliability of an asset directly and immediately impacts its productivity. If a pipeline is out of service

Q: How does Rosen help companies move toward this

half the time due to technical or operational concerns,

holistic approach to pipeline integrity?

productivity will fall. An example of a time when Rosen

A: Some operators in Mexico are better focused on pipeline

helped with this was last year. With our integral approach

integrity than others but to further improve the process

we made several PEMEX pipelines much more reliable and

Rosen is taking two approaches. First, we are trying to

loading lines that were previously out of use for a portion

provide integrity services earlier in the process. Many

of the year became much more productive. This directly

pipeline integrity issues can be avoided altogether if

affected the amount of product that could be imported

preventive measures are taken early on. Rosen can help

into Mexico through different terminals.

before a company begins designing a pipeline, ensuring correct purchasing decisions and quality-control processes.

Rosen is also trying to take our client’s decisions and active projects to a higher level. One example concerns pipeline

Rosen is also trying to align the objectives of the different

cleaning, which is routine on pipeline projects. If cleaning

stakeholders in pipeline projects who often have differing

processes are made slightly smarter, companies can glean

priorities. Rosen links the interests of the engineering

a lot of data and useful information about the status of the

company, construction company, operators and owners

pipeline at the same time. One way to achieve this is to use

around the safety and reliability of the pipeline.

more effective cleaning technologies.

Q: How does Rosen help in the early stage of planning

Rosen offers a technological solution that allows

pipelines?

companies to clean a pipeline without having to reduce

A: Rosen has the engineering capabilities to support

the pressure or flow, so it does not interrupt performance

customers with the composition and characterization of

like traditional cleaning mechanisms do. We also collect

soil. We also determine what treads can be expected in a

data during cleaning, which the operator can then use

certain type of terrain, allowing clients to make the right

to make smarter decisions later. Another benefit of

engineering decisions. Basically, we provide risk assessment,

smarter cleaning is knowing where to clean and when.

looking at tread corrosion, ground movement and possible

Changing this even slightly can result in less corrosion

damage to the pipe as it is installed.

of the pipeline, thus extending its lifespan and reducing possible downtime.

Q: CENAGAS has stringent budget objectives. Why should it invest in Rosen’s services in the early stages of its projects?

Q: Which of Rosen’s projects best showcase its capabilities

A: Persuading companies to take the long-term view

for providing integrity and maintenance services?

when short-term cost decisions have to be made is not

A: Our most successful project in Mexico has been our

always easy. To confront this, Rosen asks pipeline owners

involvement with the Los Ramones pipeline. Our work on

Compact UT Tool, Rosen

the project has allowed us to showcase our ability to link

Q: What role can Mexico play in Rosen’s global R&D efforts

the different goals of the many stakeholders, including the

as the country moves into high-tech manufacturing?

construction company, owner, operator, PEMEX, CENAGAS

A: Although Mexico has a relatively small pipeline network

and the final customer, CFE. Rosen demonstrated that

compared with the US, the combination of aging and

although their objectives may differ, all stakeholders

new pipelines in the country is interesting. The challenges

are interested in having a safe and reliable pipeline that

this presents, including politically, geographically and

operates as originally designed. We effectively mediated

environmentally give Rosen the opportunity to show off

the different parties and made integrity management their

what we can do.

common goal. Q: How do you match strategy to the client’s needs? We also showcased our complete knowledge about pipeline

A: Rosen is consistent in its strategy regardless of the client

integrity management and field verification. We were

or location. We have a long-term approach and invest

involved on the engineering side, looking at the immediate

up to 20 percent of our global turnover in R&D for new

and long-term effects of decisions on the future integrity

diagnostic tools. This is the way we approach the market

of the asset. Our participation in the Los Ramones pipeline

and our clients, with the goal of delivering high-quality

project is an excellent example of Rosen’s capabilities.

products and integrity management services. Whether the

Rosen is a relatively small company but it takes on a very

client is PEMEX, CENAGAS or TransCanada, our consistent

important task. Our global strategy is to link the different

approach makes us a stable partner.

stakeholders of pipelines around the common goal of pipeline integrity management. Successes like the Los

Q: How will Rosen’s portfolio expand in the next year?

Ramones project are used as examples to improve this

A: Although Rosen has focused on pipeline integrity

global strategy.

management in Mexico, as a global asset care company we have a lot of expertise in managing other types of

Q: Where have Rosen’s research and development efforts

assets. For this we are emphasizing the diversification of

been focused in the past year?

the services we offer in Mexico, which we are planning

A: Our R&D efforts in Mexico this year have focused

to extend to include integrity management for maritime

heavily on our e-mat technology, which has very specific

structures and offshore platforms.

applications in natural gas pipelines. Outside of Mexico, we use e-mat technology for crack detection and coating

Rosen wants to emphasize the importance of stakeholders

inspection. We also focus on corrosion control systems,

working together for the success of the Mexican market.

which is more on the engineering side of asset integrity.

Also, there is a lot of focus on the new players entering the market but we believe PEMEX is an integral part of the

Q: How do Rosen’s workshops allow the company to

industry, which will only be as successful as the NOC is.

introduce new technologies to the field?

Rosen can continue supporting PEMEX as we have done

A: Rosen never sells its technology through its workshops.

over many years.

Instead technology is a way of bringing the different stakeholders in the pipeline industry together around the topic of integrity management. We have the best tools

The Rosen Group is a worldwide provider of cutting-edge

and are the leaders in this industry, so rather than using

solutions in all areas of the integrity process chain for pipelines.

the workshop as a sales pitch, we use it to promote the

Its service portfolio includes pipeline inspection, cleaning,

integrity approach.

integrity and R&D and a range of related products

285

INSIGHT

PUMPING NEW LIFE INTO OLD PIPELINES ALEJANDRO GUTIÉRREZ Director General of United Pipeline de México

Every day, Mexico’s mature oil fields are generating

a solution that gives new economic life to a deteriorated

a growing volume of produced water, which has a

pipeline.” He adds that the system will incorporate real time

negative impact on the integrity of an aging pipeline

Cathodic Protection (CP) system monitoring along with

and production infrastructure. New players taking over

a leak-less breach detection system and other technical

PEMEX’s production fields and facilities will need to look

advancements.

for innovative solutions to give new life to the assets 286

they are inheriting, says Alejandro Gutiérrez, Director

The University of Texas at Austin has been supporting

General of United Pipeline de México. He adds that United

United Pipeline in refining its leak detection technology,

Pipeline can help operators meet this growing challenge

which will be incorporated into the Safety-Liner™ system

by addressing integrity issues through the use of its cost-

installed in this project. By pooling together leading

effective pipeline technologies.

industry players with varied areas of expertise, Gutiérrez believes the company will deliver on its objective of

expanding the company’s service envelope to include a

existing pipe, allows us to rejuvenate existing pipelines and

complete integrity management portfolio while branching

literally transform them from a high-risk liability to a safe

into undeveloped markets.

and efficient transportation asset,” Gutiérrez says. United Pipeline, a subsidiary of Aegion Corporation, is a specialized

“With everything that is happening in Mexico’s energy

pipeline technology company offering a wide range of

market, we see tremendous opportunities to expand into

rehabilitation and infrastructure integrity solutions. The Tite

unserved market areas. We are both bullish and enthusiastic

Liner system, United’s core technology, was developed in

about what Mexico has to offer and the benefits this market

1985 and has evolved into a cutting-edge alternative that

can bring in the future,” he says.

protects over 60 million feet (18,000km) of pipelines across six continents, he adds.

In addition to setting its sights on distressed pipelines, United Pipeline de México is assessing a potential project

“Our thermoplastic liners,” Gutiérrez says, “protect the

for incorporating Aegion’s Asset Integrity Management

interior of a pipeline or piping system against corrosion and

(AIM™) tool to provide an integrity management portal

abrasion thereby improving their integrity and operational

for its customers' assets. This includes performing aerial

reliability. On top of that, the use of our lining systems

surveys of pipeline systems and networks whose baseline

eliminates the need for corrosion inhibitors, which represent

information may be scant or completely lacking. “By using

an ongoing operational cost that can pay for a liner system

the same technology used by Google Maps and Apple, we

in a short period of time.”

can survey large pipeline systems in a fast, affordable and highly precise manner using industry-proven technology,”

One of the projects Gutiérrez is perhaps most enthusiastic

Gutiérrez adds, “a service which companies like CENAGAS,

about is the company’s opportunity to rehabilitate and

IEnova, TransCanada and others could use to provide

bring back to life two CO2 transport pipelines for PEMEX

accurate and timely information to assess the condition

Fertilizantes’ urea plant in Pajaritos, Veracruz. “Through the

of their transportation networks.” In addition to the work

use of an interactive liner that provides structural strength

United is doing with its lining technology, the company

and corrosion protection, we will be re-conditioning a pair

is also engaged in providing cathodic protection services

of CO2 pipelines that our customer was ready to write off,”

for new pipeline projects as well as performing structural

he says. “Through the use of our Safety-Liner™ system along

strengthening of industrial plants like the work it is

with the use of novel resin technology co-developed by

performing on two 300-foot tall concrete structures for a

United and Evonik Industries of Germany, we will provide

petrochemical plant in Veracruz.

INSIGHT

ADAPTING AND DIVERSIFYING IN AN EVOLVING MARKET DONATO SANTOMAURO Mexico Country Manager of Bonatti

Operators evaluating the feasibility of projects in the

procurement and construction services for three major

pipeline business face two main issues: first securing anchor

compression stations in Mexico.

contracts in a market that is not completely established and that lacks clear rules and consolidated players and secondly,

The key elements that define Bonatti’s competitiveness

obtaining the required permits and rights of way.

are its level of efficiency and specialization resulting from the company’s complete integration and high level of local

In general, “permits are becoming more difficult to acquire

manpower. Only 10 percent of its pipeline construction

and sometimes their absence can delay projects for months,”

activities are subcontracted, Santomauro says.

says Donato Santomauro, Mexico Country Manager of Bonatti. “Several projects have been delayed for these

An automatic welding system developed in-house offers an

reasons and in other cases we had to adjust the construction

additional competitive advantage, especially when it comes

strategy due to limited access.”

to large diameters and considerable lengths. “TransCanada mentioned that Bonatti was the fastest welding contractor

Permit acquisition becomes even more complicated when

they had ever worked with, including companies in Canada

crossing state lines, which most pipelines do, and with new

and the US,” Santomauro adds.

requirements such as the social impact study. Regarding social management, Bonatti has found that communities

Bonatti’s latest mechatronic welding system, the ROB.E

might fear the projects being developed around their

10:01, allows the company flexibility and reliability to ensure

lands because of previous accidents and in some cases

quality and profitable on-time delivery. The system, designed

the incidents are caused by attempted theft of products

to weld pipes with diameters greater than 10 inches, is the

being transported by the pipeline, a frequent problem in

result of over 25 years of research and development.

Mexico’s vast rural expanses. A change resulting from the Energy Reform is the growing Although social management is the pipeline owner’s

demand for refined products, creating an interesting

responsibility, Bonatti strives to take action and participate

opportunity for Bonatti to target multiproduct pipelines.

in the improvement of the communities it works with. The

“There is a need for importing refined products, especially

company supports local institutes such as orphanages and

from the US and Europe, and to transport them from the

schools through corporate social responsibility initiatives.

coast to consumption centers. The biggest markets are

Another strategy to support the local communities is by

from the Atlantic Coast to the central area of the country,

employing a local workforce. Over 90 percent of Bonatti’s

for example from Tuxpan to Tula, which we hope will be an

workforce in the country is Mexican.

opportunity for us.”

Bonatti entered the Mexican oil and gas market with

Bonatti is also looking for opportunities to diversify its services

Enagás, for which it was a main contractor in Spain, in

portfolio in Mexico and is considering plant construction and

2012, just before the Energy Reform was implemented.

operation and maintenance activities. “We have a strong

Its first project was the Morelos Pipeline, a 160km, 30-

operation and maintenance portfolio around the world, with

inch wide pipeline crossing the states of Tlaxcala, Puebla

between 10 and 15 percent of our revenues coming from

and Morelos. Since then it has worked for major operators

that sector. The EPC of pipelines and plants and the relevant

including Transcanada, IEnova and Gasoductos de

operations and maintenance markets are complementary,

Chihuahua and for EPC contractors such as ICA Fluor. The

with the latter providing multiyear stability, which helps

company has been involved in laying 1,628km of pipelines

Bonatti maintain its presence in the oil and gas market even

on an EPC basis and has also provided engineering,

in the absence of EPC projects,” Santomauro adds.

287

VIEW FROM THE TOP

NATURAL GAS GAINING STRATEGIC REPUTATION HERWIG BACHMANN Director General of Evonik Industries Mexico

288

Q: How does Evonik view the need for natural gas in Mexico

mostly dictated by geography and the control needs of

and how is it positioned to capitalize on the market?

the operating company. In the second scenario, a section

A: PEMEX has a significant lack of infrastructure for natural

of up to 2.5km of PA12 is introduced into steel pipelines,

gas transmission and distribution. As a result, natural gas

pulled through and blown out to the pipeline’s enclosing

has been considered a secondary product for injecting into

diameter so the PA12 takes the form of the steel pipeline.

oil wells to improve production. Recently though, Mexico

Finally, a link to connect that section with a previously

has faced several national emergencies due to insufficient

installed PA12 section is installed. In this case, the process

supply. As industrial players demand more and more natural

has the advantage of allowing the installation company to

gas for their processes, the product is starting to be seen

dig out the pipeline every 5km, making it less invasive and

as strategic in itself rather than merely a secondary choice.

therefore reducing downtime. This process increases the typical lifespan of the pipeline to up to 50 years.

For this reason, many pipeline projects are being initiated. One important example is the Apaseo el Grande-Los

The Ministry of Energy has established three types of

Ramones-Texas project, which will be crucial for stabilizing

pipelines to be installed in Mexico. The first are those used

Mexico’s natural gas supply. Evonik has developed a new

for the main network of gas distribution, which transport

product, called Polyamide 12 (PA12), which is currently

gas at very high pressures above 18 bars. The second are

undergoing the necessary technical testing to approve its

pipelines used to transport gas from city to city or to

introduction into the Mexican market and which will be used

industrial facilities through secondary networks, which are

in the pipeline-laying process to improve the pipes’ lifespan.

typically at pressures between 10 and 18 bars. Third are the pipelines used for natural gas distribution to cities, with

Around 75 percent of Mexico’s total exports are to the US but there is a lot of potential in other countries

pressures below 18 bars. Evonik’s PA12 can be used in the transmission conditions of the second type of pipes, which fortunately are also experiencing growth in Mexico due to the fact that long transmission projects such as Apaseo el Grande-Los Ramones-Texas will establish strategic points from which extensive pipeline networks will transport natural gas to cities and industrial facilities.

PA12 already has ISO certification but to be introduced into Mexico it has to pass a secondary process for consideration

Q: How easy has it been to introduce a product such as

as a NOM-approved product that can be used by the

PA12 into the Mexican market?

Mexican industry. We are in the final stage of the NOM

A: The players I mentioned before did not know about

certification, which is the only step that has kept us from

PA12. To gain their acceptance Evonik Industries Mexico

starting work with companies such as Gas Natural Fenosa,

has offered seminars and workshops to demonstrate how

ENGIE, Gas Industrial del Norte and Gas de Juárez.

the product works and its great advantages over traditional steel pipes. We also produced a small prototype line with

Q: What advantages does PA12 offer Evonik’s customers?

ENGIE that was pressurized to 18 bars to demonstrate

A: PA12’s optimal application is with natural gas pipelines.

that the pipe and fittings worked perfectly, experiencing

It can either be used to produce new pipelines or it can

neither mechanical nor chemical failures nor leakages.

be inserted into already installed pipelines. In the first

Thanks to this prototype customers could see PA12 work

scenario, pipelines are manufactured entirely out of PA12,

under real conditions, and now they are pushing for the

offering excellent chemical and mechanical resistance with

NOM to approve the product’s use in Mexico so they can

a variety of lengths and diameters. The pipeline length is

start installing it in their projects.

Evonik Industries Mexico is also aware that we lack the

Present and possibly future political developments such

extensive knowledge needed to cover the whole value

as the potential renegotiation of agreements with the US

chain to produce, install and use the pipelines, and therefore

due to President Donald Trumpâ&#x20AC;&#x2122;s statements might force

we have been in close contact with pipeline and fitting

us to move some of our production facilities to the US. The

manufacturers, installers, designers and end-users. In this

same could happen with other nations that are trying to

way, we get to know their needs, priorities and thoughts

establish stricter regulations for imports. Nevertheless, we

about PA12, which is useful for designing an effective

do not see this as a threat because we consider Mexico to

product. In effect, Evonik Industries Mexico has created

be a land with plenty of opportunities due to the high level

a value chain for pipelines to be used by our customers.

of international activity it has enjoyed in the last decades.

Q: How do you see Evonik Industries Mexico evolving in

Mexico has free trade agreements with 45 countries,

Mexico?

giving it extremely high potential for economic growth.

A: Evonik Industries Mexico can see a bright future in the oil

Even Brazil does not have the same opportunities because

and gas transportation pipeline industry here. Our biggest

of its closed economy, lack of economic and political

production line for C-4, which is a raw material for pipelines,

agreements and especially due to its artificially maintained

is located in Germany, and although we are still not thinking of

low exchange rate. Indeed, around 75 percent of Mexicoâ&#x20AC;&#x2122;s

importing the technology to Mexico the increased regulations

total exports are to the US but there is a lot of potential

and importing taxes that the US may impose make it attractive

in other countries. We believe that Mexico could position

for us to install more plants here. Evonik Industries Mexico has

itself as an important link in the supply chain directed to

been in Mexico for 49 years, focusing on specialty chemicals.

Europe and Asia. Evonik Industries Mexico will continue

Several acquisitions have boosted our company and with the

monitoring markets and regulations to evaluate the

current demand for products we are starting to fully book our

advantages of importing and installing production facilities.

facilitiesâ&#x20AC;&#x2122; production. This is the case for our sodium cyanide plant, where we may even increase capacity. Evonik Industries Mexico offers a wide range of raw material

For the last 20 years Mexico has benefited from NAFTA

products for infrastructure industries. It specializes in the

because it allowed trade almost free of duties from Germany

commercialization of petrochemical products manufactured

and other specialized product manufacturing countries.

both nationally and abroad

289

VIEW FROM THE TOP

DIGITALIZING THE MIDSTREAM MARKET MARIO CHÁVEZ Executive Commercial Director of GE

290

Q: How is GE positioned in the Mexican market and how

A: It is a challenge. Even though customers like the idea,

has the company handled its transformation due to the

understand that the world is changing and recognize how

Energy Reform?

these digital solutions can help them get more out of their

A: In the energy area GE has business units in oil and

assets, most do not yet have the mindset to embrace the

gas, power generation, renewables and electricity. Today

digital world. To address this, GE is always looking for pilot

those business lines combined make up to 70 percent of

projects to showcase its digital solutions in a real operating

our revenues in Mexico, so they are really important for

environment, illustrating the benefits to the customer and

us. In oil and gas GE covers a wide range of technologies

possibly allowing for a full-plant project.

and solutions for downstream, midstream and upstream technologies and solutions.

Q: What can be expected from the GE-Baker Hughes merger? A: With the Baker Hughes merger GE recognized its

We are aware of how the Mexican industry, thanks to

deficiencies in the oil and gas arena. We saw that to

the Energy Reform, is going from having really heavy

become a full supporter of industrial digitalization, we

governmental involvement with companies like PEMEX for

needed more knowledge and experience in operations. To

oil and gas and CFE for electricity and power generation,

solve those issues, we recognized that the best option was

to now having the presence of a multitude of different

to work with Baker Hughes, one of the most important

companies with diverse skills that can improve the market

oilfield services providers in the world, to combine our

but also with different needs and goals that must be

technologies with their operations and bring the best

addressed in another way.

solutions to the market for our customers.

Q: How is GE getting involved in Mexico’s midstream

We expect this merger to be key in our transformation

industry?

as a company to become a more robust oil and gas

A: In midstream GE is already working on several projects,

player, not only with technology but with operational

including gas pipelines. We are proud to be part of the

knowledge. This process was focused on getting

country’s largest gas pipeline project, which stretches from

more value for the solutions we offer to customers.

the south of Texas to Tuxpan. Its largest compression station

Furthermore, we consider the timing to be perfect, with

is based in Altamira, where three of our PGT25+G4 turbines

the market being ever more demanding and asking for

will be used to compress the gas with a total combined

better solutions.

power of 102MW. This project will bring 2.1 billion cfd, or one-third of the gas imports currently coming into Mexico.

Q: What solutions are the most valuable for the industry?

We are also taking a deep look into the Ministry of Energy's

A: GE’s Predix application, which is not only for oil and gas

Five-Year Plan as well as talking to private players looking

but for all our industrial business units, allows industries to

for business opportunities.

connect all the assets they own, gather data about them, process it and through analytics that depend on industry

Q: What steps is GE taking to address the bias against

algorithms, come to conclusions on how to operate the

digitalization that some customers may have?

assets in the best possible way, predict their behavior and even predict maintenance needs before they become critical. We are aware that there are different systems

GE is one of the world’s largest engineering companies,

besides Predix providing data to customers and therefore

covering diverse solutions from the Internet of Things to

we are working to make Predix adaptable to those systems,

aviation, power generation, green energy and oil and gas

so it can gather and process data in the same way and with

technology, among others

the same optimal results.

ROUNDTABLE In 2014, Mexico had around 5,500 miles of pipelines, in contrast to the 58,000 miles in Texas alone. There is also the added challenge of the aging nature of existing pipelines. When Mexico’s Energy Reform was passed in 2014, its natural gas pipeline sector was opened to muchneeded private investment to increase capacity and renew its older infrastructure. New pipeline projects such as the Los Ramones natural gas pipeline, which will supply gas from Texas to Guanajuato, have made upgrading Mexico’s older pipelines a hot topic. Mexico Oil & Gas Review asked

COULD DIGITAL SOLUTIONS HELP MEXICO UPGRADE ITS AGING NATURAL GAS INFRASTRUCTURE?

three leading technology solutions providers which digital solutions were best suited to address the issue.

Our solution for existing infrastructure is what we call operational certainty. Operational certainty takes advantage of existing infrastructure to upgrade it around its best possibilities. One instrument we are bringing to the table to upgrade and maintain infrastructure is IoT. Emerson’s approach to IoT can be summarized in 291

four steps: data acquisition from either existing or new equipment, use of wireless to transmit the acquired data, processing the acquired data to create preventive diagnostics schedules and procedures and maintaining the infrastructure by implementing preventive diagnostics. Emerson also offers connected services, allowing one less worry by becoming an automation and service partner so the

VERNON MURRAY General Manager of Emerson North Latin America

customer does not need to do anything with the information that Emerson’s equipment and software gathers and processes.

Modernizing infrastructure tends to be difficult, mainly because of the lack of information regarding its current status, making it almost impossible to have a common understanding of the problem between all the project’s partners. If each partner on a modernization project understands a different problem, then each one will also set a different roadmap that does not align with the client’s goals. Wood Group uses cutting-edge technology such as laser diagnostics and 3D scanning that enables us to retrieve a solid and live picture of the infrastructure’s status that can be used as common ground among all the project members. Once common ground has been established, real and effective milestones that will meet the client’s goals

ALEJANDRO LUPIÁÑEZ Vice President Mexico Operations for Wood Group

can be proposed.

The global pipeline network is a critical part of energy infrastructure, evolving over time to reflect shifting patterns of supply and demand. Much of the network available today was built decades ago and is aging, while at the same time society and regulators require ever-higher safety and environmental standards to meet growing demand. Within our portfolio, there is a wide range of products and services oriented to midstream activities, either to be included in new infrastructure or to enhance the availability of operating assets. We partner with operators to keep oil and gas flow uninterrupted from production plants to distribution points, connecting production to demand. We provide technologies and support to build and maintain pumping and compression stations and the digital solutions to make new pipelines “smart” from day one.

ROGERIO MENDONÇA President and CEO of GE Oil & Gas Latin America

VIEW FROM THE TOP

PERFECT MIX FOR ENVIRONMENT OF OPPORTUNITY JUAN HERNÁNDEZ Director General of Industrias Energéticas

Q: How is Industrias Energéticas managing PEMEX’s

smart grids. We are located in the south of Mexico, in

restructuring?

Merida, Yucatan, so we want to focus our attention on the

A: Industrias Energéticas is undergoing a profound

southeastern region where there are fewer competitors and

organizational transformation. As a business, Industrias

a more specialized market.

Energéticas went from being categorized as a micro company

292

to being a small company. We now have a building fully

In the long-term we want to expand and help offer the

dedicated to business development, led by a highly trained

country energy security that will facilitate its growth by

and motivated team that is creating a company prepared for

ensuring companies can bring their operations into our

the challenges brought by Mexico’s Energy Reform. Since our

territory. This will also create more jobs and infrastructure.

business focuses on integral energy solutions, we consider our human capital as our main asset. We offer constant

The Energy Reform allows state-owned companies such

training and social security to boost our human talent.

as PEMEX and CFE to open their spaces and allow direct negotiations with private clients. Industrias Energéticas

Our main market used to be commercializing Capstone

is taking advantage of this by offering two main working

Turbine Corporation’s microturbines for safety and control

schemes. The first is managing electric requirements directly

systems at PEMEX’s offshore platforms. When activity at

with final clients and recommending the use of specific types

PEMEX started to decline a few years ago we had to expand

of turbines according to their requirements. The second

our client portfolio. The Energy Reform is completely

scheme is associating with CFE to propose an electric farm

transforming the oil and gas industry and we decided to take

that distributes energy by using CFE's installations, also

advantage and expand our service offering and client reach.

known as a porteo scheme.

Thanks to private capital investment we are now working with 18 potential clients in natural gas for compressors, chillers,

Q: Where does Industrias Energéticas detect the most

regulating systems, instrumentation and engineering.

opportunities? A: As exclusive providers of Capstone Turbine Corporation

Q: What specific changes has Industrias Energéticas made

in Mexico and soon with Kawasaki turbines, we offer a great

to expand its service offering?

variety of reliable solutions for the oil and gas sector, as well

A: To expand our market we have gone from commercializing

as for the development of clean energy solutions -- we hold

exclusively 1MW microturbines from Capstone Turbine

ISO 9001:2015, OHSAS 18001 and ISO 14001 certifications.

to using turbines that range from 2 to 30MW through a

One specific niche market we have found is the tourism

partnership being negotiated with Kawasaki. The turbines

and environmental sectors, which have special needs

we previously worked with ran on fuel oil only but the new

that we can solve but which are not considered strategic

ones can run on natural gas, which shows our commitment

by CENAGAS for supply of natural gas via pipeline to the

to the use of cleaner technologies and the great potential we

Yucatan Peninsula. New infrastructure is being constructed

see in that respect. We have plans to equip our turbines with

around the clock for the tourism and environment sectors

cleaner technologies, such as solar, wind and even maritime,

in the southeast of Mexico, creating new tourism centers.

as well as combining them with the implementation of

One main disadvantage is that these industries still have to produce electricity using oil because of their location, which restricts technological knowledge and workforce.

Industrias Energéticas started as a marketer of turbines for electricity production and is now offering fully integrated

Furthermore, their energy systems have been shown to

energy services for both the private and public sector. Based in

be unsafe. On several occasions storms, cyclones, floods

Campeche, it has 12 years of experience in the Mexican market

and other environmental factors have led to power failures

because the systems are old. This problem not only affects

the main energy companies in Mexico create a perfect

the tourism industry but also communities in those regions

mixture for an environment filled with opportunities. There

to which CFE services have not been properly established,

are also cultural challenges because people are not used to

leaving them without basic services such as water and

change and a new company selling electricity without CFE’s

electricity. By working with GDF/ENGIE's private gas pipeline

logo can create doubts and uncertainty among potential

Mayakan, Industrias Energéticas wants to supply these

clients. To confront these challenges Industrias Energéticas

tourism centers and local communities with new and smarter

is incorporating the best human talent, technology and

grids that can ensure their electric services. As the state

strategic alliances.

of Campeche is about to be declared a Special Economic Zone (ZEE), we will receive special benefits at the federal

Regarding financing, we are working on implementing

level. This creates a special opportunity for us to work in the

schemes that do not involve the company diluting its

region. This new niche may mean we receive lower revenues

ownership. Fortunately, we have received offers from plenty

from customers but it will be a long term investment and

of investors interested in our projects because they consider

have consistent demand, making it safer.

our business model interesting and with a bright future.

Q: How is Industrias Energéticas preparing for the future?

We are participating in activities that ensure widespread

A: We believe that the current panorama involving a new

knowledge regarding sustainability and energy security,

administration in the US, a decrease in the price of oil and

which in the long run will be positive as clients develop a

gas resources, the Energy Reform and a restructuring of

more global and sustainable vision. 293

INSIGHT

REJUVENATING A NEGLECTED NETWORK FRANK KLUWEN General Manager of Allseas USA

The Energy Reform’s main focus has been on upstream

company worked on the Perdido Norte pipeline and is

but one fact remains: without imports the country cannot

now involved with the Texas-Tuxpan pipeline for IMG. The

meet its energy needs. To ensure a safe and constant

highly-specialized tasks performed on the vessels are left

supply of energy coming into the country, a strong pipeline

to Allseas’ personnel.

infrastructure is required. The company’s integral approach to suppliers helped In Mexico, the pipeline network is aged and underdeveloped

Allseas win the contract with IMG for the installation of the

and the country will rely on private investment to cope with

700km, 42-inch subsea gas pipeline connecting Texas and

the challenge of refurbishing and extending the system.

Tuxpan. “Our bid was competitive because of the prices,

One key will be to lay pipes along long, offshore areas.

quality and safety standards that we offered," says Kluwen.

“The biggest challenge of working in Mexico’s offshore is

"Having good client relations in Mexico made this possible."

that it has not seen activity for a long time, especially along

It was also reassuring for the client that Allseas is one of the

Mexico’s northern coast in the Gulf of Mexico so most of the

largest pipeline installation contractors and that its vessels

necessary infrastructure is nonexistent,” says Frank Kluwen

have worked on international projects such as Nord Stream

from Allseas, a global leader in offshore pipeline installation,

in the Baltic Sea and Polarled in the North Sea.

heavy lift and subsea construction. If the government can properly plan and manage the To help cope with the lack of infrastructure for efficient

bidding rounds Allseas has no doubt that the Energy

offshore operations, companies like Allseas are turning to

Reform will bring attractive opportunities that will benefit

local entities. “We see local content as an interface between

Mexico. “We are excited to enter the Mexican market and

the shore operations and our vessels,” says Kluwen, whose

expect that there will be more work.”

PROJECT SPOTLIGHT

294

UNITED BREATHES NEW LIFE INTO AGING PIPELINE INFRASTRUCTURE

liners can span areas of reduced wall thickness and give deteriorated pipelines the strength they need to operate safely. Renovating existing pipelines rather than building new infrastructure offers a compelling combination that

Mexico’s Energy Reform has opened up various interesting

provides a significant impact on a project’s financial

and unique investment opportunities for energy

requirements and risk profile.

infrastructure in everything from upstream production facilities to tank terminals and pipelines. Some of the most

On the other hand, by pairing Corrpro’s cathodic protection

compelling and less obvious opportunities though, come

solutions with Aegion’s Asset Integrity Technology high-

in updating and reconditioning aging infrastructure by

tech applications and advanced analytics, a customer has

giving it a new lease on life using leading-edge renovation

access to over 30 years’ worth of specialized midstream

technologies such as those offered by Aegion’s Corrosion

experience that provides the right information at the right

Protection System.

time for KPI improvements that have a real impact. These specialized technologies leverage resources and systems,

Renovating existing infrastructure typically requires a

including real-time and historic cathodic protection system

fraction of the resources and time compared to new

information, United’s LinerWatch™ real-time monitoring

construction. For pipelines, investors can reduce a project’s

system, historical integrity data and advanced analytics

financial requirements, risk and time to market by avoiding

using ESRI’s GIS mapping software all in an ultra-secure

the cost and complexity of right-of-way passage and

data storage platform.

construction challenges in difficult terrain, factors that directly impact the bottom line.

A CO2 pipeline project that is underway in southern Mexico provides a perfect example where Aegion’s Corrosion

and Safety Liner™ high-density

Protection System can be used to give new life to

polyethylene (HDPE) liner systems have been used for

deteriorated infrastructure that normally would have been

decades to line carbon steel pipelines to protect them

written off. The project consists of a pair of CO2 transport

against internal corrosion and abrasion. Internal HDPE liners

pipelines that have been out of service for 22 years with

and coatings provide a superb corrosion and abrasion-

minimal maintenance and no cathodic protection in place.

resistant barrier for handling corrosive fluids such as sour

The CO2 transport system is a central component of a high-

crude, sour gas, produced water, brine and wet CO2 gas.

profile project that needs to be commissioned by the end

Thermoplastic liners have a proven track record spanning

of 2017 and which requires the safe and continuous supply

three decades in successfully handling corrosive and

of CO2 gas for the next 25 years.

United’s Tite Liner

abrasive fluids in upstream oil and gas applications, both onshore and offshore.

After Aegion’s Corrosion Protection team ran a full-blown integrity assessment of the system, it was determined the

Interactive, tight-fitting thermoplastic liners are customized

pipelines were not fit for service in their current state. A

so that the outside diameter of the liner is larger than the

careful analysis of options gave the owner two alternatives:

internal diameter of the host pipe, resulting in a tight

spend at least two years building a new system or select

interference fit between the liner and the host pipe. The liner

a comprehensive rehabilitation package to bring the

diameter and wall thickness are designed based on the host

system back to life. The choice was clear: install United’s

pipe’s internal diameter and the desired service application.

interactive Safety Liner™ system including LinerWatch™

To produce a cost-effective solution, the thinnest practical

for real-time data collection, a fully automated cathodic

wall thickness is typically determined taking into account

protection system and external reinforcement using

the physical limitations of the thermoplastic extrusion

FYFE’s carbon fiber solution that acts as the pipeline’s

process as well as liner collapse resistance.

required CO2 crack arrestors.

Recent advances in materials along with a better

By choosing to renovate the infrastructure, the customer

understanding of the interactive behavior of liners and

will commission the pipelines in a matter of months instead

the host pipe have opened opportunities for liners

of years, spending half the investment required to build

as structural reinforcement alternatives. When used

new pipelines while reducing right-of-way and construction

interactively with other Aegion solutions, such as FYFE’s

risks. This is a powerful combination that underscores the

carbon fiber reinforcement products, carefully designed

value of breathing new life into aging pipeline infrastructure.

295

INSIGHT

TURNING INVESTMENT CHALLENGES INTO OPPORTUNITIES LINA MÁRQUEZ Country Manager Mexico of Enerflex

As the oil and natural gas industry shows signs of recovery

For the past decade, Enerflex has been an active player in

from the downturn that began in 2014, it has never been

the Mexican oil and gas market with PEMEX as its primary

more important for companies to boost their competitive

customer. Through the supply of natural gas compression and

edge and efficiency to deliver lower costs to their customers.

gas-processing treatment solutions, Enerflex has supported PEMEX with equipment sales and the installation of over

The Mexican market is no exception and service providers

280,000 horsepower in operating rental assets in the region.

such as Enerflex have learned to adapt their business model to

296

remain competitive. Lina Márquez, Enerflex’s Mexico Country

In Latin America, the company has focused mostly on

Manager, says the company “has focused on expanding from

Argentina in recent years, thanks to the massive Vaca Muerta

its core business of equipment supply and service to offering

shale play, seen as the second largest unconventional gas

fully integrated, turnkey solutions.” This full-cycle model offers

resource in the world. In the company’s last financial statement

customers the opportunity to keep capital expenditures under

at the end of 2016, it celebrated the renewal of all its gas

control by redirecting these costs into operating expenses.

compression contracts to the end of 2017 but complained that “opportunities to bid on new projects in Mexico slowed in 2016

Enerflex’s 40-year history in offering well-built solutions, a

as PEMEX, the state oil company, reduced capital expenditure

simplified supply chain, reduced interface risk, cost certainty

due to low oil prices.” In Mexico, the company added, “Enerflex

and the peace of mind that systems will be kept at peak

sees more medium to long-term opportunities developing as

performance throughout their life-cycle has proven successful.

a result of the ongoing Energy Reform.”

INSIGHT

MEXICO NEEDS A MINDSET CHANGE OVER NATURAL GAS FELIPE ECHAVARRÍA Director General of Gazel

Bad news for some can be good news for others, especially

changing Mexico’s mindset toward natural gas in lieu of

with the benefit of foresight. Take gas prices, for example.

gasoline, although challenges still lie ahead.

When the Mexican government implemented its plans to stop subsidizing gasoline prices at the beginning of 2017,

One hurdle is the nature of Mexico’s vast capital city. “It is

vehicle owners saw prices jump by almost a third in some

clear that Mexico City grew to its current size spontaneously,

areas, sparking widespread protest and public unrest.

without serious planning,” Echavarría says. This means future pipelines were not taken into account and the straight lines

The transition to market-determined prices left a bad taste

needed for infrastructure development are hard to come by.

for many but Felipe Echavarría, Director General of Gazel,

This problem was compounded, Gazel’s Director General

sees things differently. Gasolinazo, as the local media labeled

says, by the fact that Mexico focused predominantly on oil

the sudden rise in prices, is a golden opportunity for natural

production in the past, causing the country to fall further

gas to be adopted by vehicle owners in the country, he says.

behind in natural gas infrastructure development compared to other nations.

“In general, 2017 is a special year for natural gas in Mexico because the gasoline price liberalization is making the

Misconceptions surrounding safety come next on the list

government and vehicle owners look at alternatives,” he says.

of roadblocks to persuade Mexico to convert to natural

The clear winner should be natural gas, which his company

gas. With countless bloody accidents marring the history

supplies at its eight service stations in Mexico, part of a larger

of hydrocarbons in Mexico, Echavarría’s concern is the

network spread across seven Latin American countries.

hesitance of people to trust alternative sources of energy. “Our job is to convince the government and prospective

“Natural gas is the cheapest, most ecological and safest

users that this is a safe energy resource,” he says, highlighting

energy resource currently available to us,” Echavarría

that developing the market at a balanced pace will be key in

says, adding that every liter of natural gas used in place

ensuring its future safety.

of gasoline produces cost savings of up to 50 percent and a 70 percent reduction in pollution levels. On an

In another bid to attract new natural gas users to its stations,

environmental level, natural gas carries no danger of spilling

Gazel has focused on added value features. “By providing

like LPG or gasoline. The risk of fuel theft is also lower due

users with clean bathrooms, 24/7 convenience stores

to the practical difficulties of extracting natural gas and

and workshops about natural gas usage, we ensure client

transporting it. One other benefit: the government could

satisfaction,” he says. But at the heart of Gazel’s mission is

capitalize on the fuel’s cost-effectiveness to lower public

controlling prices to truly offer an attractive alternative to

transport costs, Echavarría adds.

gasoline, the executive says.

There are 8,900 vehicles using natural gas in Mexico and

It is all part of the company’s effort to spark a mindset

Gazel dominates the market, providing fuel for over 65

change. “Gazel is like a church of natural gas,” Echavarría

percent of them. With 35 years of experience in the vehicular

says, “and we are trying to convert people through education,

natural gas market, a strong focus on social responsibility

challenging egos and breaking patterns.” With his ambition

and customer service, Echavarría describes his company

of seeing five to 10 percent of Mexican vehicles running on

as pioneering this emerging market sector. “We operate

natural gas within 15 years, which would reflect the market’s

with high levels of professionalism,” he says, “including our

penetration in other countries, Echavarría is optimistic that it

electronic verification system that lists every natural gas

will catch on. “2016 was about confronting a mindset, 2017

vehicle user in the country and must be updated yearly.”

is about consolidating the new one, and 2018 will be about

These factors position the firm to take on the task of

a new market materializing.”

297

Transportation tank car, Tytal

INDUSTRIAL TRANSFORMATION & COMMERCIALIZATION

As the Mexican hydrocarbons downstream industry opens to international competition, opportunities for partnerships and associations with the country’s NOC have opened up. With PEMEX narrowing its focus into potentially profitable but complex downstream activities, the company’s transformation is attracting private companies interested in either revamping PEMEX’s vast but aging infrastructure or in building new facilities such as refineries. New regulations are still needed for commercialization but relevant targets have been reached, such as the launching of PEMEX International LLC and PEMEX’s first open season for capacity, which is expected to address the growing needs of private companies in terms of logistics as the market evolves.

Featured here are in-depth analyses of the emerging challenges regarding industrial transformation and commercialization in a country leaving behind a decades old and cumbersome monopoly. The chapter shares the views of incoming downstream companies, authorities and the newly operational PEMEX units, PEMEX Industrial Transformation and PEMEX International.

299

CHAPTER 12: INDUSTRIAL TRANSFORMATION & COMMERCIALIZATION 302

ANALYSIS: Great Potential but Also Many Challenges

303

VIEW FROM THE TOP: Ixchel Castro, Wood Mackenzie

304

VIEW FROM THE TOP: Carlos Murrieta, PEMEX

306

VIEW FROM THE TOP: Paul Augé, BP Downstream

308

VIEW FROM THE TOP: Guillermo García, CRE

309

SPOTLIGHT: Fill ‘Er Up …

310

ANALYSIS: A Limited Gas Station Network

312

VIEW FROM THE TOP: Rolando Vázquez, OXXO GAS

313

VIEW FROM THE TOP: José García, Onexpo Nacional

315

VIEW FROM THE TOP: Juan Gallástegui, Gallástegui Armella Franquicias

316

INSIGHT: Alberto Valdivieso, F. Ruiz e Hijos

317

INSIGHT: Ricardo Diogo, Oiltanking

318

VIEW FROM THE TOP: Guilibaldo Pérez, Tytal

320

INSIGHT: Arturo Vivar, Monterra Energy

321

VIEW FROM THE TOP: Abraham Zepeda, Grupo Hosto

322

ROUNDTABLE: How Might US Policy Changes Impact Mexico?

324

VIEW FROM THE TOP: Rogerio Mendonça, GE Oil & Gas Latin America

325

VIEW FROM THE TOP: Oscar Scolari, Rengen Energy Solutions

327

VIEW FROM THE TOP: Iván Sandrea, Sierra Oil & Gas

328

INSIGHT: Ovidio Noval, API Coatzacoalcos

329

VIEW FROM THE TOP: Javier del Castillo, Isquisa

330

VIEW FROM THE TOP: José Uriegas, Grupo IDESA

331

VIEW FROM THE TOP: Stefan Lepecki, Braskem IDESA

332

VIEW FROM THE TOP: Gerson Moacir, Oxiteno Mexico

333

VIEW FROM THE TOP: Abraham Klip, Unigel Mexico

334

VIEW FROM THE TOP: Patricio Gutiérrez, ANIQ

301

ANALYSIS

GREAT POTENTIAL BUT ALSO MANY CHALLENGES After years of primarily focusing on upstream investment, the

products and after an initial three-month

country's infrastructure is inadequate to meet the growing

delay the first such round was completed on

demand for refined products. As domestic production rises,

May 2, 2017, with refiner Tesoro Corporation

private companies see a bright future.

awarded Baja California and Sonora capacity systems that in total sum up 320,679 barrels

Mexico is among the world’s top consumers of refined

for storage and 9,535b/d for transport.

products. As the sixth-biggest consumer of gasoline,

302

third-largest of LP gas and number nine for natural

With six refineries and nine gas-processing units serving the

gas, there is great potential for growth in the country’s

entire country, the challenges facing Mexico’s downstream

midstream and downstream sectors. But strong demand

sector are not so much capacity installed but production

does not necessarily go hand in hand with optimal

efficiency. In 2015 production efficiency only reached 61

market development. PEMEX’s 76-year monopoly and

percent and the percentage of nonscheduled shutdowns

the prioritizing of upstream investment has resulted in an

reached almost 13 percent. Although operational excellence

underdeveloped midstream and downstream industry that

represents an opportunity for improvement, downtime is

is not adequate to meet the country’s needs.

also related to supply chain inefficiencies, as 74 percent of the nonscheduled shutdowns were related to the supply of

The lack of investment in and maintenance of critical

services. In its 2017-2021 business plan, PEMEX stated its

infrastructure to ensure transportation, distribution

commitment to revamping its refineries through alliances

and storage of hydrocarbons will take time to address.

focused on auxiliary activities, operation and maintenance.

Although private companies have had the opportunity to invest in natural gas infrastructure for over two decades, for

The opening of the fuel distribution market is a

example, the country’s increasing dependence on imports

simultaneous challenge and opportunity for Mexico. It is

pushed such investment down the priority list. Now, as

expected that by 2018 the entire distribution market will

domestic production rises, businesses are seeing a brighter

be liberalized and although the gasolinazo of January 2017

opportunity. The opening of the market for fuel distribution

that marked the liberalization of gasoline and diesel prices

is adding storage and transportation infrastructure for

was not well received by the Mexican people, the decision

refined products to the list of positive prospects.

to move forward at a rapid pace is a clear commitment to

“

The franchise sector is enthusiastic because they know they have opportunities to expand” Juan Gallástegui, President of Gallástegui Armella Franquicias

the Energy Reform. Fortunately companies are considering the market opening to be an opportunity and are pushing hard to get strategic advantages by moving quickly. BP, for example, has already opened its first gas station that does not commercialize PEMEX’s products. New players in the gas station business are creating and positioning new brands and seeking ways to differentiate their value proposition by offering additional services at their gas stations. “The franchise sector is enthusiastic because they know they have opportunities to expand,”

Arturo Vivar, CEO of Monterra Energy, is among those

says Juan Gallástegui, President of Gallástegui Armella

planning to be ahead of the curve. “Monterra is already

Franquicias. “Soon we will see banks, more sophisticated

working on the permitting process at several coastal and

cafes and small restaurants in gas stations and people will

inland sites around the country,” he says. “Monterra will be

decide which gas station they will visit based on these

one of the first companies to start building infrastructure in

services.”

Mexico and possibly starting operating these new projects as early as 2019.”

Without a doubt the Mexican midstream and downstream sectors have entered a period of transformation. Being

Interest in the country’s existing infrastructure is also

ready and adaptable at these times of change will

growing. Open seasons allow private companies to bid for

be crucial to make this a positive transition toward a

existing transportation and storage capacity for refined

liberalized market.

VIEW FROM THE TOP

FUELING A COMPETIVIVE GAS MARKET IXCHEL CASTRO Manager of Oil and Refining Markets for Latin America of Wood Mackenzie

Q: How is Mexicoâ&#x20AC;&#x2122;s gasoline market set to evolve given the

on ducts and pipes must be reinforced. These actions

2017 price adjustments?

discourage the entrance of new providers and drive up

A: Wood Mackenzie is expecting 2017 to be a year of

costs, which the final customer ends up paying.

stabilization with almost no growth in national gasoline demand mainly because consumers have to adjust to higher

Q: How will the particularities of Mexicoâ&#x20AC;&#x2122;s gasoline market

prices. In 2018, national demand will grow but at a limited

be impacted by geography?

rate. Taking into account the vehicle fleet growth and fuel

A: Mexico has the huge advantage of being the neighbor

efficiency improvement, we expect an annual consumption

of the biggest and most important refining center in the

growth rate lower than 1 percent for the 2018-2035 period.

world. There is a large market for exports of gasoline and

The biggest import boost will come from the risks involved

diesel to Latin America, Europe and even Asia and in such

in national refining operations and not so much out of an

cases Mexico can become a natural first stop for exports

impressive growth in fuel demand.

going to these markets. It is in Mexicoâ&#x20AC;&#x2122;s interest to achieve a higher integration of both the internal Mexican and external

Q: More than half the gasoline consumed in Mexico is

global markets through cross-border ducts, although it is

imported. How will this change in the coming years?

very probable that North American refiners will prefer the

A: Considering the limited growth in demand and the fact

flexibility of oceangoing tankers.

that no new refineries are being built, imports will probably remain at 57 percent of the total national market between 2018 and 2035. Even as SENER considers a reduction of imports in the short-run, this decrease is tied to an expected reconfiguration of the existing refineries, which will need the participation of private capital. If no private capital is involved in the reconfiguration projects that will create uncertainty.

Mexico imported a monthly average of 518,300b/d of gasoline and 249,800b/d of diesel in 2017, nearly 70 percent of all internal sales of both fuels

Q: What factors are needed for Mexico to develop its own open and competitive gasoline market?

Q: How can Mexico ensure adequate infrastructure for

A: There are several. First, there must be non-restricted

transportation, storage and distribution of gasoline?

access to different segments along the value chain, such

A: The main emphasis should be in optimizing already

as import, distribution, storage, wholesale and service

existing capacity. As transport operations through existing

stations. To achieve that, simplifying the process of granting

capacity starts to regularize, additional costs due to more

permits will be crucial. Second, the pricing system needs

expensive transportation methods such as tank trucks or

to incentivize the efficiency of communication between

pipes will decrease. The second key element is the proper

all the new players, allowing them to compete for higher

planning and development of storage-capacity projects.

market share and revenues. Third, the regulation needs to

Both will ensure energy security and open the door to the

be quickly adapted to match the evolution of the market

greater use of railroad infrastructure for transporting liquids.

and the entrance of new players to avoid monopolistic practices. A strong and reliable database that keeps track of new operations is also needed, especially as PEMEX stops

Wood Mackenzie is a global leader in commercial intelligence

being the only provider.

for the energy, metals and mining industries, providing objective analysis and advice on assets, companies and

Finally, the fight against illicit operations such as theft

markets and client insight to make better strategic decisions

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VIEW FROM THE TOP

BEST PRACTICES, ACCELERATED EXECUTION MARK NEW STRATEGY CARLOS MURRIETA Director General of PEMEX Transformación Industrial (PEMEX TRI)

304

Q: What are the main differences between the priorities

A: The fundamental decision is to process crude until

for PEMEX’s refining activities before and after the reform?

the incremental margin is equal to the marginal cost of

A: Before the Energy Reform was enacted, regulation was

supplying the demand with imports. Among the measures

restrictive for PEMEX. In contrast, now it will be easier

being taken to reach this optimal level are operations

to implement best practices and to execute investment

profitability, crude oil prices, fuel prices, maintenance

projects in an accelerated way through joint ventures and

programs and available infrastructure to maximize profit or

with business operating partners. PEMEX TRI’s strategy is

profit for refineries, as measured by the variable operating

based on these opportunities and it will be implemented

margin calculation.

through three initiatives: 1) safe operation of its assets, with an emphasis on its economic performance. PEMEX TRI will

We have been reinforcing the timely fulfillment of our

assess on a permanent basis the marginal contributions of

operational programs and also of our maintenance and

its operations, safety and preventive maintenance. We will

reliability programs. The safety of our personnel and of

increase operational discipline and processes reliability and

our process plants is our main concern. Priority is given to

also implement highly profitable operational improvements;

follow-up on every day agreements among different areas

2) focusing on core activities.

involved with production.

In some areas, PEMEX TRI will promote the participation

Q: What plans are in place to reduce nonscheduled

of other players in noncore activities in which PEMEX

shutdowns at PEMEX’s refineries in 2017?

does not have a good economic or reliable performance.

A: PEMEX’s first priority is to maintain safety indexes.

Examples of these types of services are hydrogen

PEMEX TRI has been facing operational difficulties for

production, steam and electric utilities at refineries,

some years now and several efforts have been in place

water treatment and crude conditioning, among others.

to curb nonscheduled shutdowns. However, these efforts

The increased capital availability will be used to invest in

have not attained sustained positive results because

core process plants to improve their performance; and 3)

PEMEX TRI has not been able to consolidate its processes,

associations to modernize refineries. We are looking to

procedures and operational practices. Maintenance

establish new business models through associations in the

and safety programs are geared toward reducing the

refineries to implement best practices, improve operations

nonscheduled shutdowns index and to improve reliability.

and modernize our refineries to increase refining margins.

We are implementing international standards to build predictive and preventive KPIs for timely decision-making

Operations safety and reliability are our priority. We have

that reinforces our plants reliability. During 2017 PEMEX

been using our economic resources on 2017 maintenance

has planned to invest US$265 million dollars (MX$5.03

programs, which has allowed us to increase process from

billion) on its maintenance program.

769,000b/d in December 2016 to close to 1 million. Q: What factors make investment in Mexico’s refineries an Q: What parameters are used to define the optimal

attractive investment opportunity for the private sector?

processing level, estimated at about 1.2-1.25 million b/d?

A: On the one hand, our refineries are attractive if we look at the fuel market that Mexico represents. On the other, we have a privileged geographic position since at least two of

Petróleos Mexicanos (PEMEX) is the most important company

our refineries may serve the Pacific fuel market. PEMEX’s

in Mexico, an international reference in the field of hydrocarbons.

goals do not affect the attractiveness of this investment

Its activities involve the entire production chain, from exploration,

opportunity since we are looking for associations and

production, industrial transformation, logistics and marketing

investors are looking for a strong partner like PEMEX.

Q: What role will partnerships play in the revamping of refineries? A: Partnerships and risk-sharing with third parties are strategic for PEMEX. All around the world we find this successful business model and PEMEX is looking to take advantage of it. We are looking for strong partners willing to share operational and market risks, as happens everywhere in this industry. Risk management is well-known among companies in general and the energy sector is no exception. Q: How has PEMEX’s downstream and midstream strategy been impacted by Open Seasons? A: A basic assumption for the success of the Energy Reform is the price liberalization to really have an open market. The recognition of opportunity costs is a basic requirement in the transition phase since open market prices will reflect this in the future. This includes not only the price of the commodity but also the cost to serve or supply the different markets of petroleum products. This is the way it works in an open competitive market. The other factor critical for the success of the process of liberalization of the Mexican petroleum markets is the open access to PEMEX’s existing infrastructure. As mandated in the regulation, PEMEX is offering through the open seasons the available capacity in the different systems. Working together with other operators on existing infrastructure is the new model that PEMEX is beginning to implement. We are happy to participate in the industry’s rebirth, providing a great option to our clients in terms of competitiveness and efficiency. The new rules imply that our clients will be able to choose from a variety of options, that not only price but also product availability will play an important role in that decision and at PEMEX TRI we are ready to provide an outstanding level of service. In relation to the cost of logistics for PEMEX TRI, the authority assigns the capacity to carry out the supply, based on the proposal for reservation of capacity sent by PEMEX to the Energy Regulatory Commission (CRE). Rates that apply will be the result of the first stage of the open season. CRE issued the methodology to establish the minimum rates for PEMEX Logística (PLOG), for the auction process of the open season procedure, establishing that the total cost of the service of storage will include a capacity charge resulting from the auction process, adding the receptiondelivery charge indicated by the regulator. Also, for the pipeline transportation service, the total cost will include a single charge resulting from the open season, adding the maintenance and safety costs approved by the regulator, plus the nonoperational costs that can be transferred.

305

VIEW FROM THE TOP

DOWNSTREAM FOCUS ON MARKET SHARE PAUL AUGÉ Vice President of Business Development for Latin America at BP Downstream

306

Q: Why did BP focus on downstream for Mexico?

how to improve our additives. Bringing that technology

A: One reason we put a strong focus on downstream was

to Mexico was no easy task because it involved plenty of

the 2014 drop in oil prices. That showed us the importance

negotiations with PEMEX and other regulatory institutions

of having a balanced portfolio, which helped the company

that in the end allowed us to put the additives in their assets

weather hard times. We have restructured our business to

and transport them to our locations. This has really proved

include a larger number of assets in the downstream area,

to be a key asset for us because consumers in Mexico are

making us more efficient and strategy-oriented. We now

used to regular fuels that do nothing to improve their

consider downstream to be a critical business segment.

cars' performance. Market reaction has been extremely encouraging. We have seen lineups to fill up at our stations

When the Energy Reform was enacted in 2013 we thought it

and that will allow us to further invest in the network.

was the perfect opportunity to tackle an important market that had been on our radar for a long time. We were quite

For us the trust of our customers is the most important thing,

cautious at the beginning. Our business development

and trust can be lost in a day, so we are putting everything

team here held talks with government agencies, asking

in place to make sure we meet their expectations, first on

whether deregulation was going to happen, creating close

customer trust basis and then by adding in our technologies

relationships and developing feasibility studies for our

such as additives and digitalization. In Mexico, consumers

entrance. We now see the bones of a structured reform

are accustomed to very basic services. Simply looking at

and the will of the government to keep pushing it.

our Facebook page we can already see people commenting on how their cars are running further with BP fuels and how

BP’s goal is to achieve a material market share so the

they enjoy the experience we provide, which is proof of how

strategy regarding the number and location of the stations

the Mexican market has embraced our presence.

it manages varies greatly depending on the country. In Mexico, we expect our planned 1,500 stations will lead to

We are working on apps that will make the entire customer

a 15-18 percent market share. Our goal is to be among the

experience friendlier and faster. One solution we already

top three brands in Mexico during the next five years. BP

have in other markets is the BPme app, with which

is working hard to build local capabilities that can handle

customers can pay, receive invoices and manage other

that growth and also provide local expertise. Locations are

services. In a place like Mexico City, where there is always

determined by several factors such as demand, competition

a rush, this will be another key differentiator for our brand.

intensity and expected customer growth but of course

We consider Mexico to be an excellent market for our

regulation will remain a strong external factor.

digitalization services because it has more mobile phones per person than any of our markets. BP wants to implement

Q: What will differentiate BP as it competes against PEMEX

the digital experience as soon as possible, maybe even as

and other brands that also enter the market?

soon as the third quarter of 2017.

A: We really wanted to bring a differentiator and concluded that the best differentiator would be our technology. We

Q: How do BP’s additive technologies impact the

are extremely proud of our investment in technology and

environment? A: From a regulatory perspective, allowing the inclusion of additives will enable Mexico to easily reach its goal

BP Downstream is the segment of BP, the global upstream,

of contamination reduction and fuel efficiency. For the

midstream and downstream company based in the UK, that

additives to have a real impact on contamination and

works on the fuels, lubricants and petrochemicals segments.

efficiency levels, consumption must grow. For that to

BP Downstream has opened its first gas station in Mexico

happen infrastructure is a must. Mexico has a clear lack

First gas station opened by an international company in Mexico, SatĂŠlite, State of Mexico, BP

of infrastructure in the midstream sector that breaks

an entrepreneurial mindset that allows them to react quickly

downstream market flexibility. The solution requires a

to any challenge through innovation.

significant amount of investment. Even if the refining sector does not get revamped and companies decide to increase

In order to face our competitors, BPâ&#x20AC;&#x2122;s strategy is to have

imports, the infrastructure cannot handle it. That is a big

a national presence in all the important urban areas in

problem Mexico must focus on and plan for the short,

Mexico. That of course depends also on infrastructure and

medium and long term.

the regulations settled by the government. Our strategy will include ownership of locations in important urban areas

Q: What other innovative concepts will BP bring to the

and offering franchises to local partners in other regions,

Mexican market?

allowing us to really scale up and expand without having

A: BP is always looking to the future. It is interesting that

to spend too much capital and time.

every time we hold global meetings all the developers want to implement their technologies in Mexico because of the

Q: How does BP measure success?

openness and potential that exists in this market.

A: In several meetings, we have discussed pricing and we have concluded that our customers do not come to BP

We are looking for partners to help us develop the

stations because of price but because of convenience,

convenience segment at our stations. We are thinking

innovation, loyalty and the experience overall. Being a

of also adding cross-loyalty programs that would have

consumer-oriented organization, it is a really good result

many different companies participating. These cross-

to see customers lining up to come with us. The fact that we

loyalty programs have a strong global presence because

have finally opened our first location and the success it has

they provide plenty of benefits to the consumer and BP is

had points to the excellent future we have in the Mexican

getting ready to implement them.

market. It involved a lot of work and an investment of over US$50 million in technology but after all this we are certain

We have many ideas and projects in the pipeline awaiting

that no other company can replicate our achievements in

implementation. It would be great if we could do it all but

the short run.

we have to pick our battles and really understand where the customer is expecting more from the company.

Return to shareholders will also be an important factor for measuring success. Given the number of customers we have

Q: How does BP see competition developing?

and growth expectations, we believe it will not be hard

A: We can see some companies making a strong entrance

to offer our stakeholders positive results. We see Mexico

here. The local competitors have the advantage of having

becoming one of BPâ&#x20AC;&#x2122;s strongest businesses.

307

VIEW FROM THE TOP

PUTTING THE POWER INTO THE HANDS OF THE CUSTOMER GUILLERMO GARCÍA President Commissioner of CRE

Q: What have been the highlights of CRE’s activities

good operating conditions. For now, the most reasonable

during 2017?

step would be for PEMEX to work in joint ventures.

A: A key achievement has been the gas price liberalization.

308

The original plan was to implement the change in 2018

Q: How will storage facilities be interconnected with gas

but the executive branch decided to accelerate the

station owners?

process and move it up to 2017. This decision proved

A: The US is a liquid market in terms of oil products. There,

to be positive because the market cannot be opened if

the owners of gas stations are different from those who

prices remain fixed.

own the storage facilities, a situation dictated mainly by market conditions and not by regulations. In Mexico, the

Although there were some problems, the Open Season

law stipulates the separation of these activities according

has been another highlight. The process took into account

to regulations from both CRE and COFECE. There can

best practices and market conditions but the complexity of

be some integration in terms of companies bringing and

the system posed an issue. We decided that it was best to

storing their final products via a certain system provider

temporarily halt the process to implement a simpler system

but we expect that in the majority of cases storage will be

proposed by PEMEX. It was relaunched in the middle of

allocated to multiple users. Those two models are possible

April. Future Open Seasons will be more complex but

in Mexico.

we will use what we learned from this first Open Season. Companies have also been positive in their feedback.

Q: How do you expect the branding phenomenon to develop in Mexico?

Q: Which of CRE’s current projects will have the most

A: Branding is an interesting phenomenon in Mexico. BP

influence on Mexico?

has opened a service station that is the first of its kind

A: Storage capacity here is scarce. This is a big issue for

in the country. Consumers are interested in buying new

a sector that has to work with strategic reserves of 10 to

products and services and gas stations are adequate places

15 days. More storage infrastructure must be built. CFE is

to include convenience stores, dry cleaners or even banks,

working to switch from oil to natural gas as a prime fuel

from which companies can receive bigger revenues. It will

for its plants. We are working toward a way to use its fuel

be interesting to see how companies follow BP’s lead to

oil facilities. By doing so, PEMEX could double its storage

create a different product as well as offering extra services

capacity to six days from three in the coming years.

at gas stations. The gasoline business has small margins and companies must adapt to increase profits.

Private companies are also asking for permits to create privately owned storage facilities and we have awarded

Gas stations will not be selling only one brand. They will

some such permits on a first-come first-served basis, mainly

offer a broader range of products and we believe PEMEX

in the central region of the country but also in states such

has an opportunity to compete against other brands. Most

as Nuevo Leon, Chiapas and Yucatan. PEMEX will have to

probably PEMEX will become a white flag product provider

compete against and learn from other storage providers to

for gas stations by selling the two types of gasolines we

become competitive. It will have to offer attractive prices and

are accustomed to, without additives, in a more economic market. To allow for fair market competition, CRE has launched the Gasoapp, a smartphone application that

The Energy Regulatory Commission (CRE) is a government

allows customers to identify nearby gas stations together

agency in charge of oversight and ensuring regulatory

with the price of gas at that location. The app also allows

compliance in the energy and natural gas sectors in order to

users to report problems such as price discrepancies and

promote their efficient development

lack of fuel at a station.

TECHNOLOGY SPOTLIGHT

FILL ‘ER UP … It is late at night, you are driving down an unfamiliar road

users find the best option for filling their tanks, anytime and

and the fuel gauge is dangerously low. Almost anyone who

anyplace. The app also allows users to identify the same

owns a vehicle has had a similar experience and wondered,

information for magna, premium and diesel categories,

where is the gas station? As the now-cliché saying goes,

making the process of finding the best gas station easier.

there is an app for that.

When a user selects the gasoline station of their choice, the app provides directions.

CRE and PROFECO, the federal attorney’s office for the protection of consumers’ rights, developed Gasoapp to help

To ensure the quality of the information and promote

consumers not only find the closest station but also the

interactivity, users can evaluate the station they choose. An

most economical. The smartphone application is equipped

average grade for the gasoline station is displayed, allowing

with an extensive database of every gasoline station in the

consumers to make better, more informed decisions.

country and is updated with daily prices reported by those stations.

Gasoapp is not designed to be just an information-gathering tool but also a way to report gasoline stations that are not

By using the Gasoapp, the user can get the geographic

complying with three specific metrics: adherence to the

location and information about any station up to 5km away

prices reported through the app, whether user received

that reported its prices that day. The app identifies five

the product they asked for and whether user received the

categories: the reported gas price, expensive gas station,

amount of gas they paid for. Gasoapp is fully supported and

cheap, close and finally, cheap and close. Gasoapp helps

free for both Android and iOS.

309

ANALYSIS

A LIMITED GAS STATION NETWORK Years of a PEMEX monopoly delayed development of much-

the single-supplier system and move toward

needed infrastructure. As a result, the US has 10 times the

a competitive, open market where prices will

number of gas stations for a population about three times as

be determined by the market and gas stations

big as Mexico's. Change, however, is on the way.

will compete for clients. Official data points to around a dozen new fuel storage and

The now extinct state monopoly over Mexico’s oil and gas

distribution companies setting up shop, with projected

industry had a stifling effect on the development of crude

investments of US$427 million, according to CRE.

oil production and also on the infrastructure needed to distribute products to the final customer. Fixed fuel prices

“The previous model discouraged investment in fuel

set by the government and the presence of PEMEX as the

transportation and storage, resulting in an insufficient

country's only supply source led to an underdeveloped

infrastructure and therefore less security in the fuel supply,”

network of gas stations.

CRE said in a press release early in 2017. “Under the new scheme, investments for US$2 billion have been identified

310

In 2017, as part of the sweeping changes brought about by

and there is an additional US$12 billion expected to reinforce

the Energy Reform, Mexico started a process to abandon

Mexico’s fuel supply,” it added.

STAGES OF THE STRATEGY MARCH 30

MAY 25

JUNE 15

JULY 26

OCTOBER 30

Baja California

Chihuahua

Baja California Sur

Sonora

Coahuila

Durango

Tamaulipas

Sinaloa

Durango Nuevo Leon

With effect from February 18, 2017, the Ministry of Finance established regional maximum daily prices, which take into account the costs of production,

OCTOBER 16

NOVEMBER 30

Aguascalientes

Guanajuato

Morelos

Oaxaca

Mexico City

Guerrero

Nayarit

Tabasco

Colima

Hidalgo

Puebla

Tlaxcala

Chiapas

Jalisco

Queretaro

Veracruz

State of Mexico

Michoacan

San Luis Potosi

Zacatecas

NOVEMBER 30

DECEMBER 30

transportation and storage of gasoline and diesel. In adherence with the following calendar, CRE will gradually ease the prices,

Campeche

which will fluctuate according to

Quintana Roo

Adjudication of open season

market conditions

Yucatan

Price easing

TOTAL GASOLINE CONSUMPTION IN MEXICO (million liters per day) 150 120

55%

increase in total gasoline consumption from 2000 to 2016

60 30 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Gasoline Gasolinas

——Magna

——Premium Pemex Magna

Pemex Premium

2011

2012

2013

2014

2015

2016

FUEL DISTRIBUTION ROUTES

——Pipeline ——Ocean tanker ——Tank car ——Tank truck

US$427 million in projected investment in Mexico's gas station network

311

Differing costs of transporting one barrel of gasoline per km according to method used. (using pipeline as a reference)

Ocean tanker 2 times more than a pipeline

Tank truck 14 times more than a pipeline

Tank car 6 times more than a pipeline

PROJECTED STORAGE CAPACITY IN DAYS

3 DAYS

5 TIMES BIGGER

current storage capacity

projection by 2025

SHOULD MEXICO BUILD NEW REFINERIES?

HOW DOES MEXICO COMPARE?

The existence of more refineries does not necessarily mean

1Gas:station 2,910 : inhabitant

lower fuel costs for the following reasons:

1Gas:station 10,765 : inhabitant 111,583

11,358 324,666,952

Building new refineries

The cost of refining is one

would take several years

element of the final price

and is expensive. It is

of the gasoline and diesel.

more efficient to import

Other elements include

than to refine

the international oil price

122,273,473 260,350,938 34,958,067

Acording to the conditions of the market and the industry, it is

Mexico

more convinient to reconfigure existing refineries.

Source: Ministry of Energy, Ministry of Finance, CNH and CRE

VIEW FROM THE TOP

REBRANDING FOR THE NEW-LOOK MARKET ROLANDO VÁZQUEZ President of OXXO GAS

312

Q: What does OXXO GAS hope to achieve with its new

A: We are looking into different options. There are many

branding?

international companies assessing the possibility of entering

A: This development is a big step for us. Our company

the market and competing with PEMEX at some point. We

has provided services and assets to sell fuel in Mexico

are having conversations with several companies to evaluate

for more than 20 years but having the first station with

what would be the best alternative for us in each city under

its own brand has been a historic moment. We have had

our scope because it is difficult to find a company that has

the opportunity to evolve the brand to a more modern

both national coverage and competitive prices.

identity, representing quality, dynamism, energy and confidence.

With the liberalization of the market, we make sure we have frequent discussions with different associations

Q: How will OXXO GAS differentiate itself from other gas

and even other businesses in the industry so we can

stations, especially with the arrival of Major companies?

understand any new laws that emerge as the industry

A: OXXO GAS has been focusing on building trust with

changes. It is important not only for OXXO GAS but also

consumers and increasing brand recognition. This is

for other companies to interact and exchange different

important for us especially now that we have many more

points of view.

opportunities to advertise our brand. When we open a new station, we want consumers to trust in our brand and

Q: What is impeding Mexico from developing a gasoline

know that they will receive quality products when they buy

market balanced between nationally produced and

from us. Another point is our level of service. OXXO GAS

imported gasoline?

is always looking to provide new services to our clients so

A: PEMEX is still an important and strong player in many

they can get the most from visiting one of our stations. We

regions. It is our supplier and owns all the infrastructure

are exploring and analyzing the cost effectiveness of new

in Mexico but we also have to look to other providers to

businesses such as having a repair shop, car wash, auto care

make sure we can offer the most competitive supply to our

products and other services.

clients. We are evaluating how best to import gasoline to make the business more profitable and provide added value

Q: How does OXXO GAS face the challenge of Mexico’s lack

and quality to our customers.

of infrastructure for the distribution of gasoline? A: We are learning from other countries, talking to

Q: What are OXXO GAS’ targets for the coming five years?

companies in other countries and looking to apply those

A: We are planning to have about 1,000 gas stations around

lessons as we search for ways to build new infrastructure

Mexico, expanding our reach into states where we have

here. All current infrastructure is owned by PEMEX but over

little or no presence. Venturing into other fuels or industry-

the years we are going to see that change, creating new

related segments such as commercialization, fuel storage

opportunities for other private companies.

and distribution is a possibility. Our goal is to increase our sales around 30-40 percent per year.

Q: What types of alliances does OXXO GAS see on the horizon?

Today the operation of gas stations in Mexico depends to a large extent on equipment imported from the US, which is subject to minimum tariffs. Changes to that could

OXXO GAS is the fuel division of Femsa. It has a network of 307

increase the cost of operations and maintenance of service

gas stations in the states of Nuevo Leon, Coahuila, Guanajuato,

stations. An uncertain economic scenario would challenge

Chihuahua, Aguascalientes, Queretaro, Jalisco, Quintana Roo

our industry to be more cautious about investments and

and San Luis Potosi

could even affect expansion plans.

VIEW FROM THE TOP

MEASURED STEPS TOWARD LOWER GAS PRICES JOSÉ GARCÍA President of Onexpo Nacional

Q: How will the arrival of international companies into

square meter. We transitioned from supplying gasoline to

gasoline market change the quality and service customers

supplying solutions for car drivers’ everyday necessities:

can expect?

convenience stores, car washers, automotive and financial

A: There are palpable changes we will begin seeing even

services, among others.

before the necessary infrastructure is developed, one of which is the incorporation of transnational brands into

Q: How has Onexpo’s role changed in fostering the new

the gasoline market. In 2016, we witnessed the addition of

competitive and productive requirements for PEMEX?

some national brands, which in collaboration with PEMEX,

A: Onexpo is an Energy Reform enabler. Its primary role is

transformed the image of their stations, but they were still

to ensure the interests of the gasoline sector and to help it

being supplied with the same product by the same provider

undergo the liberalization process efficiently, providing a

and at the same price. We are starting to see different

level playing field for all the market’s participants. Prior to

brands, with some positive impact but not all the benefits

the Reform, more than 75 percent of Mexico’s 11,500 gas

that the public is waiting for, like a different quality of fuel,

stations was made up of entrepreneurs who owned one or

a different price and service differentiators.

two gas stations. The reform had to introduce guarantees for the national and international players of the industry in terms

In other countries, many things like loyalty cards and rewards

of equal footing, legal certainties and investment securities.

schemes are already functioning. It is important to highlight that in 2014 Onexpo promoted the pact for the unity and

Q: What are Onexpo’s goals for the future?

transformation of the gasoline sector. We gathered small and

A: It is worth noting that the vision of Mexico’s gasoline

medium gasoline station owners around the table, together

sector is clear for the long run, directing our efforts toward

with representatives from each of the state associations and

particular goals. The imperative goal is Onexpo’s effort

the biggest international companies. In this way, we could

as an enabler for efficiency and social responsibility in a

foment the creation of synergies and alliances.

market where not only various brands compete but also that gasoline distribution reaches a functional and optimal

We knew that the sector would be opened but it was not just

stage. Brand competition has to also mean competition

that Exxon, Shell and BP would arrive and start selling their

on product and services. For instance, we could consider

own product in their own stations. To be more efficient we

offering diversified octane levels, tailored to the

had to take advantage of local knowledge of the gasoline

specificities of the different segments of the automotive

market. National and international companies are already

market. Product offer also has an important part to play

sitting together at the table reviewing potential projects. We

in corporate social responsibility to mitigate pollution.

are sure that in 2017 these projects will take off.

Mainstream availability of alternatives to gasoline and diesel is a goal we are striving for. Our organization’s philosophy

PEMEX is also transforming to offer more benefits to the

revolves around three main axes: unity, transformation

consumer because it must get used to its new competition.

and positioning. We need unity to generate the required

As part of our pact, we agreed that the gasoline

transformation that will position Mexico at the forefront of

entrepreneur, whether Mexican or foreign, could participate

what energy efficiency means.

in this transformation from gas stations to service stations. In Mexico, we are accustomed to thinking of gas stations as a space exclusively dedicated to selling gasoline. With

Onexpo is Mexico’s largest union of gasoline associations. Its goals

this new business scheme, these strategic points, which

are to be an effective link between government and business as

are located on the main avenues, the best street corners

well as to reinforce the groups commitment to society. Its work

and all highways, had to be modified to capitalize every

includes publications, events and having a social presence

313

Etileno XXI, Coatzacoalcos, Veracruz, Braskem IDESA

314

VIEW FROM THE TOP

PERSUADING MEXICANS TO LOVE THE GAS STATION JUAN GALLÁSTEGUI President of Gallástegui Armella Franquicias

Q: As Mexico’s fuel market is liberalized, what new

Companies should also invest in creativity to provide added

opportunities are created for Gallástegui Armella?

value to consumers. When people start seeing new brands,

A: The liberalization process started in 2013 before the

they will be loyal to the brand that provides the best service.

Energy Reform, when a group of fuel entrepreneurs asked

The market opening also brings other opportunities such

us about the possibility of distributing PEMEX fuel under

as complementary businesses. Before the reform, PEMEX

another brand with a different image and name. Our legal

regulated the businesses that were present in a station. The

research determined there was no law preventing this and

franchise sector is enthusiastic because they know they

the Ministry of Energy later confirmed this. We registered

have opportunities to expand. Soon we will see banks, more

our brand as La Gas. But the process toward a free market

sophisticated cafes and small restaurants in gas stations

was not as easy as anticipated, since secondary laws were

and people will decide which gas station they will visit

passed and we had to wait for clarification. In 2015, it was

based on these services.

finally established that fuel entrepreneurs were allowed to distribute fuel under other brands.

Q: What are the challenges regarding regulation and the legal framework for these companies?

President Enrique Peña Nieto determined that from April

A: The law has to have a great deal of foresight. CRE and

2016, those who met certain requirements could import

antitrust watchdog COFECE plays important role in this.

fuel but the lack of storage and import infrastructure was

They need to regulate a market of franchise networks

an obstacle. As a result, since February 2017 PEMEX must

that will compete against each other and with other,

lease part of its infrastructure so that fuel companies

independent businesses. The authorities also face the

can transport fuel from the northern border. The full

challenge of improving regulations as the market evolves

process of liberalization will occur throughout 2017. Fuel

without inhibiting its development.

entrepreneurs will then begin competing in two main arenas: service and price.

Q: How significant is this new business division for Gallástegui Armella?

We worked with PEMEX and Onexpo as a permanent

A: We want to focus on what we know how to do well. We have

adviser. Since the market’s opening we have worked with

more than 25 years of experience in supporting franchises with

some brands in the creation of their franchise networks.

more than 1,300 success stories. We have a very important

Today we have La Gas, Hidrosina, Oxxo Gas, Petro-7 and

geographical presence, with 22 offices across the country and

OctanFuel, among others. New chains are emerging and

offices in Central America, the Dominican Republic, Colombia

we can help them with our knowledge about this industry

and Ecuador. A big market for franchise networks lies with the

and our experience in franchising.

8,000 small fuel entrepreneurs that want to be part of the new market. We must not forget PEMEX, which will continue as a

Q: What challenges do companies face when franchising

major player and will compete as it should have competed a

gas stations?

long time ago. Our goal is for more people to get involved so

A: The challenge for new franchises is to become strong

that we can create a competitive and free oil and gas industry

and offer differentiating elements for the consumer. One

where the primary beneficiary is the consumer.

study found that one task Mexicans hate is going to the gas station, so a big challenge is making that experience more pleasant to attract clients with good service. This will be

Gallástegui

the main differentiator because I do not think prices will

specialized in franchising projects. It has offices in Mexico,

vary greatly. They will be determined by the oil price, taxes

Central and South America and Europe, and has participated

and import prices.

in the Mexican Franchising Association since its foundation

Armella

Franquicias

consultancy

firm

315

INSIGHT

SECURITY AND THE FINAL MILE ALBERTO VALDIVIESO Director General of F. Ruiz e Hijos

The fuel distribution and storage business is set to receive

the few in the market that offers open access storage. It

a boost as the fuel market opens to foreign imports

is something we do very well.”

and investment on the heels of the Energy Reform, but

316

international firms breaking into this market will be put

The Mexican business manages a fleet of ground tankers

off completely from attempting the last mile of fuel

for fuel transportation and also provides storage facilities

distribution due to the risk, complexity and bureaucracy

at its Mexico City plant. “Our location is strategic. Being

involved. That, says veteran Mexican player F. Ruiz e Hijos,

in the center of the city, we can distribute fuel all over

is an opportunity.

easily,” says Valdivieso. He believes this advantageous location of the company’s main facilities in the center of

The company, with more than 70 years of experience, is

Mexico’s vast capital city could hold the key to unlocking

ready to reap the benefits of this inherent knowledge of

the new diesel market. “Mexico City is the most important

the industry in an increasingly large market for domestic

market for fuel in Mexico, due to its size,” he says. The

distribution of hydrocarbons, says Director General

main difficulties in fuel transport and storage do not

Alberto Valdivieso.

come from the distances between facilities but from the

“

F. Ruiz e Hijos is one of the few in the market that offers open access storage. We do not want to be the cheapest option. We want to offer services with the most added value”

complexities involved in the bureaucracy of distribution, he says. F. Ruiz e Hijos also hopes to appeal to new foreign companies with its special focus on safety and security during fuel distribution. “We take two courses per year centering on civil protection and industrial safety” he says. “Our goal is zero spills.” As well as keeping its staff up-to-date on safety procedures, the company enhances safety and security technologically. Its SCI Level Shield technology keeps its clients informed on the fuel levels in their storage tanks and allows them to monitor the date and time any fuel has been extracted. This not only promotes security against

F. Ruiz e Hijos, founded as a family-owned operation in

fuel theft but also allows companies to plan their orders in

1935 to fill a niche as a distributor of fuels for personal

advance to avoid running out of fuel, increasing efficiency

use, has enjoyed growth centered on delivery and

and reducing downtime. Sensors attached to tanker trucks

storage of industrial fuels like diesel and bunker fuel,

en route to the delivery destination offer further security.

spanning industries from transportation to medical

The sensors carefully monitor deposits and extractions,

services, construction, manufacturing and oil-well drilling.

immediately flagging any unauthorized activity.

Valdivieso anticipates that incoming companies will give the risky last-mile journey into F. Ruiz e Hijos’ hands

These value adds are part of F. Ruiz’s overall business

based on its experience and knowledge.

strategy. “We do not want to be the cheapest option. We want to offer services with the most added value,”

The company executive also highlights F. Ruiz e Hijos’

Valdivieso says. The company is not only looking to fulfill

involvement in fuel storage as a distinct advantage in

the final mile of distribution but to also go the extra mile

the new-look market. The company, he says, “is one of

for its clients, Valdivieso adds.

INSIGHT

OIL STORAGE TO BENEFIT FROM GLOBAL EXPERTISE RICARDO DIOGO Regional Business Development Manager of Latin America for Oiltanking

Mexico is the biggest opportunity for expansion in the oil

means there is a concentration of competitors vying for

storage sector in Latin America and German-based storage

business in the area. “We are also looking southward toward

giant Oiltanking is deploying to the country in full force to take

the center of Mexico for opportunities,” Diogo says, “and

advantage of the business at hand, looking to provide options

for the same reason we are keeping our eye on the Pacific,

in this market segment as new private oil operators coming in

not just on the Gulf.” The increase in competition in storage

the wake of the Energy Reform demand more space for their

ventures shows the expected boom in Mexico’s fuel market.

products, the company’s Business Development Manager for

“The companies who will do well are the ones who get in

Latin America, Ricardo Diogo, says.

first, and do so strongly,” Diogo says, alluding to the market’s anticipated acceleration.

On February 15, 2017 PEMEX’s logistics subsidiary, PEMEX Logística, announced the allocation of its storage and pipeline facilities to the various companies that bid during its first Open Season. “The Open Season demonstrated that third parties will be able to use PEMEX’s infrastructure for storing petroleum products,” Diogo says, adding that there is still a long way to go to meet the needs of Mexico’s future oil and gas industry, and that privately developed infrastructure will also be required. Oiltanking hopes to help fill this demand for private, thirdparty terminals and storage facilities in Mexico, an opportunity its leaders see as so significant that they reestablished a

Oiltanking owns and operates 81 terminals with a total storage capacity of 21 million m3

presence in the country in 2017. The firm is the second-largest independent storage terminal company in the world and has

Oiltanking’s status as a privately held company also affords

been active in storage logistics since 1972. As the owners

it more independence on the market, which is particularly

and operators of 81 tank terminals in 23 countries spanning

beneficial to any future partners in Mexico, Diogo says.

five continents, the firm boasts an overall capacity upward

With a long history of joint ventures and partnerships, the

of 21 million m .

company is searching for associates to fortify its entry into

the Mexican oil and gas market, promising an entrepreneurial Mexico’s oil and gas industry will have no choice but to

attitude, lean management structure and strong balance

eventually rely on privately-owned infrastructure, because

sheet, Diogo adds. “We are not only focusing on big projects.

the current space is simply not enough to cover projected

We would be very pleased with smaller ventures, including

activity. “In the short term, the increasing flow of light and

O&M projects.”

middle distillate imports from the US will present the most opportunities for infrastructure companies,” claims Diogo.

Diogo is no stranger to the advantages of teaming up for

Storage facilities for crude oil products may come later, he

capital-intensive terminal projects, highlighting the spread

claims, as it will take companies who won blocks in Rounds

of risk, reduction in investment and shared interests as the

One and Two five to ten years to need them.

main benefits. Oiltanking’s financial standing is backed up by its parent company, German trading company Maquard

“Another question concerns geographical location,” he adds,

& Bahls, he adds. “Mexico is a country open to the world for

explaining that while northern states will see a bigger increase

business,” he says, “and within a couple of years Oiltanking

in activity due to their proximity to the US, the same fact

hopes to be operating facilities in the country.”

317

VIEW FROM THE TOP

TRANSPORTATION ARENA A STORM OF OPPORTUNITY GUILIBALDO PĂ&#x2030;REZ President of Tytal

Q: What opportunities does Tytal see in the Mexican oil and

market. The expectation is for Mexico to have 7,000 new gas

gas market?

stations within five years, with brands such as Shell, Exxon

A: There are seven companies in Mexico competing in the

Mobile and many others.

transportation arena. Tytal is the only one working with 100

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percent Mexican capital and AAR certification to perform

Q: Are Tytalâ&#x20AC;&#x2122;s rail and auto tanks ready to work in both the

both minor and major refurbishing and repairs as well as

US and Mexico?

to manufacture and certify rail and auto tanks. Given the

A: US rules are very strict, which is why American DOT

marketâ&#x20AC;&#x2122;s opening, the ever-increasing demand for energy

certification is used as a benchmark for all other regulations.

resources and the lack of infrastructure, we are in the eye of

Even in the US there are American companies that have not

an opportunity storm.

complied with DOT regulations and that is why we have an internal policy of always prioritizing investments in training

New players in the wholesale market want affordable

and certification that allow us to comply. Tytal achieved a

transportation units. Tytal has embarked on the task of

major milestone by getting both DOT and DIN-certified, which

delivering transportation means that are both economical

allows the free movement of our transportation units in both

and high-quality. Energy resources have similar transportation

the US and Mexico. This could mean losing some load capacity

costs regardless of whether they are produced inland or

but the tactical advantage that our clients achieve by having

imported by ship or pipelines. Once these resources are

units that can move in both countries is a major advantage in

in the deposit units they need to be transported to the

a liberalized market such as the one Mexico has established.

final destination. With an aging and limited infrastructure, transportation costs will be a critical and differentiating factor

Q: What added value does Tytal offer its customers?

in the market. Mexico has an average daily requirement of

A: We are always looking to improve our products and we

500 million liters of both gasoline and diesel and regulations

enjoy the challenge of tailoring new designs or meeting

require companies to keep 15 days of stock, opening a total

requests for re-engineering. Tytal has engineering and quality

investment opportunity of US$30 billion. Apart from Mexico,

departments that work closely together to achieve ambitious

the US, Russia, the Middle East and Asian companies are also

goals and deliver products certified under regulations such

looking to invest here.

as ASME, AAR, NBBI, DOT and the MC-331 certification for hazardous materials transportation. Our commitment has

Q: Is Tytal looking for opportunities to diversify its product

allowed us to export transportation units to Saudi Arabia,

portfolio?

Colombia and the US. We cannot deliver bad quality because

A: Tytal is certified to manufacture not only rail and auto tanks

that would affect our worldwide presence and business. Every

for the transportation of energy, food and building industry

customer must receive the same high-quality product because

products but also storage tanks. We want to increase our

if one of our tanks fails anywhere in the world, every other

presence in both areas. The biggest commercial storage

region would know about it and raise an alert regarding the

units in the private sector can store around 3 million liters

units that are at work in the country.

and several small competitors are joining forces to install such units so they can compete against larger firms entering the

We are also the only auto tank company with its own production line. Using engineering software from SolidWorks, we can design, load and apply stresses in our draft designs

Tytal is the only 100 percent Mexican company devoted to auto

to quickly check for failures, correct if necessary and send

and railroad transportation equipment manufacturing, leasing

the final design directly to the manufacturer, resulting in

and repair. Based in Nuevo Leon, its expertise covers the energy,

shorter production times and increasing our competitiveness.

food and building industries both in Mexico and worldwide

Customers are in pursuit of high quality, low prices and fast

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Worker welding a tank truck, Tytal

delivery times. Other companies have tried to replicate our

Q: What challenges is Mexico, and specifically Tytal, going

products but they do not have the same high standards,

to face in the coming years?

design competencies and highly qualified workforce that we

A: There is a serious lack of infrastructure in Mexico. Rail

have, resulting in them producing low-quality products.

companies such as Ferromex and Kansas City Southern are already investing but this will likely fall short of the country’s

Q: Which of Tytal’s projects showcases the company’s

needs in the coming years. They should have started preparing

engineering services?

earlier but that is not their fault. The government should have

A: One engineering development we are working on is a

published all the regulations two years ago so companies

40,000m3 auto truck, which is an improvement from the

could know what was coming. Because the process took so

20,000m auto truck we currently offer. We want this auto

long, companies were afraid it would not materialize and they

truck to have two sections to carry two kinds of products,

were reluctant to start investing. Now everyone wants a license

which means it must comply with more regulations. Such

to enter the wholesale market but licenses demand many

development requires coordinated efforts between lawyers

requirements that cannot be met right away. An example is

and engineers to produce an auto truck that complies with

the case of ship-imported oil. Ships need to be discharged

all the requirements and laws that will allow it to be driven

as soon as they hit harbor because costs skyrocket every

in cities and on highways in both the US and Mexico. This

minute they are stopped. Without proper infrastructure the

is a challenge but such an accomplishment would allow

only option is to discharge everything to rail and tank trucks.

us to offer a higher value and range of services to our

This, of course, represents a major opportunity for Tytal.

customers. There will be a lot of movement in the northern region of We have also designed an insulated rail tank that maximizes

Mexico due to its proximity to the border, and most orders

the amount of product that can be transported. Traditionally,

will be directed to the country’s central region. Cities like

insulating a tank greatly reduces the amount of product it

Houston already have massive deposit tanks that make

can hold, dropping from a capacity of 30,000 gallons without

them first-class transaction centers. Mexico has a strong

insulation to 25,000 gallons. Thanks to our engineering efforts

automotive infrastructure and we already produce auto tanks

we were able to maximize its carrying capacity, achieving

to allow the mobility of energy products along its highways

up to 29,000 gallons and therefore offering more savings

but with an ever-increasing need for these products railroads

to the client.

will become crucial.

INSIGHT

MIDSTREAM, DOWNSTREAM BRIMMING WITH OPPORTUNITY ARTURO VIVAR Director General of Monterra Energy

Despite much of the focus on Mexico’s 2013 Energy Reform

plan,” Vivar says. “Phase One consists of building multiple

still being on the E&P side of things, with the mixture of

terminals, marine and inland-based, along the Mexican

shallow, deepwater, onshore and mature fields offered via

coast and in key inland zones and transporting products

CNH’s bidding processes, the midstream and downstream

further inland by using trucks or rail. Phase Two consists

sectors are also brimming with opportunities as the industry

of supplementing trucks with new pipelines that connect

looks to bring the benefits of the Energy Reform into the

coastal and inland terminals.”

economy as a whole. 320

The US market has wide experience with portfolio An old and deficient infrastructure system coupled with the

companies or teams backed by private equity, given their

opening of a long-restricted industry to private firms, as

involvement in facilitating the boom of shale production.

well as an oversaturation of players north of the Rio Grande,

That experience is what Monterra brings to the table.

generated the perfect scenario for investment companies

But more changes are still needed. “The government has

like Monterra Energy to look for new business opportunities

not established the complete set of rules that will enable

in Mexico, says the company’s CEO, Arturo Vivar. “By 2013

companies to start investing. As of the end of the first

when the Energy Reform was launched, there were around

quarter of 2017, PEMEX has not yet concluded its first open

150 portfolio companies like ours in the US, compared to

season,” Vivar says. “The only way to allow competition is

only 30 in 2009, thus opening up a perfect opportunity for

by deregulating the monopoly that PEMEX has, otherwise

those willing to take the risk of leaving an already saturated

competition will not exist in Mexico. The global community

market to start working right across the border,” Vivar says.

is seeing hints of deregulation mainly in E&P activities but

“Monterra decided then to start raising capital from private

in the midstream area there is still a lot to work on.”

equity firms to use the portfolio company business model

“ in Mexico.”

Mexico has a problem because it has several entities that do not always play along. The Ministry of Energy is the owner of the deregulation but CRE is the one writing the rules”

“Mexico has a problem because it has several entities that do not always play along. The Ministry of Energy is the owner of the deregulation but CRE is the one writing the rules. Then there is PEMEX, the monopoly that is being deregulated and that, as any other monopoly in the world would be, is not happy with the situation,” Vivar adds. Infrastructure needs to be built and without a counterparty to guarantee the investment, companies cannot start building. Having a country with a clear demand for refined products such as Mexico and a deregulated market with clear rules would create an environment to support longterm commitments that would ultimately give investors the comfort required to risk billions in capital, he says.

The midstream market of storage for refined products faces a particular challenge in terms of infrastructure available

Monterra knows the strategic value of being a first entrant.

and new investment needed in the country. Monterra plans

“Monterra is already working on the permitting process at

to support the Mexican energy industry first by expanding

several coastal and inland sites around the country,” he says.

its storage capacity and then by connecting that capacity

“Monterra will be one of the first companies to start building

with market demand. “Monterra wants to help transport

infrastructure in Mexico and possibly starting operating

molecules into Mexico and for that it has a two-phase

these new projects as early as 2019.”

VIEW FROM THE TOP

GAP IN GAS MARKET OPENS OPPORTUNITY ABRAHAM ZEPEDA Commercial Director of Grupo Hosto

Q: Grupo Hosto is expanding its business into gasoline

will be the contractual schemes. There is still resistance when

storage and distribution. Where are you in that process?

it comes to macro-contracts, with some decision-makers

A: Grupo Hosto is obtaining construction licenses to build

still clinging to the old method of signing many smaller

gas stations and storage units. We already acquired plots

contracts for a project. This fragmentation did not work well

of land and we are waiting for the permits before we

and the industry is calling for integrated projects defined by

proceed to build the terminals during 2017. We have also

one larger contract. This would involve one company being

entered the liquefied petroleum gas (LPG) sector and our

responsible for executing the entire maintenance contract at

intention is to build 10 plants in the Valley of Mexico. The

a plant. Such a scheme would prevent the many issues with

first opportunities we detected in the gasoline realm was

accountability and responsibility that arise when the contract

with the liberalization of fuel imports and the fuel price.

is split between smaller parties.

There are around 600 companies registered to import gasoline, around 12,000 registered gas-station owners

Q: What issues will PEMEX face in the coming years?

and thousands of haulage firms but there are no registered

A: A pressing issue in the Mexican oil and gas industry right

storage companies. We saw this gap in the market and

now is refinery maintenance, a service that Grupo Hosto

decided to fill it. PEMEX is the only current storage supplier

has been providing for over 30 years. Refinery production

and distributor of fuel and given its size and the series of

rates have dropped due to a lack of maintenance work but

licensing rounds, a private company can offer versatility

we believe that PEMEX’s directors have finally realized that

and really satisfy customer needs.

investment is indispensable. We expect to see a lot of work and new contracts coming our way in refinery maintenance.

Q: How is Grupo Hosto positioned to seize this opportunity

PEMEX’s choice of maintenance company will define the future

in the storage and distribution of fuel?

success of their refineries. Grupo Hosto can offer competitive

A: We already own the necessary infrastructure to carry out

prices, advanced technologies and solid guarantees.

this endeavor and moreover we can optimize our existing technology to improve the costs involved with expansion.

Q: How is Grupo Hosto answering the industry’s demand

Our operational costs are going to be lower than what PEMEX

for innovative technologies?

can achieve. We are more profitable and competitive than

A: Grupo Hosto is active in investing in new technologies

PEMEX in this area because our infrastructure will be simpler

for oil refineries, which waste a lot of money buying new

and cheaper, resulting in smaller investment costs. This cost-

catalysts. We recognized this problem so we now offer

efficiency will lead to cheaper fuel costs for the end-user.

mixed catalyzers with reaction additives, which save money

The key objective is to charge the customer less. In 2017, we

and are more efficient. We supply the catalysts directly to

will already have at least two gas stations in operation and

PEMEX, saving the NOC 20 percent in costs. Soon we will

by 2020 we will have eight up and running. We also made

distribute Atmos technology, which detects leaks in gas

the strategic move of acquiring a company specialized in

pipelines. If there is an interruption in the flow of product,

commercializing these new products.

this device will detect it, helping fight problems like fuel theft. We also partnered with Honeywell to work on the

Q: What are the biggest challenges for PEMEX as it attempts

optimization of reformer plants.

to increase production at its refineries? A: The refineries need responsible financial investment and attention. A refinery itself cannot be responsible for the loss of

Grupo Hosto has 20 years of experience in the design,

hydrocarbons in pipelines because its job is simply to produce.

engineering, construction, maintenance and development of

A great challenge will be defining who is responsible for the

industrial infrastructure, serving both the government and

losses in product after it leaves the refinery. Another obstacle

private sector with innovative solutions.

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ROUNDTABLE

HOW MIGHT US POLICY CHANGES IMPACT MEXICO?

During the 2016 US presidential campaign, eventual President Donald Trump promised to rip up NAFTA as soon as he took office. This promise, coupled with the anti-Mexican theme that colored his rallies, sent ripples of fear through Mexico’s investors and markets, including the opening oil and gas industry. Concern was particularly felt in midstream and downstream, given that Mexico is the largest importer of gasoline from the US. In February 2016, 65 percent of gasoline consumed in the country originated from north of the border. We asked a range of midstream and downstream players to share their views on what Trump could mean for their companies and the country at large.

The energy industry is not vastly discussed in NAFTA except in the chapter regarding investment protection. There is still uncertainty about the potential impact from President Trump’s policies on Mexican industries but there are still plenty of factors to be examined besides his comments. More than half of Mexico’s gasoline consumption comes from imports, of which 80 percent comes from the US, not to mention gas.

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Such a massive amount of product being traded between the US and Mexico cannot

SALVADOR ORTÍZ Partner at SAI Derecho & Economía

simply be transferred to another country or region. Companies know that and are willing to protect their interests and get them recognized. Imagine a scenario in which the White House decides to cut gas trade with Mexico. Will it start trading with Europe or Asia at much higher costs, therefore bringing losses for the companies?

Besides free trade agreements, it would be very difficult for the links between the North American market to be untangled in any way. It could be that NAFTA is renegotiated, which after a few decades is a very normal development. In our opinion, the North American region has a natural inclination to push its members to be competitive. Today, every dollar of Mexican exports to the US contains 40 cents of American content. Every dollar that China exports to the US has four cents of

JOSÉ URIEGAS CEO of Grupo IDESA

American content. This shows a huge imbalance. If you look at the deficit between the US and Mexico, which is often discussed, it amounts to US$60 billion but Mexico has a US$40 billion deficit with China, so indirectly that is where the US deficit really is. In our view, the answer is to aim for more regional content in the products we export to the US. This will allow Mexico’s deficit with the US to be reduced.

It is yet unclear what the new US administration’s action plan will be, particularly with respect to border adjustment taxes. The US is starting to export oil for the first time and, quietly, has hit over a million barrels per day of exports. The US has one of the largest heavy-oil refinery complexes, with most of its supply coming from Mexico. A slap on US import taxes would also hit this industry, as oil would fall into the import category. What the Trump administration is going to learn very soon is that trading

JORGE LEIS Partner and Lead of Oil & Gas Practice in the Americas for Bain & Company

is a two-way street. Mexico and Canada are the two largest US trading partners in the world, both with fairly large economies, so the US cannot simply renegotiate trading agreements looking for a unilateral benefit. The Trump administration will also have to understand that trading agreements cannot be categorized as “one size fits all” because different industries have different requirements.

PEMEX is not only a National Oil Company but international as well, as it takes advantage of the foreign market. Like any other refining company, PEMEX TRI operates in a highly competitive market. It should take every opportunity in both national and international markets and be able to compete effectively with other major downstream companies. PEMEX TRI’s vision is to become a fully sustainable company, a leader in the market where it operates and a company that Mexico is proud of. Free trade is one of the basic premises that allow the world energy market to behave competitively, so putting up commercial barriers is not desirable for the success of Mexico’s Energy Reform or for PEMEX.

CARLOS MURRIETA Director General of PEMEX Transformación Industrial (PEMEX TRI)

NAFTA talks give us incentives to search for American partners to ease commercialization. If this scenario turns sour, we will be looking at alternate business opportunities not only in Mexico but also in the Caribbean and Central America, where we have identified a recent growth trend with favorable economic conditions. As a company that works with American input, if our northern neighbor discards

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NAFTA we would be looking for European and Asian alternatives. Our worldwide position is solid, with more than 60 plants, 25 factories and a presence in more than 80 countries. It would only be a matter of selecting the adequate alternate plants to competitively attend to the Mexican market and its needs.

ARTURO FLORES Mexico, Central America and Caribbean Sales Director of Hempel

For the last 20 years Mexico benefited from NAFTA because it allowed an almost free trade of duties from Germany and other specialized-product manufacturing countries. Present and possibly future political environments such as the potential renegotiation of agreements with the US might force us to move some of our production facilities to the US. Nevertheless, we do not see this as threatening because we consider Mexico to be a land with plenty of opportunities due to the high international activity it has had in the last decades. Mexico has free trade agreements with 45 countries, creating high potential for economic growth. Indeed, Mexico exports around 75 percent of its

HERWIG BACHMANN Director General of Evonik Mexico

total exports to the US but there is a lot of potential in other countries. We believe that Mexico could position itself as a very important link in the supply chain directed to Europe and Asia.

Blocking gasoline imports from the US to Mexico would affect the domestic market as much as it would affect the refineries on the coast of the Gulf, therefore we consider it unlikely to happen. Other measures, like the introduction of additional taxes, would be reflected in consumer prices in Mexico, and could – depending on their magnitude – make supply from other regions more competitive, like Europe for example. Managing close relations with possible European suppliers is something Mexico has done in the past and could be reactivated if necessary. In the end, the question is not whether the local market can be supplied or not but how it would affect the final consumer price. This will depend not only on the region but also timing and quality regulation. In any case, a sudden lack of gasoline would have other economic effects and would push the development of alternative modes of transport in the long run.

IXCHEL CASTRO Manager of Oil and Refining Markets for Latin America of Wood Mackenzie

VIEW FROM THE TOP

DIGITALIZING MEXICO’S MIDSTREAM MARKET ROGERIO MENDONÇA President and CEO of GE Oil & Gas Latin America

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Q: What range of solutions does GE provide to support

all industrial businesses and across all sectors of the

Mexican infrastructure projects?

oil and gas industry. On the production side, we can

A: We have been operating in Mexico for the past 120

give operators a full view of their wells, improving their

years and throughout that time we have contributed to the

operations by giving visibility on well performance and

country’s growth in different infrastructure-related projects.

the analytical insights to optimize production and lower

We are positive that our unique financial tools, together

costs. For pipelines, we can help operators improve risk

with our complete portfolio of products and services, can

management and make faster decisions that maintain

support new infrastructure developments.

safety by integrating various sets of data that affect pipeline integrity and by providing analytical insights to

In 2015, we signed an agreement that establishes a framework

predict potential issues and prioritize resources efficiently.

for PEMEX and GE to work together in the development

Also, for plants such as LNG, we can package a solution

and financing of projects involving the entire value chain of

that maintains high availability throughout the plant

the oil and gas sector, including downstream, as well as the

through advanced monitoring and diagnostics for both

mutual exchange of experience and knowledge to guarantee

rotating and static equipment.

Mexico’s energy future. We also have a technological collaboration with the Mexico Institute of Petroleum (IMP),

Q: How is GE introducing the Predix application to be used

supported by PEMEX, to help improve productivity and

between several plants?

efficiency at mature onshore fields and to develop deep

A: Similarly to what we have been doing internationally, we

and ultra-deepwater projects, allowing PEMEX to develop

are introducing technologies that increase asset availability

future deepwater projects in a safe and cost effective way.

for our customers. By going digital, through data analytics and by using Predix, we simulate asset performance

Q: How is GE expecting to include its operating system for

through digital twins to predict and anticipate operational

the industrial internet, Predix, into the midstream industry?

and maintenance requirements to increase asset behavior.

A: GE has been transforming to a digital industry for decades. We experimented on ourselves first, developing

Q: What GE technologies and solutions are available to its

the model and defining the technology needed for

customers in the downstream market?

digital industrial transformation. Predix is the core of that

A: There are a variety of technologies and solutions available

transformation. It is an operating system for the industrial

in our portfolio to support new and existing downstream

internet and it will securely harness massive data volumes

customers, including an extensive range of proven industry

and deliver advanced analytics for any industry. Predix is the

standards such as gas and steam turbines, centrifugal and

only software platform that offers complete connectivity

reciprocating compressors, expanders, pumps and more.

from the edge to the cloud and computing capabilities at

We design, manufacture and service equipment to meet

every level of the industrial software stack.

individual plant requirements and offer the advantage of multiproduct integrated solutions. Our commitment

Predix provides a platform for the development and

is to continually support our products with our technical

connection of software, applications and analytics for

knowledge over their operating life. Reducing costs while operating safely, reliably and

GE Oil & Gas, headquartered in London, supplies mission-critical

efficiently represents a huge challenge for downstream

equipment for the global oil and gas industry, used in applications

companies. This is why we are focused on defining and

that include drilling, subsea and offshore, onshore, LNG,

managing the scope of projects as well as keeping an eye on

distributed gas, pipeline and storage, refinery and petrochemical

modularization and simplification to control expenditures.

VIEW FROM THE TOP

PEMEX REFINERIES NEED PRIVATE-SECTOR HELP OSCAR SCOLARI Director General of Rengen Energy Solutions

Q: Where does Rengen see the most opportunities for

provision of these services is something we are actively

growth?

pursuing today, particularly in Minatitlan and Salamanca.

A: In terms of oil and gas we are convinced that important

A large sum of money has been invested to revamp the

opportunities lie in refining and petrochemicals. You cannot

refinery in Minatitlan but it is still short of electricity and

simply throw a match at oil when it is so expensive and

stream. Rengen, which is predominantly focused on providing

becomes scarcer by the year. Companies must transform

steam and electricity to the refining industry, is proposing an

it into something more valuable, like petrochemicals.

effective solution to this issue to PEMEX.

For that reason, petrochemicals have an important and sustainable future.

Q: How has your business portfolio evolved since the beginning of the Energy Reform?

Investing in refining and petrochemicals is always a long-

A: The market has opened up in an incredible way and it

term proposition. In the case of government spending it

has been a great opportunity for players in the oil and gas

is difficult to justify investments that may not see a return

industry as well as in the energy sector. I did not believe I

for 10 or 15 years. This is especially true for the Mexican

would see such a wide range of opportunities in my lifetime.

government, which has so many demands from different

At Rengen we are happily surprised with all the options out

sectors. But for the private sector petrochemicals are a

there, even though they are accompanied by many problems.

feasible investment option. We are proud of our work with PEMEX and of how we have Refining remains an issue, with Mexico importing 750,000b/d

adhered to the objectives set out by its new leadership under

of gasoline. There are six major refineries in Mexico that are

González Anaya. Right now, we are providing PEMEX with

said to be inefficient. But this is incorrect. These refineries

boilers on a lease basis, with Rengen doing the operations,

have not been well maintained and they are failing to function

maintenance and installations. PEMEX is obtaining steam

as business units. They are merely functioning as an inherited

without having nvested any cash.

issue, so there is no real motive to properly finance them. Q: What advice would Rengen give to allies with partnership Expenditures of between US$1.5 billion and US$2 billion can

potential?

be expected per refinery just to bring them up to speed.

A: Rengen’s strategy has been to establish long-term

Plants need supplies of crude oil, catalysts, electricity, steam

relationships with state-of-the-art suppliers who stick with

and a labor force. Without proper investment in these

us, work together with us and help us solve problems. This

things, the productivity and capabilities of a plant diminish.

has been key in our market development because we entered

Companies must invest in maintenance and upgrades but

with firm and strong associations. We offer the best solutions

that is not appealing in the current climate. There are so many

at the best price and our clients are aware of this quality.

pressing issues in Mexico that the private sector must step

Rengen is loyal to the companies it represents and likewise

in and come up with more economically feasible ways to

they are loyal to us. Like PEMEX’s González Anaya said,

make money.

strategic alliances are key to development. You cannot go it alone in this industry, it is too expensive.

Q: What solutions could Rengen offer to help PEMEX revamp its refineries? A: Many major players, such as Exxon and Shell, may be more

Rengen Energy Solutions is a company that aims to participate

interested in getting involved in the operations at PEMEX’s

in the development of Mexico by implementing efficient

refineries but there are many smaller players like Rengen

solutions for energy supply matters in both the public and

that can offer power generation and steam solutions. The

private spheres

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Etileno XXI, Coatzacoalcos, Veracruz, Braskem IDESA

VIEW FROM THE TOP

SOWING SEEDS IN MIDSTREAM IVÁN SANDREA CEO of Sierra Oil & Gas

Q: What are Sierra’s goals in the midstream segment?

because it is a very complex thing to do but we have

A: Sierra wants to become the first independent Mexican

certainly seen progress. The government has established

company that participates in the complete oil and gas value

a proper set of objectives and a strategy to achieve them.

chain, to become a local energy champion able to attract

Although there have been delays, we look at that as part of

investment and projects that will benefit the country. In

the learning process.

midstream we see several opportunities such as onshore terminals, pipelines and storage. For now, we have decided to

Looking ahead, we have a number of wells to drill as part

focus on projects that will ultimately create marine terminals

of our commitment and a defined midstream project to

for development and growth.

develop. Oil prices and other external factors are not a real fundamental worry for us because we are building a company

The creation of hubs is complex, takes time and requires

with a low-cost structure and fortunately without inherited

large capital. We have around nine of these projects in our

high costs. We compete with other players in the market

sights but have only announced one so far, Caoba Terminal

with cutting-edge technology and our fields have the right

in Tuxpan. The Caoba project involves installing marine

volumes to make them economically viable. Nothing seems

terminals, docking positions, 260km of pipeline, truck

impossible.

facilities and interconnections to PEMEX infrastructure at a cost of US$800 million. Very few companies can take on this

Q: How do you see Sierra developing in the coming years?

kind of investment but we believe it is in the best interest of

A: Sierra is receiving up to 10 job applications per day to

Sierra and Mexico to do so.

join the company. After winning Round 1.1, we received 800 job applications in two weeks. We are looking for the best

Our goal in midstream is to do at least three of these projects

people and make sure we get them by going through a very

over the next seven years to help the market develop and to

thorough and personal process involving senior management.

become leaders in the creation of strategic infrastructure.

Sierra is happy to have an immense pool of talented people in Mexico. We continue to chart Sierra’s journey in an emerging

In midstream, Caoba remains our single most important,

and growing environment. We want to be leaders.

largest and strategic project. We are putting it together in partnership with TransCanada and TMM has a special place in

In upstream we expect to target around 500 million barrels

the overall reshaping of the midstream sector in Mexico. We

of net reserves. We want to have a leading portfolio, continue

feel very good about how everything has developed so far.

growing and looking for opportunities. In midstream we want to have a strategic participation as developer and operator

Sierra remains stronger than ever. We continue to grow in

of three projects that help develop the market.

terms of technical and management capability and also have added more capital to the company from important

In human capital we also want to become a highly recognized

sources such as CKDs. Last year, around 15 percent of Sierra's

company, a unique place to work where people develop their

capital came from a single CKD. By adding a second CKD,

skills and abilities as leaders in the sector and maybe even

that percentage has grown by another 20 percent. We have

create their own companies.

also added strategic investors, which shows that people are willing to invest in the company. Sierra Oil & Gas is focused on opportunities arising from

Q: What challenges does Mexico’s midstream sector face?

Mexico’s Energy Reform. Its activity covers upstream and

A: Two and a half years ago we were worried about the

midstream with a team averaging 25 years of experience in the

whole process of liberalization for the midstream segment

Mexican oil industry

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INSIGHT

PORT PREPARES FOR NEW PLAYERS OVIDIO NOVAL Director General of API Coatzacoalcos

As the effects of the Energy Reform continue to unfold,

area consists of 11 docking points, 14 private terminals and

repercussions have been felt far beyond the country’s oil and

four companies dedicated to intermodal operations, while

gas companies. In addition to players within the industry,

the Pajaritos area has 18 docking points operated by three

Mexico’s sea ports are bracing for an influx of activity in the

companies.

coming years as the winners of the first licensing rounds begin operations.

The Pajaritos Harbor is the focus of API Coatzacoalcos growth plans, including a harbor expansion from 272m to

328

API Coatzacoalcos, the state-owned authority to one of

660m. The project was approved by the Ministry of Finance

Mexico’s most important oil ports, is preparing to capitalize

after initial funding issues and shows API Coatzacoalcos’s

on these opportunities by expanding its Pajaritos harbor, says

confidence that a surge in activity at the port is just around

Director General Ovidio Noval.

the corner. As well as securing public funding for the project, Noval says that “several private enterprises are interested in

The Port of Coatzacoalcos, located in the eponymous city

investing here and we are currently in talks with them. Either

in southern Veracruz, handles the second largest volume of

way the port must grow.”

liquid cargo in Mexico, the third largest volume of agricultural grains and boasts the only Roll-On/Roll-Off (RO-RO)

“Ninety-six percent of the country’s petrochemical industry

Ferrobuque service in the country. It is split into two separate

is located in this area of Coatzacoalcos and Minatitlan, so

areas, Coatzacoalcos and Pajaritos. The Coatzacoalcos port

chemicals and petrochemicals are an important industry here.

We do not receive cargo such as cars or other commercial

In 2016, President Peña Nieto announced proposals to

products because this is not an area where the port has

create Special Economic Zones (ZEEs) in several areas in

comparative advantages,” Noval says.

the south of Mexico to promote economic development. Coatzacoalcos was among the ports included in the plan.

One of the port’s most attractive features, Noval says, is its

Noval says the proposed changes would make the port

unique Ferrobuque service, which connects with the port of

extremely attractive to incoming companies. The majority

Mobile in Alabama every four days. The freight cargo ship

of Mexico’s petrochemical industry is located in Veracruz,

transports rail cars containing liquids, grains, containers and

so companies specializing in these products will also find

bagged goods and is the only one of its kind connecting

comparative advantages at Coatzacoalcos, he adds.

Mexico to the US. The Ferrobuque gives the port a distinct advantage in competing for more business, with easy and

There is still some way to go to raise the capacity and

straightforward logistics. As the Mexican oil and gas market

functionality of the Port of Coatzacoalcos, and Noval identifies

opens up, connections from this part of Mexico to the US will

accessibility to and from the port over land as an area for

grow in importance, especially considering that six of the 15

improvement. Investment in highways and trains surrounding

shallow-water blocks to be auctioned off in Round 2.2 are

the port are vital, he says, to better connect it with surrounding

located just off the coast of Veracruz, he adds.

factories and thus attract investing companies.

VIEW FROM THE TOP 329

RAPID RESPONSE MAKES THE DIFFERENCE JAVIER DEL CASTILLO CEO of Isquisa

Q: What are Isquisa’s competitive advantages?

ITESM Veracruz we built a technological park that facilitates

A: We set ourselves apart from our competitors through

external access to industry experts and analysts and it has

our processes. Despite using similar materials in production,

been quite successful. In this constantly evolving market with

Isquisa distinguishes itself by its immediate responsiveness,

new players, legislation and business schemes, information

delivery service, high-quality products and commitment to

will be the most valuable asset for incoming companies.

customers. Being local is certainly an advantage because the Mexican market works differently from any other place in

Q: How do you balance environmental concerns with your

the business. Since we understand the culture perfectly and

business activity in fracking?

already have excellent relationships with national players,

A: Our engineers have identified and addressed this issue

our customers can be sure of our expertise in doing business

from the beginning, updating our processes in chemical

in Mexico. An additional asset is our understanding of

product management for fracking. We are always looking

international business schemes, which allows us to function

for ways to innovate to take better care of the environment

as a bridge between national and international companies.

without hindering productivity. Working closely with

We have a privileged location that connects Poza Rica,

the Veracruz Industrial Association (AIEVAC) I realized

Veracruz, and the north side of the country with the east

that all Veracruz’s companies are deeply committed to

and southern sides. Thanks to our 60 transport units we have

environmental protection and any improvements that can

the capacity to move specialized cargo, allowing us to adapt

be done to address this issue will be implemented as long

to any location that our customers need.

as productivity is not compromised.

Q: What is Isquisa’s relationship with teaching institutions and how does information help your business acumen?

Isquisa is a Veracruz-based company specialized in the

A: ITESM has the capability and resources to create a

management and transportation of chemical products required

consulting agency, where its experience and knowledge can

in the oil and gas industry, with over 20 years of experience in

address the needs of new oil and gas players. For instance, at

storage and industry innovation

VIEW FROM THE TOP

MILESTONE PLANT COULD HELP SHIFT EXPORT RATIO JOSÉ URIEGAS CEO of Grupo IDESA

Q: What were the 2016 highlights for Grupo IDESA’s

is very important. It is a more permanent and stable market

petrochemicals business?

than Asia, where it is more difficult to establish a permanent

A: The biggest success during 2016 was the beginning of

presence. We are interested in Europe’s ethylene market. Most

Braskem IDESA. This was an idea that was formed in 1999

of the production of this product happens in North America.

but launched in 2008. That was the year we decided to enter

We produce 1 million tons of ethylene a year but in the next

an ethane auction and in 2009 we won with Braskem. From

two years 8 million tons will be added to the market.

2010 we started selecting the technology and constructing 330

the plant, called Etileno XXI. Just over US$5 billion was

Our national focus will be on the Gulf of Mexico and our

invested in this project and operations finally began at the

international focus will be on Europe since it does not have

site in April 2016. The design and technological decisions

its own natural gas and ethylene market. Additionally, Mexico

have turned out to be very successful and we have been

does not pay taxes when exporting ethylene to Europe.

operating at 95 to 100 percent capacity. Q: How is the ethylene market evolving and what role is We produced the equivalent of 15 million tons of ethylene

Braskem IDESA playing in this?

and polyethylene in the last four months of 2016 and we

A: The development of the US shale industry means that

are selling about 3,000 tons per day. Our sales are split

ethylene is abundant in that region. IDESA was lucky

equally between international exports and national clients

because we initiated Etileno XXI in 2016 before the

in Mexico. Over the next three years this ratio will shift, with

American market took off. Braskem IDESA added a little

the objective of selling 80 percent to the Mexican market

more than a million and a half tons of ethylene to the

and exporting the remaining 20 percent. Etileno XXI is a

market in 2016.

huge milestone for IDESA, and the culmination of many years of dreaming and planning.

By the end of 2018, a number of new US plants should be finished, adding around 8 million tons to the market. It

Another historic moment for IDESA occurred in September

sounds like a lot but the polyethylene market is enormous

2016, when we began a new partnership called CyPlus-

and global. The interesting thing to note is that North

IDESA with the launching of two plants we invested in

America used to be a net importer of ethylene. Now the

during the last few years. These plants, which are located

region has a surplus of this product and is an exporter.

in Coatzacoalcos, are still in the adjustment stage. Q: How is IDESA approaching the changing political Q: To which countries does the company export products

panorama between the US and Mexico?

produced at the Etileno XXI plant?

A: Besides the free trade agreements, it would be difficult

A: The destinations for our products are quite varied. For

for the links between the North American market to

example, Asia took a large share at the beginning. Asia is an

be untangled in any way. It could be that NAFTA will

enormous market where companies can sell what they want in

be renegotiated, which after a few decades would be

whatever volume they wish but the returns are not always the

a normal development. Today, every dollar of Mexican

best due to the distance and the price levels. For us Europe

exports to the US contains 40 cents of American content. Every dollar that China exports to the US has four cents of US content. This shows a huge imbalance. If you look

Grupo IDESA is a Mexican conglomerate that produces,

at the deficit between the US and Mexico, which is often

distributes, markets, and sells various petrochemical and

discussed, it amounts to US$60 billion. But Mexico has

chemical products in Mexico. It is also active in onshore E&P

a US$40 billion deficit with China, so indirectly that is

and midstream storage and distribution.

where the US deficit really is.

VIEW FROM THE TOP

ETILENO XXI: CONSOLIDATING EARLY SUCCESS STEFAN LEPECKI CEO of Braskem IDESA

Q: What has Braskem IDESA achieved in the Mexican market?

millions of tons of polyethylene, we have to develop a

A: Braskem IDESA is an association founded at the beginning

flexible and adaptable delivery process, including a variety

of 2010 to lead the Etileno XXI project. We started operations

of transportation methods, such as railroads, trucks or boats.

in April 2016, with our first plant transforming ethane into

Developing this network, for both imports and exports, has

ethylene using the cracking process. In mid-2016 we started

been a major challenge.

production at three other polyethylene plants, two of which focus on high-density polyethylene and the other on low-

Q: How does Braskem IDESA illustrate its commitment to

density polyethylene. As of April 2017, we have achieved 95

Mexico?

percent operability, when comparing average production to

A: We like to work with local content. During the

the nominal designed production, and have also introduced

construction phase of our petrochemical complex, we

our product to the local market, which is an important

focused on hiring and training people from the region. At

achievement.

a certain point, we had more than 26,000 people working onsite. Armed with a premarket study, we started hiring

Prior to production we were importing products from

personnel for our future operations and bringing specialists

Braskem and other companies and selling them in the

from Braskem Brazil to train them. We started with a group

Mexican market. Now we are selling our own product. We

of 60 people from Brazil doing this task and now have fewer

faced some difficulties in achieving stability, mainly because

than 20 still in the country, which shows the skill of the

of bottlenecks at PEMEX plants, which made the pipeline

local talent pool and the positive way in which they have

unstable. To address the issue, our technical and managerial

accepted the challenge.

teams worked with their counterparts at PEMEX to ensure a constant supply.

Q: What are your plans for the long term? A: Thanks to our combined efforts we have achieved a

Q: What are the main challenges Braskem IDESA faces as

constant supply of ethane from PEMEX. Nevertheless, we

a producer?

are aware that PEMEX suffers from a lack of investment and

A: We face the challenge of convincing customers to replace

we understand how that could affect us. Having a long-term

the products they are accustomed to using with ours. Instilling

commitment to Mexico we are looking for ways to positively

in them the confidence to change requires that we exhibit

work together with PEMEX and other companies to ensure a

production stability and quality but that takes time. To speed

proper supply of ethane. To that end, we need an appropriate

up adoption, we incorporated potential customers and their

level of investment, mainly because of the lower oil prices

customers into our pre-marketing stage to understand their

and financial difficulties faced by the country. The Energy

needs, worries and expectations. This strategy has delivered

Reform is not tackling the problems the petrochemical

strong results and a high-quality product that is becoming

industry faces because the reform is mainly focused on

widely known in the market. Not many companies follow this

upstream. But we are confident that once the Energy Reform

approach because most petrochemical companies treat their

starts showing results the country will work to improve the

products as commodities, especially US companies that are

situation and we will be working together to create a positive

geographically far away from their clients. We try to work

result for the country.

with our clients as closely as possible, which has proven extremely important in the qualification and certification processes.

Braskem IDESA is an association of Brazilâ&#x20AC;&#x2122;s Braskem and Mexicoâ&#x20AC;&#x2122;s IDESA, which was created in 2010. The association leads the Etileno

Another important challenge is the logistics of distribution.

XXI petrochemical project for the production of polyethylene and

With exports to over 40 countries and a production of

other chemical derivatives in the state of Veracruz

331

VIEW FROM THE TOP

EXCELLENCE AND FLEXIBILITY AMONG VALUE ADDS GERSON MOACIR Commercial Director of Oxiteno Mexico

Q: How can Oxiteno’s chemical solutions help solve the

and development lab, the result of a partnership between

issues companies may face as they enter deepwater?

Oxiteno and the University of Southern Mississippi. The new

A: Oxiteno’s diversified portfolio can help companies

lab will allow us to provide samples and develop products

overcome challenges in deepwater but also in mature fields

locally, reducing the time required for these activities.

and unconventional reservoirs. The oil and gas industry is

332

characterized by extreme conditions, including high and

Investments in Mexico and the U.S. position the company as

low temperatures and high-pressure levels. Oxiteno offers

a key player in the NAFTA surfactant segment, reinforcing

chemical precision, providing high-performance solutions

its already extensive geographic coverage of the Americas.

that help oilfield service companies overcome these and

This will allow Oxiteno to become an important player,

other challenges posed by offshore and onshore operations.

collaborating and developing solutions jointly with our clients and local research centers.

We provide anti-foamers and emulsifiers to drillers while also offering a line of demulsifier bases, emulsifiers

Q: How does Oxiteno ensure its plants are as

and corrosion inhibitor intermediates to producers.

environmentally friendly and safe as possible?

Our portfolio also contains products for completion

A: The company follows an integrated management policy,

and stimulation operations, including cleaning agents,

with senior management defining and establishing key

formulation stabilizers, flowback aids, non-emulsifiers and

elements for the organization, where health, safety and

mutual solvents.

environmental conservation play a leading role in its activities.

Q: How does Oxiteno keep up with the industry’s rapidly

We ensure these issues operationally by complying with

evolving nature?

the legal framework applicable to Oxiteno Mexico’s

A: Oxiteno is committed to operational excellence, flexible

activities, as well as adhering to best market practices, ISO

production and suitable logistics to meet its clients’

14001 certification on global environmental management

demands. Our plants are aligned with the ever-growing pace

standards and adoption of the voluntary Responsive Care

of the industry, delivering full products on time, tailored to

program at the international level. Nationally, we have Clean

each specific demand. We manufacture in Mexico, Brazil,

Industry and Industrial Safety certification through the

Uruguay and Venezuela, and in the US in the near future,

Health and Safety at Work self-management program, in

meaning products are available across strategic locations

which we always achieve the highest possible rating.

in the Americas, which lowers our customers’ costs. Q: What are the main success factors that define Oxiteno’s Oxiteno is continuing to establish itself as a global enterprise.

alliance with IMP?

In 2015, the company inaugurated one of the world’s most

A: The demand for new technologies to help overcome

modern ethoxylation plants in Coatzacoalcos and in 2016 it

the challenges of oil production is even more significant in

started construction of an ethoxylation plant in Pasadena,

deepwater and ultra-deepwater. This means our international

Texas, which will begin operating in the fourth quarter

partners must help us consolidate our knowledge to create

of this year. Oxiteno has also announced a new research

precise solutions for our clients. Since 2014, we have been partnering with the Mexican Petroleum Institute, which is a global reference in technology and innovation for the oil

Oxiteno is a leading manufacturer of surfactants and specialty

and gas segment. The goal of the Oxiteno-IMP partnership

chemicals, developing innovative and sustainable solutions for

is to share technological expertise while focusing on the

personal care, home care and industrial and institutional cleaning,

discovery and improvement of products and solutions for

paints and coatings, oil and gas and agrochemicals markets.

the oil industry.

VIEW FROM THE TOP

PEMEX PARTNERSHIP BEARS FRUIT, CHALLENGES ABRAHAM KLIP Director General of Unigel Mexico

Q: How has Plastiglas’ relationship with PEMEX developed

A: To face the lack of methyl methacrylate, Plastiglas had to

since it entered the Mexican market?

start importing raw material from Unigel Brazil. Importing

A: Unigel is a Brazilian chemical group that commercializes

the product from Brazil means that costs to produce acrylic

products such as acrylics, sodium cyanide and polystyrene as

sheets are higher, which means that the whole industry

well as products for the fertilizing industry with ammonium

based on the byproduct is also at risk. Because of the lack

sulfate. We are the largest producer in Latin America. Unigel

of propylene from PEMEX the whole chemical value chain

Brazil decided to buy Plastiglas from Grupo Desc in 2006

in Mexico using that product is affected. To avoid imports

with the idea of making the same acrylic sheets as we do in

and help the Mexican industry, Unigel is trying to reach an

Brazil for sales in the North American market.

agreement with PEMEX in which Unigel can rent or buy PEMEX’s acrylonitrile plant, take care of the propylene raw

To ensure raw material availability for the production of these

material through other sources besides PEMEX refineries

acrylic sheets Unigel entered an agreement with PEMEX to

and bring the whole industry back to life.

use the acrylonitrile produced at its plants. At the time, those plants were idle so we were supporting the whole industry

Q: What are Unigel’s options if it does not reach an

using acrylonitrile production byproducts. Before that

agreement with PEMEX?

agreement, PEMEX had to incinerate the byproducts resulting

A: President Peña Nieto stated the importance of protecting

from the acrylonitrile production chain, incurring extra costs.

the chemical products industrial chain in Mexico but his message missed the fact that PEMEX operates at extremely

In the agreement, PEMEX and Unigel committed to improving

low production efficiencies, therefore destabilizing the value

acrylonitrile production technology as well as to allowing

chain. We are therefore looking for alternatives. One option

Unigel to build a plant inside PEMEX’s facilities that would

is synthetically producing the raw materials needed for the

take advantage of all the byproducts being incinerated. This

production of acrylic sheets instead of receiving them as

included hydrocyanic acid, which is dangerous to handle

byproducts from Mexican industries. This would of course

and transport. By building the plant, Unigel was expecting

involve a different set of costs but we are willing to take them

to have a constant supply of methyl methacrylate, a vital

on because of the high stakes related to Plastiglas’ cell-cast

raw material for the production of acrylic sheets. The plant

acrylic sheets in the North America market, which represent

had to be operated by PEMEX’s union so Unigel took the

65 percent of the Mexican and 25 percent of the US market.

operators to Brazil and trained them. Unigel is extremely proud of that because it was the first company to invest

Sixty percent of the acrylic sheets produced by Plastiglas in

in PEMEX's petrochemical facilities long before the Energy

Mexico is sold in the US and Canada, making it unviable to

Reform took place.

supply them from Brazil. This range of acrylic sheets can be used for many final products such as bulletproofing, heat

The problem that arose from that relationship is that the

resistant and shock resistant applications, among others. A

plant needed propylene as a raw material, also made by

range of our acrylic sheets just got approved by the National

PEMEX as a byproduct of refining, and since refineries in

Sanitation Foundation (NSF) as a safe product to be in

Mexico operate at very low capacities the whole value chain

contact with food.

of producing acrylic sheets was affected. This led to one of Unigel’s methyl methacrylate plants not operating due to lack of propylene.

Grupo Unigel is a Brazilian company that transforms petrochemicals

for

the

textile,

mining

and

agriculture

Q: How is Plastiglas solving its raw material supply issue,

industries. It entered Mexico in 2008 with Plastiglas, Unigel

while ensuring the best quality for its customers?

Quimica and Unigel Acrilicos

333

VIEW FROM THE TOP

DEVELOP SYNERGIES TO DEVELOP STRENGTH PATRICIO GUTIÉRREZ President of ANIQ

Q: What role do ANIQ’s member companies play in the

the particular interests of two members have conflicted.

Mexican oil and gas industry?

In these cases we try to align their interests. Ultimately

A: ANIQ has close to 270 members including producers,

we all need to supply gasoline to the customer, whether it

distributors and some manufacturing companies

comes from PEMEX or any other company that imports the

that use raw materials coming from the chemical or

product. Our real goal is the development of the industry

petrochemical industry. Just over 95 percent of the

and the development of Mexico as a country.

industry is incorporated in our organization. Within ANIQ 334

we have many different commissions, one of which is the

There was an initiative from the Ministry of Communications

energy commission that works on specific topics related

and Transportation (SCT) to prevent the transport of six

to the energy sector, including oil and gas. Through

hazardous materials. Of those six, only one – ammonia – is

this commission we try to be as close as possible to

moved by tank trucks, with the others transported in bulk by

the development of the energy sector across the value

railcar. Ultimately, all the players involved in the consumption

chain. We try to promote synergies in the industry that

of these products agreed to compromise with the government

will lead us to more reliable long-term competitive supply

to allow a transition period wherein the size of the trucks

of raw materials. If we can achieve this, our industry

would be decreased and limited.

can grow and become stronger. If any of the federal or independent energy agencies want to create regulations

Q: What are the main opportunities you see for your clients

we need to ensure they will not create barriers or affect

in upstream given Round 1.4?

the competitiveness of our industry.

A: In upstream new players will enter and oil and gas production in Mexico will increase over the mid to long-term.

Q: What examples demonstrate ANIQ’s role in the industry?

All those new players will ultimately need to buy services,

A: One situation in which we were strongly involved was

products, different raw materials and consulting services

the quality specification for gasoline or fuel. Some of the

from Mexican companies. This is a demand our country can

participants in ANIQ’s energy commission, like BP, Exxon

meet. Previously, even though PEMEX was a large customer

and others that want to import gasoline into Mexico have

it was difficult to have a relationship with the NOC because

a vested interest in this subject. We actively participated in

it called all the shots. It could shift the goalposts at any time

the development of a strong quality specification that can

and there was really not much companies could do about

be applied to Mexico and that also represents the interests

it. With more players and higher standards there will be

of ANIQ’s members.

greater competition. On the other side of upstream, when more players enter, Mexico will have more raw materials for

Q: What happens when the interests of your members

the country’s development and we will be able to decrease

conflict?

the huge commercial deficit in our sector.

A: We always work toward a consensus and to represent the industry and not a particular fragment, which is extremely

The chemical and petrochemical industry has enjoyed steady

important. I think part of the strength of ANIQ is that we try

growth of about 6 percent per year in the last 15-20 years,

to avoid any political interest. There have been times where

which is unprecedented. This equates to demand of around US$40 billion. The problem is that 80 percent of total demand has been covered by imports. This is the potential we have

The National Association of the Chemical Industry (ANIQ) is a

as an industry.

civil association established in 1959. Over 95 percent of private chemical production in Mexico is represented through ANIQ’S

Q: How much do you see oil and gas impacting growth

member companies

objectives?

A: Using the example of Braskem IDESA, the company has a

percent, the remaining 60 percent will be imported. We need

20-year contract that requires 66,000b/d of ethane. This is

infrastructure and storage at ports to reduce logistics costs.

just one project that produces 1 million tons of polyethylene,

It is a daily battle to reduce logistics costs related to both

which is valued at around US$1.5 billion. If we capitalize on

exports and imports.

the opportunities arising from the Energy Reform, we may be able to reduce around 40 to 50 percent of imports in

Q: How is ANIQâ&#x20AC;&#x2122;s vision changing and how might it look in

the next 15 years.

five years? A: We envision an increase in our ability to participate more

Q: To what extent does the Energy Reform return power to

in the development of the midstream sector. We do not want

your members?

to remain at the back of the value chain but rather, we would

A: This is an opportunity for suppliers but I think this will take

like to be more involved in promoting the midstream. The

a lot of time because there must be a great deal of investment

new participants in the market could also be incorporated

across the value chain in E&P, midstream and downstream.

into ANIQ but it is important to stay focused on what we do

The only company that participates in midstream is PEMEX so

well and not lose our vision. One of our strengths is that ANIQ

for some years we will continue to work with PEMEX, which is

has always been focused on downstream and distribution of

OK so long as we have an adequate transition period. We may

petrochemicals. But we must constantly evolve and if there is

have some opportunities to work with natural gas producers

something of value to the industry, we must assess whether

and at that time companies can create alliances with PEMEX

it is important for us to be involved with it.

whereby the chemical company or upstream company will supply the natural gas, which PEMEX can separate and return

Today the industry is suffering from a decrease in the

liquids or raw materials to our members. It will take at least

availability of raw materials, which is part of PEMEXâ&#x20AC;&#x2122;s overall

15 years for true competition to emerge because PEMEX has

issues. PEMEX is facing a difficult financial situation. It is

been the only company building midstream infrastructure.

focusing on improving this but in a way it is losing its focus on the rest of the value chain. This is part of why ANIQ and

Q: How important will new infrastructure be in achieving a

its members are affected because we stand at the end of the

reduction in imports?

value chain. We need to communicate the message that a lot

A: This will be extremely important because even though

of the raw materials our industries need remain underground

the chemical industry can try to reduce imports by 40

and those need to be extracted for us to flourish.

335

Nova LT16 Gas Turbine, Florence, Italy, GE Oil & Gas

BUSINESS & FINANCE

As the Energy Reformâ&#x20AC;&#x2122;s momentum grows, the changes in the Mexican oil and gas industry are generating a buzz that could change investment trends for private investors near and far, financing institutions and project developers both in the country and abroad. The previous restrictions on investment in the sector have been all but lifted and the companies flowing into its different segments are searching for the funding to make their plans a reality, while at the same time having to deal with the financing sectorâ&#x20AC;&#x2122;s natural wariness about the countryâ&#x20AC;&#x2122;s still newly opened industry and its legal framework.

The market is evolving and large business opportunities have emerged for projects requiring heavy investments such as pipelines, oil platforms, refineries and so on. This chapter offers insight into the main financial concerns and opportunities as the market shows the first newcomers the possibilities for investment in the revamped Mexican hydrocarbons industry.

337

CHAPTER 13: BUSINESS & FINANCE 340

VIEW FROM THE TOP: Juan Pablo Newman, PEMEX

343

ANALYSIS: The Elephant in the Room

344

VIEW FROM THE TOP: Eduardo Lavalle, UTCAM

345

VIEW FROM THE TOP: Richard Kirwan, Brunel

346

INSIGHT: Lewis Adams, Heidrick & Struggles

347

INSIGHT: Carmen Suárez, Stanton Chase

348

VIEW FROM THE TOP: Guido van der Zwet, IPS Powerful People

349

VIEW FROM THE TOP: Martín Proske, ExxonMobil

350

ROUNDTABLE: How Will Industry Tackle Talent Gap Conundrum?

352

VIEW FROM THE TOP: Gerardo Mancilla, Ministry of Economic and Portuary

353

Development of Veracruz

INSIGHT: Marcelo Mereles, HCX

Rodrigo Favela, HCX 354

INSIGHT: Juan Casillas, ManattJones Global Strategies Mexico

Pedro Niembro, ManattJones Global Strategies Mexico 355

INSIGHT: Gabriel Parrodi, Rainmaker Global Business Development

356

INSIGHT: Jesús Rodríguez, Rodríguez Dávalos Abogados (RDA)

357

VIEW FROM THE TOP: Salvador Ortiz, SAI Derecho & Economía

358

VIEW FROM THE TOP: Héctor Arangua, Nader, Hayaux & Goebel

359

INSIGHT: José Rinkenbach, Ainda Consultores

360

INSIGHT: Daniel Ruiz, Tomas Ruiz

361

VIEW FROM THE TOP: Juan Segura, Aon Risk Solutions Mexico

362

VIEW FROM THE TOP: Graciela Álvarez, NRGI Broker

363

INSIGHT: Gustavo Moreno, Sespec

Armando Moreno, Sespec 364

VIEW FROM THE TOP: Michael Günther, Marsh Brockman and Schuh

Sebastian Aguayo, Marsh Brockman and Schuh

339

VIEW FROM THE TOP

MEXICAN NOC’s JOURNEY TOWARD PRODUCTIVITY JUAN PABLO NEWMAN CFO of PEMEX

objective of these adjustments was to leave short-term

progress toward financial stability during 2016 and the

crude oil production untouched. Our main cutback

first quarter of 2017?

involved our administrative services: consulting, travel

A: In 2016, we focused on two elements: financially

expenses, stationery costs and so on. Also, we delayed

stabilizing PEMEX and implementing the Energy

some projects that were set to begin production in the

Reform. The basis of PEMEX’s financial deficit considers

long term, especially those in deepwaters. At the end of

our revenue flow from our product sales minus our

2016, we achieved our MX$100 billion budget adjustment

expenditures: taxes, rights, royalties, operational costs

and the Mexican oil mix closed at a higher price than

and investments, to name a few. This calculation is our

US$25/b.

primary balance, to which debt interest has to be added to obtain our balance sheet. The Mexican Congress

Q: How did the Federal Government’s support measures

approved a financial deficit amounting to MX$150 billion

effect PEMEX finances over the past year?

in the same year. This budget was built under economic

A: PEMEX had a MX$147 billion debt with its suppliers and

premises different from those observed empirically.

contractors. The Ministry of Finance assisted us with half this amount through capitalization and fiscal incentives. On our end, we normalized our accounts payable.

Two primary variables influenced this result: oil prices and the exchange rate. A budget adjustment of MX$100 billion had to be made since oil barrel prices reached

At a later stage, we issued debt in the market together

US$20/b while our premise was US$50/b. We modified

with new and increased credit lines, obtaining the

the macroeconomic conditions to account for a US$25/b

required liquidity for PEMEX’s size and an improved

price as a general average for the whole year. The

financial debt profile. Debt maturity increased by one

120

Average: US$76.6/b

0.5

40 100 50 0

73 4

(50)

4 49

39 77

(100)

114

(150)

101

153

8.1 118

168

(200) (250) (300) (350) (400)

360

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

Audited quarterly results, excluding 1Q17, which are preliminary results

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

Price of the Mexican mix (US$/b)

NET PERFORMANCE AND PRICE OF THE MEXICAN MIX

Net performance (MX$ millions)

340

Q: What are the main factors that contributed to PEMEX’s

year and its duration to 0.8 years, mitigating our exposure to interest rates. Additionally, we underwent a liabilities management exercise of our US dollar-denominated debt, reducing the debt maturity of the following two years. Our portfolio became more robust through these

ADJUSTMENT PLAN

Generating efficiencies and cost reduction: MX$29 billion

measures, with a better price discovery. • The original goal of

All of the above measures supported the liquidity of our

MX$28.9 billion was

different instruments that gradually decreased the debt

exceeded

differential with the federal debt. We started the year with 300 differential basis points and reduced this gap

• It is currently estimated

to approximately 130 basis points.

that by the end of the year a MX$35 billion saving will

Concerning E&P, the Federal Government assigned

be reached

PEMEX certain fields during Round Zero. We went through our first migration process a few months ago with the Trion field, and recently we migrated the Ek and Balam fields from an allocation to a fiscal contract

Administrative austerity saving through efficiency and cost reduction (MX$ billion)

without a private partner. In our oil refinery segment, our unscheduled shutdowns are three times the international

Action

Amount

Contract renegotiation

20.3

Workforce

12.0

As a countermeasure, we established partnerships to

Administrative Costs

3.0

inject modernization and operation investments for these

Efficiency and cost reduction

35.5

index. Conventional inputs and processing aids hydrogen, steam, electricity, and water treatment- are responsible for these events in 80 percent of the cases.

341

auxiliary plants, limiting our participation to the purchase of the products we need. We achieved this already in our Tula refinery for the supply of hydrogen. In addition,

MX$100

we are analyzing potential partnerships to improve plant operation, increasing installed capacity, adding value to

billion budget adjustment was achieved by PEMEX in 2016 and the Mexican oil mix closed at a higher price than US$25/b

our refineries and decreasing supply imports. Price liberalization also has an important part to play as a component of the reform, reflecting the international West Coast index and logistics cost and improving our refining revenue. Moreover, the reform stipulates that PEMEX should launch the Open Season, sharing its

Corporate austerity

Procurement transparency

logistics infrastructure, pipelines and storage through

Senior leadership positions in the corporation (number of positions)

Direct assignments (% of total amount awarded)

the corresponding fee structure. The US Treasury was awarded 100 percent of the storage capacity in

1,000

800

600

400

the northern part of the country. These auctions will continue through 2017 for the remainder of the logistic infrastructure. As a whole, budgetary adjustments and the Energy Reform brought PEMEX favorable accounting results for 4Q16 and 1Q17. Our income statements reflected net

200

0 2016

0 2015

201520162

The number of providers increased by 35%

200

profits of MX$77 billion and MX$81 billion, respectively. 0 Petróleos Mexicanos (PEMEX) is the most important company in Mexico, an international reference in the field of hydrocarbons. Its activities involve the entire production chain, from exploration, production, industrial transformation, logistics and marketing

0 2015

20152016

From the subdirector level

Only includes April to September period

Source: PEMEX

20162

mdp 2015 ANNUAL PENSION EXPENSE FLOW (Millions of MX$, 2015) 10

92,475 (year 2038)

In 2038 maximum saving of $17 billion in annual expenditure flow will be reached

Actuarial 2015 valuation includes a reduction of MX$25 billion, in addition to the MX$184

75,354 (year 2038)

billion of savings generated by the reform,

due to changes in the discount rate and population base

2016

2024

2032

2040

Retirees with payment in process

2048

2056

2064

Annual expense without reform

2072

2080

2088

2096

Annual expense with reform

Source: PEMEX

342

Q: How important are your associations and partnerships

sheet. Both parts complement each other. As PEMEX

to your financial stability going forward?

increases its number of private partners, we have joint

A: For our financial stability, associations and partnerships

investment obligations. It is imperative that against

will not prove to be overly important but they will

possible oil price drops, we are able to comply with

be significant in terms of our marginal growth. In our

these third party obligations, cement certainty in these

Business Plan, we differentiate our production from the

ventures and assert our non-speculative position.

improved scenario through our partnerships. One of the fields we cut as a result of the adjustments was Trion. We

Q: PEMEX issued US$5.5 billion in bonds in December

had a budgeted investment of MX$13 billion for that field

2016. What will be the effects of this measure?

to build the required infrastructure to reach operational

A: We not only issued US$5.5 billion in bonds in December,

phase in six to seven years. We put Trion on the table to

we also issued US$4.5 billion in February and March 2017.

attract a farm-out partner on Dec. 5 and the Australian

Most of PEMEX’s hard currency is in US dollars, as it is our

company BHP Billiton won the bid. In that same farm-out

debt. These US$9.9 billion bonds issued represent a pre-

round, we participated jointly with Chevron and INPEX

scheduled payment operation that ensure our minimum

and won a government-owned field. We also made a

financing requirements. For 2017, we have an approved

farm-out bid for two shallow water fields and two onshore

financial deficit of MX$94 billion, which is our target. The

fields. As a result of these developments, we are only

bonds pertain to gross exposure, as we had expirations

missing partners in unconventional fields.

close to US$5.5billion. As for the US$4.5billion issued, representing close to MX$90 billion, they cover our deficit

PEMEX had a budgeted investment of MX$13 billion to build the infrastructure for Trion to reach operational phase in six to seven years

target. This does not mean that we are opposed to using the markets, swapping market debt to banking debt. Q: What is the short, mid and long term financial outlook for PEMEX? A: We published a Business Plan in November in flow terms. We expect to mitigate losses in the auxiliary services of our refinery sector. Most of our losses are generated in our E&P segment. Sharing our fields in partnerships, we aim to increase production through greater efficiency and stabilizing it around 2 million profitable b/d. We anticipate that by either 2020 or 2021, depending on the

Q: What effect will oil hedge funds have in PEMEX’s

reform’s implementation speed, we will bring our deficit

financial situation?

to zero. In this surplus scenario, we will be working toward

A: The federal government covers its fiscal sensitivity

decreasing our total debt. By then, PEMEX will emulate

against oil price drops to ensure its fiscal income. What

private company behavior, without equity, and achieve a

PEMEX wants to cover its sensitivity against its balance

profitable state owned company status.

ANALYSIS

THE ELEPHANT IN THE ROOM From international best practices and performance standards

the beginning. “This should slowly become 20-

to linguistic hurdles, Mexico's oil and gas businesses are

80 over the following years,” he says, highlighting

experiencing unprecedented change as they grapple with a

the key role international knowledge transfer will

looming labor shortage and a shift in corporate culture.

play in the industry.

To say Mexico’s oil and gas industry is changing is an

But for the time being, “Mexico’s oil and gas talent gap is the

understatement. Private companies entering the market are

elephant in the room,” says Benjamín de la Cueva, President

introducing international best practices and performance

of Golfo Energy.

standards, while new regulations are being pumped out at an unprecedented rate. Although the Energy Reform’s objective

THE CORPORATE MINDSET

of adding 500,000 new jobs by 2018 has not materialized,

While Mexican workers might lack expertise in English and

a shortage of qualified labor is still looming on the horizon,

deepwater know-how, local players are reaping the benefits of

worrying potential employers. As new operators advance from

other areas of competency in which international companies,

exploration to field development and production, the industry

with no experience in the country, are deficient. “To be an

is destined to see activity levels and human capital demand

effective law firm in Mexico, deep knowledge of the country

rise rapidly in the coming years, provided that oil price levels

is required,” says Jesús Rodríguez, Founding Partner at

create a supportive environment.

Rodríguez Dávalos Abogados, adding that context of Mexico’s history and the capacity to deal with local communities for

Everything that is happening is doing so as goalposts shift,

land access, among others, are potential roadblocks for which

requirements evolve and stakeholders across the industry’s

local companies could be drafted in to help.

value chain struggle to cover as much ground as possible. At the very basic level, Mexico’s recent history as a closed state

Insight into the unwritten rules that govern oil and gas

monopoly with PEMEX ruling supreme means that Spanish

operations in the country is something that money cannot buy

was the standard operating language. But international

and a history in the country is being marketed as a competitive

companies, from China to the US to Norway, are demanding

advantage. Perhaps the most complex challenge for new

that potential employees speak English, the international

operators will be forming relationships with local communities.

business language, which might prove a hurdle in the short

Historically, oil and gas operators and service companies in

term. “The main client’s official working language is Spanish,”

Mexico have negotiated with the communities residing in

points out Bruno Picozzi, General Director of Sapura Energy,

operational areas by investing in local infrastructure. Luis

adding that even the signage used on PEMEX’s platforms

Vázquez, President of Mexican oil services company Grupo

would need to be changed to comply with international

Diavaz, which has over four decades of experience in Mexico,

standards. The shortage in language skills extends beyond

says his firm’s contribution to local communities has created

the NOC and is a countrywide problem across all industries,

mutual respect. “As an example, the company installed a water

adds Carmen Suárez, Director of Stanton Chase.

pump in a village of 250 houses and has built schools and parks in other areas,” he says. “These communities respect

The lack of English proficiency is even more relevant when

us because we provide their people with jobs.”

compared to regional competitors. Despite being the US’s largest Latin American commercial partner and its closest

Business customs are not the only cultural shift taking place.

Spanish-speaking neighbor, Mexico ranks sixth in English skills

PEMEX’s evolution into a productive state enterprise reflects

in the region (behind Argentina, the Dominican Republic,

changes occurring throughout the value chain. As PEMEX

Peru, Ecuador and Brazil) according to data published by

alters the way it awards contracts to focus on the most

the country’s respected competitivity think-tank IMCO in a

efficient option financially and time-wise, its suppliers are also

2015 study called Inglés es Posible (English is Possible). The

being forced to focus more on these aspects. This is already

lack of official data regarding language proficiency also is a

having an effect on personnel expectations, for example, says

hurdle, the study says.

Richard Kirwan, General Manager for Brunel Latin America, as employees switching from PEMEX to private companies face a

On top of linguistic challenges, Mexico lacks experience in

significant upheaval of values. “Often, it is virtually impossible

deepwater since the vast majority of its offshore activity has

to be fired from state-owned companies, so there is a strong

been limited to shallow waters. Guido van der Zwet, Manager

sense of job security. Moving to a commercial environment

Americas for IPS Powerful People, projects an 80-20 split

where focus is on performance, safety and the environment

between foreigners and Mexicans in deepwater operations at

means that job security diminishes.”

343

VIEW FROM THE TOP

THE TALENT OF THE FUTURE EDUARDO LAVALLE Director of University Extension of UTCAM

Q: How have industry changes impacted demand for

important for us, not just with private companies but also

UTCAM’s courses related to oil and gas?

with academic institutions.

A: UTCAM offers various courses related to oil and

344

gas, including Petroleum Engineering and Petroleum

Q: How is UTCAM expanding its presence in the country?

Maintenance. Many students continue to show interest

A: We are focusing on Mexico City and our new offices in

in these subjects, mostly because UTCAM is located in

the capital are a few months old. The goal is to boost our

a region that relies on income from the oil industry. The

presence and to facilitate our interaction with PEMEX and

Energy Reform in 2013 transformed PEMEX and shifted the

new industry players. A team of specialists will be based

country’s focus to incoming private companies. Our goal is

there to provide services to all the new companies coming

to help these players by training our students and making

into the market. As we close more contracts we will also

sure they are prepared for the changes brought about by

open new offices. We have rolled out UTCAM branches in

the reform.

Villahermosa and Poza Rica, among other locations.

Q: What is the school’s strategy to ensure its students are

Q: What is your strategy with PEMEX as it transforms into

ready for the new-look market?

a productive enterprise of the state?

A: UTCAM participates in alliances with national and

A: We will continue working with PEMEX, with which we

international oil companies to provide students with

have important contracts. The initiative to make PEMEX a

practical working experience during their studies, meaning

competitive company is to its advantage because it forces

they will have the skills to go immediately into employment

the company to look for the best quality at the lowest cost

after graduation. Given the industry’s changes, oil firms

and to be profitable. UTCAM offers high-quality services

want to ensure their personnel is fully trained. There is no

at competitive prices, with staff who have experience in

better way to do this than to provide local employees who

commercial activity and with PEMEX. We are adapting our

live near the facilities and who already have real-world

own team to become more efficient and to compete in the

working experience through the university’s program. That

opening market.

is UTCAM’s priority. Many students who complete the work program end up returning to those same companies as full-

Q: How might UTCAM work with the authorities to develop

time employees after graduation.

regulations for the oil and gas industry? A: UTCAM has the capacity to help in the development of

Q: How important are ties between UTCAM and

regulations for the industry. Although we are not focused on

international universities?

this at the moment, if a client requires this service, UTCAM

A: Agreements between Mexican and international

can provide it. We already have a widely varied portfolio

academic institutions are critical. UTCAM is actively

of services and if there is something else we can do we

seeking to partner with international universities. This is

will develop the courses necessary to meet that need. Our

a project we need to speed up because more companies

courses are specialized, based on the needs and focus of

will soon arrive in the country. UTCAM’s goal is to be ready

our clients and their staff.

before they set up operations here. Alliances are vitally Q: Which types of companies does UTCAM want to work with? The Universidad Tecnológica de Campeche (UTCAM), founded

A: We are open to working with any company that requires

in 1997, prepares technicians and engineers in areas such as oil

our services. If we find there are areas we are not yet

facilities maintenance, industrial automation and communications

servicing, UTCAM will do all in its power to develop tailored,

in Campeche, one of the main oil states in the country

original services to fill these gaps.

VIEW FROM THE TOP

SOURCING LOCAL TALENT A PRIORITY RICHARD KIRWAN Business Manager USA and Latin America of Brunel

Q: As Brunel expands further into Latin America, what

A: Transitioning from a state-owned company to an IOC means

challenges are you helping oil and gas companies overcome?

a significant shift in corporate culture and creates challenges

A: When expanding into other countries in the past, specific

for both the company and its employees. Often it is virtually

projects helped propel our business into the market. In

impossible to be fired from state-owned companies so there

Mexico, however, we will not be working on specific projects.

is a strong sense of job security. Moving to a commercial

Instead we will accompany and support our existing clients

environment where focus is on performance, safety and

as they themselves expand here. As the largest engineering

the environment means that job security diminishes. Those

recruitment firm in the world, our clients often approach us

companies all have deep cultural identities, so any new

directly to enquire about our activity in specific countries.

employee would need to embrace that quickly.

Brunel’s task is to fully establish our business in Mexico and position ourselves to help our clients.

Q: Will industry experts start considering Mexico and what is the main advantage of moving to the energy sector here?

Q: How extensive is local talent in Mexico?

A: Mexico gets a bad deal in portrayals in the media and news

A: Although it may be considered a developing nation,

but the oil and gas industry is used to working in environments

PEMEX’s prevalence in Mexico means the country has a long

that are often more risky and difficult to manage than Mexico.

history in the oil and gas industry, so it is a case of finding

The country’s proximity to the US and South America is

existing talent and using it. Brunel will not rule out sourcing

advantageous. For Brunel it will be easy to sell Mexico to our

talent from north of the border either or encouraging people

international candidates.

who have left Mexico to return for work. Sourcing local talent wherever possible is always a priority for us, particularly in

Q: What differentiates Brunel from other specialized HR

the oil and gas industry where local content requirements

solution agencies already in Mexico?

are common. Brunel has opened many different businesses

A: Brunel is registered on the Euronext Exchange in

across the globe, so we are accustomed to establishing

Amsterdam, meaning that all business Brunel does is utterly

business and finding the best talent in a new country. When

transparent and can be accessed online by the public. At

expanding into new countries we often source people

Brunel there are no closets, let alone skeletons. This is a

who have left the country for work and wish to return.

vitally important selling point for our clients, given the focus

Alternatively, they may have previous experience working

on anticorruption and proper conduct in the industry, and

in similar markets and are therefore familiar with the nature

particularly in Mexico. Although inappropriate conduct

of specific projects.

is still rife across the globe, it simply cannot happen within Brunel. We have offices in the US and the US, so all

Q: As PEMEX cuts its budget, is it becoming a pool for

employees worldwide must be held to the same standards

Brunel’s recruiting efforts?

regardless of their nationality or location. Anyone found

A: Companies like PEMEX tend to retain their best talent so

involved in bribery would be tried under the UK bribery act,

this poses a challenge for us. Instead, our focus is on young

which is the strongest in the world. This aspect gives us a

talent, given that the changes in Mexico mean several decades’

distinct advantage over local companies that do not have

worth of exciting projects are coming up. So much of the Gulf

a presence in the UK.

of Mexico is still unexplored and as we become more skilled at drilling in deepwater and with complex rock formations, an enduring industry will form.

Brunel provides project-resourcing services, global care and mobility solutions to industries including oil and gas, mining and

Q: What challenges do companies and personnel face when

engineering, helping find technical specialists, trade and craft-

migrating from the public to the private sector?

labor experts and staffing whole projects in multiple locations

345

INSIGHT

COMPANIES MUST MANAGE DIFFERENCES TO SUCCEED LEWIS ADAMS Principal at Heidrick & Struggles

Mexico’s oldest companies and the new entrants coming

too little cooperation internally, as “PEMEX has tended

from abroad share a common dilemma: how to adjust

to operate in silos.” Adams highlights the need for more

to the new world order that is the country’s liberalized

harmonization between the various divisions that make

energy market. For a behemoth such as PEMEX, a cultural

up the national oil giant.

shift is needed, while foreign firms will require local understanding to succeed, says global executive search

It is not only the industry’s oldest player who will need

firm Heidrick & Struggles.

to adjust but also its newest ones. According to Adams, new international oil companies “need to have a cultural

346

The human resources company not only sources talent for

understanding of how things operate in Mexico” to find

top-executive positions in the oil and gas industry but also

success in the country. As the market awaits the influx

offers “leadership consulting and cultural advisory services,”

of foreign firms expected to take advantage of Mexico’s

much needed to rapidly increase high-level employees’

Energy Reform, stark differences in approaches to business

productivity in a sector just starting to welcome foreign

practices can become a sticking point for companies

players after decades of strict national control, says Lewis

used to working in other regions. “There are significant

Adams, Principal at the firm’s Mexico City office.

differences between Mexico and the US or Europe,” he says.

The Chicago-based firm has over 30 years of experience

While tipping his hat to the improvements CNH and the

in the Mexican market and boasts consultants covering

government have made, Adams specifies bureaucracy

every industry in the country. Adams specializes in the

and administrative processes as potential roadblocks

automotive, manufacturing, energy, infrastructure and oil

international newcomers will face. He emphasizes the need

and gas sectors. As foreign players start arriving in Mexico’s

for patience and perseverance to overcome them.

petroleum industry, he is quick to highlight the challenges they may face, and how Heidrick & Struggles can help them.

Hiring local talent will work in favor of companies aiming to effectively adapt to Mexico’s oil and gas industry, Adams

When it comes to the firm’s experience in coaching

suggests. “The critical point is that they hire people who

companies through periods of cultural adjustment, “the

have previous experience in Mexico or Latin America,” he

most interesting example is PEMEX,” Adams says. Heidrick

says, and also points out the leverage companies gain

& Struggles held a contract with the NOC for cultural

by focusing on personal relationships and networks in

transformation within the organization and worked with

Mexico. Candidates with experience in the Colombian or

its top leaders to “unfreeze and redefine what the new

Venezuelan oil and gas markets could be a good option to

(PEMEX) culture should be.” Despite PEMEX’s executive

help incoming companies navigate the new cultural terrain.

committee’s willingness to participate in the cultural transformation project, Adams says they came up against

When it comes to downstream activity, local demand is

resistance within the company and describes it as a “big

already on the rise due to the fast-paced development of

oil tanker to turn.”

the sector. But Adams believes multinational companies will bring in talent from abroad for upstream activity.

Adams adds that the influence of unions is something PEMEX must overcome, along with their historically

It is clear that the ongoing transformation of Mexico’s oil

hierarchal structure, to create more agility to respond to

and gas industry will demand huge shifts in the corporate

the changing markets. Employees at PEMEX will often

culture of all of its players, Adams adds. As a global

“look upward” before making a decision. Inefficiencies

company, Heidrick & Struggles is positioned to help both

arising from a lack of accountability are compounded by

national and international companies.

INSIGHT

SWITCHING GEARS TO PRIVATE TALENT CARMEN SUÁREZ Director of Stanton Chase

As IOCs begin sourcing Mexican talent to fill top positions

As well as opting for a retainer-based recruitment firm,

for their nascent operations in the country, they are bound

incoming companies seeking top-tier oil and gas talent could

to come up against the challenge of PEMEX’s public sector

also turn to international oilfield service companies already

mindset, says Carmen Suárez, Director at executive search

present in the country as a source of corporate-minded

firm Stanton Chase.

applicants. “Companies like Halliburton, Schlumberger and Baker Hughes already have a strong base in Mexico,

After a monopoly lasting just shy of eight decades, PEMEX

with experience providing services to PEMEX. They have

remains at the epicenter of Mexico’s technical hydrocarbons-

qualified technicians and engineers,” Suárez says. This will also

related petroleum talent pool and is projected to clock

mitigate the issue of unavailable, near-retirement age PEMEX

116,601 employees in 2017, according to Mexico’s planned

candidates who will be disinclined to leave their current

budget for the year. For this reason, Mexican recruitment

positions due to the NOC’s rich pension benefits, she says.

agencies will have to work hard to identify candidates adaptable enough to make the cultural switch from a state-

To fill the 212,000 new energy jobs Energy Minister Pedro

controlled company to the private sector. Suárez says her

Joaquín Coldwell projects will spring from the Energy Reform,

firm’s “retainer” approach to headhunting can assist new

the search will not be limited to Mexico. Another source for

companies facing this challenge.

candidates is the pool of Mexican expat oil and gas workers who have left the country due to the decline in production

“Our retainer method is based on an extensive initial

and subsequent layoffs at PEMEX. “A lot of recruiters are

search,” Suárez says. Unlike contingency recruitment

talking about bringing back Mexican candidates who left

agencies that only charge if their candidate is successful,

to work in other, more affluent markets,” she says. With

Stanton Chase’s upfront fee structure means its agents can

presence in 74 cities spanning North America, Europe, Asia

focus on sourcing the right candidate, rather than rushing to

and Latin America, Stanton Chase is well positioned to lend

fill the spot and get paid. This will be especially important

its international links to companies working to bring native

for the dozens of oil and gas companies entering the market

talent back to Mexico. International reach will also play a

that are looking to dig into PEMEX’s experienced pool of

central role in bringing much needed deepwater expertise

employees for their own operations. Suárez believes this

to Mexico, Suárez adds, as well as experience with advanced

extra focus on the search process will go a long way.

technology that the Mexican market lacks.

Stanton’s emphasis on the research and background phase

Besides prioritizing technical qualifications and cultural

also allows the company to tap into what Suárez terms

adaptability, the new operators in the oil and gas market will

“passive candidates.” Prospective employers must face

place English language aptitude high on their list of desired

the paradox of desirable candidates not actively looking

skills when selecting their future leaders, something that will

for opportunities in other companies because they are

likely be a stumbling block, Suárez warns. Mexico is seriously

focused on being successful in their current positions. In

lacking in candidates fluent in the global business language.

the competitive panorama of oil and gas, and especially in the high-stake deepwater ventures arising from Round

The need for language skills is a key area where academia

1.4, these are the candidates IOCs will want to reach out to.

and the government will bear the brunt of responsibility

Stanton Chase allows them to do that. While PEMEX does

and Suárez praises IMP and IPN for increasing efforts to

not lack in technical talent and expertise, Suárez adds,

align the needs of private oil and gas companies with

it will take specialized headhunting experts to identify

students’ training through alliances and new, specialized

employees with the corporate “chip” demanded by the

courses. “In the end, the creation of talent has its roots in

private sector.

the classroom,” Suárez says.

347

VIEW FROM THE TOP

INVESTING IN BLUE AND WHITE-COLLAR TALENT GUIDO VAN DER ZWET Manager Americas of IPS Powerful People

Q: How does the success of CNH’s licensing rounds impact

exists to an extent in Mexico because Grupo R operates

the opportunities in the Mexican market?

Centenario-2 and Seadrill operates West Pegasus, both

A: Mexico became an exciting destination through its

semisubmersible rigs.

various licensing rounds and is one of the few oil and gas

348

markets where things are actually happening, while markets

Q: What talent does Mexico need to invest in as Big Data

in other countries continue moving at a slow pace. The

becomes more widespread in oil and gas operations?

winners of the licensing rounds definitely see opportunities

A: Digitalized solutions require new and different skills sets

and we were pleasantly surprised by the success of the

but companies should be clear on what they are looking for.

deepwater round, which attracted investments of US$41

They either need to seek out experienced people or provide

billion over the next 10 years. It has proven that Mexico is

their own training facilities. Automation is important but

top of the list for oil and gas companies.

there are many ways of doing it, so companies need to be very clear about what they expect.

Q: How is IPS harnessing the knowledge of laid-off PEMEX employees?

Q: How do developments such as the successful results of

A: IPS’ doors are always open and we receive resumés from

Round 1.4 impact salary expectations?

a wide variety of candidates. The people who used to work

A: The main effect of Round 1.4 is on market supply and

for PEMEX will need to be trained to international standards

demand. A report highlighted that Mexico lacks 120,000

but their knowledge of operations in the Gulf of Mexico will

experts in oil and gas. The fact that PEMEX has paused up

be very useful.

to 60 percent of its platforms means that there are a lot of people on the market but more are required. The next

Q: What role will foreign talent play in the development

discussion surrounds how employees want to earn their

of Mexico’s deepwater sector?

money, either in US dollars or in Mexican pesos. There will

A: Foreign expertise will play a big role. Especially at the

be different rules for each contract because operations in

beginning, foreign crews will be brought to Mexico to start

shallow water will be carried out under the Mexican flag

operations. The key will be knowledge transfer between

but semisubmersibles that are further out to sea could

international crews and local teams, a process that takes a

have international flags. This could affect the currency its

couple of years. As deepwater operations start, we expect

workers earn in.

to see an 80-20 split between foreigners and Mexicans. This should slowly become 20-80 over the following years.

Q: How important is Mexico in IPS’ overall global portfolio and what are your goals in the country?

We bring in people who are experienced in finding

A: IPS’ Mexican branch is responsible for 10 percent of the

deepwater candidates. There are some key differences.

company’s global turnover. Our goal is to increase this

Extra skill sets are needed when semisubmersible rigs are

to 20 percent in the next four to five years. We want to

used instead of jack-up rigs, for example, because they

work with the winners of every licensing round. We are

require personnel such as Dynamic Positioning Operators

also expanding to the US, so we are especially interested

(DPO) to ensure the rig does not move. This talent already

in helping American companies recruit blue-collar and white-collar workers in Mexico. We have a database of more than 100,000 engineers and people related to offshore oil

IPS offers employment of multinational personnel worldwide.

and gas operations. We intend to keep up our safety and

Since 1988, iPS has been supplying personnel to the international

transparency standards. IPS has all the relevant compliance

maritime and dredging industry, and has expanded into other

certificates and operates with an open-book policy, so there

sectors such as offshore, oil and gas and tunneling

are no hidden charges in the way we work.

VIEW FROM THE TOP

LEADING PLAYER ENTERS THE FUELS SPACE MARTĂ?N PROSKE Fuels Director Mexico for ExxonMobil

Q: How is ExxonMobil differentiating itself from other brands

A: ExxonMobil will not own any service station but will

coming into Mexico?

establish relationships with local businessmen to provide our

A: We started evaluating the Mexican market as soon as the

products in an efficient and reliable way to final customers.

Energy Reform was enacted. We conducted market research

Our Synergy fuel technology consists of a proprietary additive

to understand the needs of final consumers in Mexico and

package added to the fuel. Synergy was recently launched in

of the Mexican businessmen who own gas stations and to

other markets around the world. It will be launched in Mexico

understand the areas of opportunity so we could satisfy

from the first day the service station is established. The fact

their needs and excel beyond their expectations. With that

that we have announced the presence of this product in

research concluded, we designed a special offer for Mexico,

Mexico will make a great difference in the market.

including an investment commitment of US$300 million over the next 10 years. The strategy for the investment and time

Another part of our investment went toward creating an

relies on three elements. The first and second elements relate

appealing and refreshing image that will be inviting to the

to logistics development and product inventory, both of which

customer. For ExxonMobil a marketing program involves

will ensure a reliable and constant supply of our product. The

more than advertising. It consists of three points that will

third element consists of branding and marketing that reflects

help our partners meet and exceed customer expectations,

our Synergy Gasoline product and our special programs that

therefore increasing the number of customers coming into

ensure a supreme service.

their facilities. The first is the Guaranteed Fuel program, which originates at ExxonMobil laboratories and includes inspection

Q: How is ExxonMobil working to deliver the logistics

visits to retail stations to ensure the quality and quantity being

development and product inventory elements?

offered to consumers through certifications. The second

A: Designing the infrastructure and product inventory strategy

program is designed for the station owners and consists

included exhaustive studies and planning. Mexico is in great

of training programs for their pump attendants, to ensure

need of infrastructure. Projections suggest that Mexico will

they offer a supreme service and invite the final consumer

continue growing and to satisfy the accompanying demand

to choose upgrades and additives. The third program is the

there has to be more investment in logistics and infrastructure

mystery shopper, which consists of an unidentified consumer

but that has not happened yet. There are some projects being

who will come to the station and film the whole experience,

planned but only a few have started to lay steel on the ground.

from the service offered to the appearance of the facilities.

Developers need commitment because projects require big

The goal is to ensure a consistent image.

investments and it takes time to see the results materialize. ExxonMobilâ&#x20AC;&#x2122;s strategy is to offer a long-term commitment

Q: What are ExxonMobilâ&#x20AC;&#x2122;s plans in Mexico?

to enable, facilitate and support investment in key logistics

A: The first milestone for 2017 was the announcement that we

projects. Through our commitment with infrastructure

are entering the fuels space. The next milestone is opening

developers we are going to have a partner in the terminals

the service station, which will happen before the end of the

and have a guaranteed and constant supply. This strategy

year. For the long term we want to be a player that enables

is a result of our knowledge from other markets where we

logistics investment across the country and brings choice to

learned that it is not necessary to own the terminal but to

consumers. We are coming to Mexico for the long term.

have a professional midstream partner to own and operate the terminal and with which you can make a commitment that enables fuel supply.

ExxonMobil participates in upstream and downstream in Mexico. With local offices in Mexico City and a strong presence through

Q: How is ExxonMobil guaranteeing the product and service

its lubricants and other chemical products, ExxonMobil is now

offering at gas stations?

entering the fuel commercialization sector with the Mobil brand

349

ROUNDTABLE

HOW WILL INDUSTRY TACKLE TALENT GAP CONUNDRUM?

As an influx of new players pour onto Mexico’s oil and gas scene, the industry hopes that job opportunities will be created for Mexican nationals. In fact, companies entering through CNH’s licensing rounds are required to employ local content as per the terms of each contract. Round 1.4’s winners, for example, must comply with local content rates of 3 percent during the exploration period, increasing to 8 percent later in the project. But concerns abound over a skills shortage ranging from English proficiency, to deepwater knowledge and corporate savvy. Mexico Oil & Gas Review asked a range of industry players their view on Mexico’s oil and gas talent gap.

Concerns have been raised regarding a lack of vocational training in degree programs in Mexico. Graduates in relevant degrees such as geology or engineering tend to lack practical experience in their field. Companies entering the market will need to create schemes to help these graduates ease into the real aspects of the working environment, or take a chance on candidates with no work experience. Mexico has a good university system but it could perhaps interact more with the private sector

350

RICHARD KIRWAN Business Manager USA and Latin America of Brunel

for training purposes and to increase the employability of their graduates. Mexico needs to invest more in its education system to ensure the country is equipped with the correct talent to the the oil and gas industry’s future needs.

The talent drain resulting from the retirement of PEMEX’s employees has left an opportunity for new generation courses and careers. We started a course two years ago for PEMEX executives detailing industry knowledge all along the production process. We believe the human resources gap can be addressed through education. Many of PEMEX’s former employees are now teachers who are transferring their knowledge as a way to thank PEMEX for their evolution and opportunities given.

LUIS PUIG President of Petroexpertos 5000

We have already offered our services for educational purposes to CNH, CENAGAS and private companies as well.

This is an issue that has been raised with us principally by PEMEX’s technicians and engineers. The problem is that experienced workers are already retiring, leaving a gap between them and younger engineers. América En Triunfo has helped to close this talent gap because our products require fewer personnel to operate and we fully train all users. Before, cleaning a heat exchanger may have required 20 people but now we offer solutions that require only four operators. The talent gap is worsened by the fact

RAÚL ALONSO Director General of America En Triunfo

that a lot of information in PEMEX has been lost over the years due to the manual way they used to work. Technological solutions will help protect data because information will be stored securely to be passed on to the next generation of workers.

Understandably the country lacks experience in deepwater operations because it has never been done in Mexico. There is a gap between the younger and older generations, which becomes an issue when companies look for 10 to 15 years’ experience before hiring applicants. After 25 years PEMEX employees are allowed to retire and 4,500 of them have done so in the past few years but the NOC tries to postpone retirements from key positions. IPS also looks for laid-off workers from countries like Brazil, Venezuela and Colombia to bring to Mexico. Another skills gap in Mexico is the language barrier. Historically the working language of PEMEX was Spanish but as new companies arrive the international standard of English as the

GUIDO VAN DER ZWET Manager Americas of IPS Powerful People

working language must be adopted.

When Sapura expanded to Mexico two years ago, we brought our global philosophy of being a local company. Our Mexican office has 45 team members and only five are ex-pats. We operate according to our global standards, processes and procedures but we also recognize Mexico’s long history in oil and gas and the fact that there is plenty of talent available here. Although we managed the construction of a subsea pipeline with a predominantly Mexican team, there are still issues with fluent and industry-knowledgeable English speakers in the country. Our main client’s official working language is Spanish, so when new players arrive they have to face the fact that all contracts and reports are in Spanish, which can be challenging.

351

BRUNO PICOZZI Director General of Sapura Energy Mexico

The first talent gap companies will come up against is English language ability. In the past the oil and gas industry here did not concern itself with language simply because there was little need. This is a Mexico-wide problem that touches every industry. Another issue is that many PEMEX employees who are close to retirement will refuse to leave the NOC because of its elevated pension rates. PEMEX’s technicians are talented but are already aging within the organization. Big efforts have been made by the Instituto Politécnico Nacional and Mexican Petroleum Institute (IMP) to educate new geologists and these youngsters will be valuable. This is particularly true for

CARMEN SUÁREZ Director of Stanton Chase

the private sector because the way students are being taught is more aligned with the needs of private companies.

Although English is critical for any industry, I believe that 100 percent English is not necessary for technicians because their position requires English expertise in very specific terminologies, such as welding, cementing or painting. The technical knowledge is the priority and 50 to 70 percent English is required. There will be a set of positions that need 100 percent English but those are limited and the focus should therefore be on the technical scope that the vast majority of positions require. There is also a lack of talent for upper-echelon positions. PEMEX managed all of the country’s industrial facilities, while its suppliers focused on exploration, extraction, operations, logistics and sales, so many companies lack experience in managing facilities and workforces. We believe that collaborating with PEMEX will help companies improve this knowledge.

OSCAR GONZÁLEZ President of ARHIP

VIEW FROM THE TOP

AN APPEALING STATE FOR OIL AND GAS INVESTORS GERARDO MANCILLA Former Minister of Economic and Portuary Development of Veracruz

352

Q: What are the economic development priorities for the

Portuaryis undeniable is the need for tangible results and

Veracruz state government?

social development resulting from these reforms. Outside

A: The priorities for the State of Veracruz are closely related

factors that impact the reform’s development can cause

to its competitive advantages. We are highly competitive

lack of confidence in its efficacy, which is why it is the

in the different stages along the production chain for the

government’s duty to keep the general public, businessmen

oil and gas and electricity industries and have comparative

and industry experts informed about developments in the

advantages in energy production and port management.

oil and gas industry in Mexico and to generate agreements

When both activities are combined in the same location

to boost local companies’ productivity, such as for port

it creates a crucial synergy to support the production

renovations and infrastructure development.

process. We are also developing other areas around these main two industries such as logistics, transportation,

Q: How is Veracruz addressing the shortage of skilled labor

electromechanics and petrochemicals.

and the issues of security and infrastructure? A: We work closely with technical schools to develop

One of the state’s main achievements has been the

programs to address the specific needs of incoming

transformation of its investment portfolio. Almost 65

companies. We are also developing new courses and

percent of investment is for industrial services such as

careers with Veracruz University, or re-introducing old ones

logistics, infrastructure and petrochemicals, which have

that had already closed, such as chemical engineering. We

high added value and contribute greatly to the social and

are working to train and certify employees and building

economic development of the region. Over half of the

incentives to keep them here. Regarding security, it is not

investment comes from foreign resources with more than

only public safety but also legal security that is relevant for

15 countries investing in this state in numerous industries.

business development in the region. Certainty has to exist

Private investment has grown three times with an estimate

for companies to be willing to set up shop here.

of US$10 billion annually in the last six years. The state is also developing additional projects to continue its business

Q: What are the main differences and competencies of

expansion. One of the largest projects is the enlargement

Veracruz’s main ports?

of Veracruz’s port to increase its capacity fivefold, making

A: The government’s vision for its ports is for them to

it the largest in Latin America. The government is also

complement each other, instead of competing. Each port is

planning the enlargement of Tuxpan Port, specialized in

a reflection of its comparative advantages and the activities

imports and exports of oil and oil products, as well as

developed in the region they are located in. Tuxpan’s

Coatzacoalcos Port, where major project developments

port, for example, is specialized in fuel supply due to its

are taking place.

proximity to Corpus Christi, Texas, the origin of 90 percent of our imported oil. Tuxpan should focus on enhancing its

Q: What has been the impact of the Energy Reform on

infrastructure to boost reception and distribution capacities.

Veracruz? A: The market opening for the oil and gas industry is a

Q: What comparative advantages does Veracruz have over

process that has generated debate on all sides. What and

other states? A: One of the main comparative advantages is Veracruz’s geographic location. Almost 60 percent of all new oil

The Ministry of Economic and Portuary Development of

developments are located here. Veracruz is also very

Veracruz coordinates industrial development, commercial and

infrastructure-competitive since it has three major ports

port policies in the Gulf of Mexico coastal state. It has a long

working at full capacity and several minor ports that can

tradition of commerce with the oil and gas industry

be developed to tend to the needs of the offshore industry.

INSIGHT

A DIFFERENT APPROACH TO OIL CONSULTING

Marcelo Mereles Partner at HCX

Rodrigo Favela Partner at HCX

As a new company in the fluid Mexican oil and gas

HCX’s main competitive advantage. “Although the new

environment, HCX is looking to introduce a fresh approach

companies are experienced in operating activities, they

to the energy business and go “beyond traditional

require somebody who understands the challenges,

consultancy to stand at the crossroads between consulting

bottlenecks and opportunities specific to the Mexican

and project execution and development,” says Marcelo

market,” Mereles points out. “The devil is in the details,

Mereles, one of the company’s three founding partners.

and a shallow analysis of the new laws will not be enough to guarantee success.”

HCX, which stands for HydroCarbon Exchange, was created in 2016 to help companies seize the opportunities emerging

HCX is familiar with the government stakeholders, decision-

from the Energy Reform. As new companies and already

makers and the people who do the real background work

established players begin to expand their presence in

in the institutions, Favela adds, making HCX a good choice

Mexico, the trio, which also includes Rodrigo Favela and

for new companies seeking a ready-made network of

Máximo Hernández, saw the opportunity for a more detailed

market players.

and hands-on approach to consultancy. The goal was to branch out into services as diverse as commodity trading,

As well as offering valuable local know-how, HCX is capable

representing high-tech solutions and providing temporary

of providing companies with highly trained personnel

staff for projects.

through its Field Personnel Resources platform. Mereles explains that the service offers prospective employers “an

The firm’s portfolio of services reaches deep into the oil

Airbnb-style recruitment model,” allowing them to hire

and gas value chain, from providing valuation and risk

staff on a temporary basis. He predicts that a new focus

analysis on upstream projects, to advising companies on

on efficiency and the prevailing market uncertainty will lead

logistics solutions for downstream endeavors. The HCX

to increased demand for a flexible, temporary workforce

partners say the company can support clients that are

that companies can easily modify in case of downturns.

embarking on projects in the newly opened hydrocarbons industry, even with projects that may be the first of their

Field Personnel Resources answers this demand by

kind in the country.

supplying highly trained personnel that can be hired by the hour, week or month, Mereles adds. The system is

HCX is also willing to partake in the risks of untested

active in West Texas but will be adapted to Mexican market

markets. “HCX aims to align itself with our clients’

conditions before being rolled out in the country. As well as

interests,” Mereles says. “For that reason we charge as

the obvious benefits of providing an adjustable labor force,

little as possible at the beginning of a project and instead

the system could also “help companies comply with local

are willing to receive most of our payment upon full

content rules more effectively,” Favela says.

completion of the project.” HCX’s wide arsenal of services and expertise allows the HCX’s ability to successfully accompany a project to full

company to target a large potential client base. “Our ideal

completion is bolstered by its founding partners’ varied

client falls into two categories,” Favela says. “Mexican

experience. With an accumulated history of around 65

companies that need help getting into the market and

years in the Mexican oil and gas industry and two PEMEX

international companies that need help partnering up.”

veterans in its ranks, HCX’s partners bring a wealth of local expertise to the table. With many IOCs expected to

The untouched territory ahead does not faze them,

arrive in Mexico with their own international consultancy

according to Mereles. “HCX wants to help develop innovative

firms in tow, specialized Mexican knowledge could be

projects that may be the first or second of their kind.”

353

INSIGHT

NO ‘PERFECT’ MOMENT TO ENTER MEXICO

Juan Casillas Managing Director of ManattJones Global Strategies Mexico

Pedro Niembro Senior Director of ManattJones Global Strategies Mexico

The Energy Reform is opening up an increasing array

several Fortune 500 and midsized companies into the

of opportunities in the oil and gas sector but those

Mexican market and now we are excited to help them seize

companies that take a wait-and-see stance will be too late

the Energy Reform’s opportunities,” Casillas says.

to take full advantage, according to ManattJones Global Strategies Mexico.

Those opportunities are coming quickly. “The current Mexican administration will be remembered for really

354

Juan Casillas, the firm’s Managing Director, and Pedro

pushing for a significant change in the energy sector,”

Niembro, its Senior Director, insist that now is the time to

Casillas says, highlighting the far-reaching impact of

invest in the country. Often, they say, companies wait for the

President Peña Nieto’s 2013 reforms. Niembro adds that

“perfect” moment to enter a market. Their advice is to stop

although mistakes have been made, the willingness of

hesitating when it comes to Mexico. “If an energy company

the Mexican authorities to listen to feedback and adjust

faces regulatory blocks or challenges, ManattJones can help

accordingly has been commendable.

them,” Niembro says. “But if you are waiting for the perfect time, you will be too late and will end up watching the whole

Both admit that much needs to be done in terms of

show from the sidelines,” adds Casillas.

regulation to assuage the concerns of incoming companies.

“

If a left-wing party wins, it will influence the Energy Reform’s progress but it will not stop it” Juan Casillas, Managing Director of ManattJones Global Strategies Mexico

“There are still some key pieces of information and topics that need to be clarified for all participants to feel comfortable entering the market,” Niembro says, including rules and regulations and the pressing issue of rights of way and social license to operate processes, which need to be smoothed out to help along the industry’s development. “The Ministry of Energy and the judicial system must work on this together to avoid future frivolous injunctions and lawsuits threatening projects.” The team points to security as a main issue in areas like

The international consulting subsidiary of US law

transportation and project development. “Until now, only

firm Manatt, Phelps and Phillips LLP is ready to usher

PEMEX’s fuel distribution pipelines were affected by security

international companies as they set up shop and expand

issues but this problem will be of greater concern when

their business lines in Mexico. The firm, a leader in providing

the private sector begins to incur losses,” Casillas says.

government relations, nearshoring and business strategy

Another area where the consultancy would like to see more

and development services in Mexico, has extensive

work is the collaboration between the country’s academic

experience in this area and, as Casillas says, “we are well

institutions and the private sector.

aware of developments in the Mexican oil and gas industry and maintain close ties with key decision-makers.”

Despite the work still required in terms of regulation, the executives praise the current government for changing the

The company boasts some big names, including former

Mexican perception of the energy sector, promoting the

Assistant Secretary of Commerce Michael Camuñez,

need for the private sector to participate and recognizing

ManattJones’ President and CEO, and former US

that the new energy scenario will take center stage in

Ambassador to Mexico, Jim Jones, that give it leverage

Mexico’s next general election in 2018. “If a left-wing party

for aiding new companies entering the country. “Over the

wins, it will influence the Energy Reform’s progress but it

past 15 years we have been successfully helping introduce

will not stop it,” says Casillas.

INSIGHT

KNOWLEDGE WILL GO A LONG WAY FOR NEW ENTRANTS GABRIEL PARRODI Managing Director Mexico of Rainmaker Global Business Development

Information, it is said, is power. As Mexico’s oil and gas industry

size. “It will be easiest for small companies, which just need

welcomes a host of new, international players, knowledge

a few resources and one or two contracts to get started.”

will go a long way in helping them face the many challenges

Medium businesses face the challenge of securing financial

awaiting them, says Gabriel Parrodi, Managing Director

backing, for which they should seek out larger firms to

Mexico of business facilitator Rainmaker. Global Business

partner with. “Lastly, large companies need to complete

Development. “Learning the Mexican way of doing business

mergers and acquisitions to truly capitalize on the reform

will pose the biggest challenge for newcomers,” he says.

and accelerate lasting change,” Parrodi concludes.

With a presence that spans Houston to Dubai, and Aberdeen

As well as posing a challenge for foreign companies

to Vienna, Rainmaker was founded in 2007 and announced

regardless of size, Mexico’s opening oil and gas market can

its expansion to Mexico City in February 2016, specifically

be tough for national companies too. “As Mexicans, change

to assist oil and gas, energy and mining-related companies

is never easy for us,” Parrodi says. “This is especially true in

to develop their business in the country.

the oil and gas industry.”

“Rainmaker acts as the eyes of foreign companies in

Even though the country’s culture may lean toward the

Mexico,” says Parrodi. With his extensive experience guiding

status quo, Parrodi thinks this factor is counterbalanced

foreign businesses as they enter new markets and his past

by Mexico’s young population. “Unlike Europe and the

involvement in PEMEX construction projects, Parrodi says

US, Mexico is not disadvantaged by an aging population

adequate guidance is indispensable for new international

and thankfully young people are more courageous in the

companies arriving on the scene.

face of change.” He mentions the fact that thousands of engineers graduate from university every year, emphasizing

Overcoming the inevitable cultural barriers that will spring

the emerging talent pool that will be at the disposal of

up is a big part of that but also involves getting used to

Mexico’s oil and gas industry in the coming decades. Also,

interacting with the Mexican government. “Even though

the entrance of a younger generation into the market means

the oil and gas industry is being opened to private players,

innovative technologies will be absorbed and used at a

newcomers must remember that the government still

faster rate, which will benefit business greatly.

plays a significant role,” Parrodi says. It is not just a case of negotiating and communicating with the government but

Despite the challenges ahead, Parrodi praises Mexico’s

also of complying fully with the documentation it requires

investment potential and reassures companies interested

and the regulations it sets out, he says.

in expanding that their preconceptions about the country are probably wrong. “Foreigners often come to Mexico full

In announcing its entry into Mexico, the company said on

of fear and caution because of what they have heard in the

its website that its focus would be twofold. “First, it will

media,” he says.

connect our clients to the advanced Mexican supply base to build products for the oil and gas industry, worldwide.

Rainmaker’s mission, therefore, is to make companies “fall

Second, this office will be instrumental in assisting oil and

in love with Mexico,” a task Parrodi says is greatly facilitated

gas, energy and mining-related companies to develop their

by the country’s young, dynamic population and the

businesses and increase their profile throughout the region.”

government’s policy improvements in recent years. From his point of view, “Mexico’s stability has improved greatly

Commenting more specifically on how companies should

in the past two decades,” and business can now be done

approach their entry into Mexico, Parrodi highlights the

without corruption. “But it is not easy. It is essential to be

different strategies for success depending on a business’

persistent in always doing the right thing.”

355

INSIGHT

LOCAL KNOWLEDGE AN ASSET WHEN NEW RULES MEET OLD WAYS JESÚS RODRÍGUEZ Founding Partner at Rodríguez Dávalos Abogados (RDA)

To successfully enter a new, evolving market such as

country’s history and industry quirks. “Issues such as price

Mexico’s oil and gas industry, companies not only need to

liberalization after decades of price controls, historical

understand the potential for economic gain but also the

monopolies and social differences between regions will

risks involved when new rules being created from scratch

impact the end result. These must be taken into account

meet old ways and practices, says Jesús Rodríguez,

when defining the legal frameworks,” he says. To address

Founding Partner at veteran Mexican law firm Rodríguez

the need for specialist help, RDA is “putting together a

Dávalos Abogados (RDA).

team of specialist contractual litigation consultants and economists,” to ensure all its clients’ needs are met.

356

“As legal advisers,” he says, “we enjoy the challenge of new regulations and being creative with the development of new

Rodríguez believes that the Mexican government has taken

legal frameworks.”

the right steps at the right time and that the Energy Reform is being enacted at a suitable pace. However, there are still

RDA is a boutique law firm specialized in providing legal

some legal hurdles to overcome on a variety of issues. He

services to the energy sector with more than 20 years of

says that investor interest could wane if the government

experience in the private and public sector in Mexico. The

does not take action to reassure companies that certain

firm is helping the country’s government shape the new

risks will be covered, because the current terms are not

regulatory and legal frameworks needed for a successful

entirely clear. “The Mexican authorities must decide which

oil and gas market.

party will take responsibility for the costs resulting from delays, excessive bureaucracy and crime, all of which were

Mexican law firms are helping incoming companies on

previously paid by PEMEX or CFE,” he says.

a variety of legal and consultative fronts, in particular regarding three main areas. First, RDA provides incoming

Additionally, Rodríguez raises concerns surrounding the

companies with an overview of the various risks involved

transportation of products, a sector that could become the

in the new legal framework. It also advises businesses on

source of opportunities, and Mexico’s fuel theft problem. He

the best approach regarding subjects such as the recent

questions who will pay for any losses if companies comply

low oil price environment and hesitant investors. Finally, the

with regulations but still fall victim to crime.

firm helps government agencies put the new standards and regulations together.

PEMEX’s payment slowdown during the past year has been a hot topic in the energy legal sector but Rodríguez advises

“Our workload is equally split between electricity,

service providers against taking legal action to resolve their

midstream oil and gas, downstream oil and gas and E&P,”

issues with the state-controlled oil company. In his view,

Rodríguez says. His firm is also working on Multiple Services

low oil prices and PEMEX’s strained relationship with the

Contracts and contract migrations, where Rodríguez says

Ministry of Finance are to blame for the payment slowdown,

progress has been made despite company complaints to

something companies should take into account before

the contrary. Rodríguez highlights the firm’s Mexico-specific

working with PEMEX.

knowledge as one of its main selling points, stressing that “deep knowledge of the country is required” to be an

Despite some concerns, Rodríguez remains optimistic

effective law firm in Mexico.

about the future of Mexico’s oil and gas industry, citing PEMEX’s potential partnerships, the opening of deepwater

Although he recognizes the advantages of global

exploration and production to private companies and

experience, he points out several issues particular to Mexico

the liberalization of the gas station market as exciting

and the need for legal experts who are well-versed in the

prospects.

VIEW FROM THE TOP

FULL SUITE OF LEGAL, ECONOMICS SERVICES SALVADOR ORTIZ Partner at SAI Derecho & Economía

Q: What is SAI’s approach to its business and who are its

Sometimes a company may reach an agreement with a

clients in the oil and gas segment?

land owner or an ejido community but the people who

A: SAI is a boutique consulting firm founded more than

live in the region may not be willing to allow the project's

20 years ago. Our professionals are mainly lawyers and

development for different reasons. This can become a

economists with a strong quantitative approach. One of our

legal problem that independent medium-sized companies

first projects was active involvement in the NAFTA trade

are not ready to deal with and which can cost them time

pact and we continue to provide expertise on free trade

and money. To avoid this setback, we have sociologists

issues and economic competition. Most law firms in these

that investigate the social environment of the region and

fields hire a complimentary economics firm while they focus

identify opinion leaders and the populations' concerns to

on the regulatory framework. SAI on the other hand can do

achieve socially acceptable and inclusive projects. As for

both, the economic and legal analysis including competition,

midstream, we see logistics, transportation and storage of

pricing and market assessment, therefore delivering a much

liquids among the business opportunities in Mexico.

more comprehensive analysis to the client. Furthermore, our exposure and experience solving issues in a wide variety of

Q: SAI’s legal and economic strategic analyses are relatively

industrial and service sectors in Mexico allows us to correlate

new in Mexico. What is their added value?

our studies with the current problems of specific customers.

A: We offer our clients complete transparency from the first day, letting them know what can and cannot be done as well

In the oil and gas industry, SAI’s customers are found

as the risks involved in the projects. Because of our size and

mainly in upstream and midstream and around 50 percent

the way our teams are composed, combining both young

are foreign companies. Besides our incorporation services,

and experienced talent, SAI can offer its customers a fresh

we want to help companies clarify their view of the legal

and interdisciplinary approach not often found.

and economic framework of the country before they set up shop here and most importantly, build possible future

Q: How might US President Donald Trump’s agenda impact

scenarios for their business decisions. This way, companies

Mexico’s oil and gas industry?

can adapt their strategy to fit with the bidding, contracting

A: There is uncertainty about what the policies of

and permitting provisions of the Energy Reform. There is a

President Trump related to energy exports will be but

wide variety of consulting topics: other firms need a refined

there are still plenty of factors to be examined. Our

regional market analysis, administration of their contracts,

energy supply dependency on the US is substantial,

support in their strategic planning or quantitative solutions

including about half of Mexico’s gas consumption and

for specific problems.

nearly 50 percent of our gasoline. On the other side of the coin, Mexico is the first customer of US exports of

Q: In which areas does SAI see opportunity and what are

natural gas and gasoline. Shifting the supply to another

the challenges to seeing those through?

country of the massive amount of trade between the US

A: For upstream oil and gas, just looking at the official

and Mexico is difficult, or impossible in the case of natural

reports it is clear that the largest hydrocarbon reserves

gas. Our dependency is high but so is the dependency of

and potential resources in the country are located not in

US companies on the Mexican market.

deepwater deposits but onshore, such as Chicontepec in the Tampico-Misantla Basin. Companies that want to work onshore face the problem of dealing with legal and social

SAI Derecho & Economía is a Mexican law firm and

issues related to land management and to the so-called

economics consultancy with over 20 years of experience

“social license to operate,” areas in which Mexico still faces

in the business sector, working for both national and

considerable challenges.

international companies

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VIEW FROM THE TOP

FINANCIAL HELP FOR MIDSIZE COMPANIES HĂ&#x2030;CTOR ARANGUA Partner at Nader, Hayaux & Goebel

358

Q: What separates NHG from its competitors in Mexico?

the Mexican Stock Exchange (BMV). Banking institutions

A: NHG is a law firm with full knowledge and experience in

are trying to do business by financing infrastructure and

the transactional and corporate finance area. The market

they are increasing their participation in the financing of

has acknowledged our expertise in these areas as well as

projects. As for private equity, Mexico has a really useful

our commitment to go the extra mile to keep our clients

tool called CKDs. There are also global private equity

happy and protect their interests. We prefer to work on

funds focusing specifically on Latin American and Mexican

sophisticated transactions with a focus on innovation. These

projects. We can help companies work with any of these

are the kinds of deals that make us different. Due to this

three financing tools due to our broad experience with

approach we have been recognized by the Financial Times

structured financing, M&A and capital markets.

as one of the most innovative law firms in Mexico. NHG has special M&A transactional experience and banking

Q: What blind spots do you detect in Mexican oil and gas

and finance experience. On the energy regulatory side,

regulations?

we track legal developments to garner knowledge and

A: Current regulations have, as all new regulatory frameworks

understanding of regulations and can have a fluid discussion

do, issues that need to be solved. In this regard, CNH, CRE,

with authorities such as the Ministry of Energy, CNH, CRE

ASEA and the Ministry of Energy have accomplished a lot

and ASEA to offer more value to our clients.

by stating regulations and approaching players to ask for feedback, allowing for a positive and transparent dialogue.

Q: What specific opportunity do you can see in the Mexican

They are all open to improving the regulation and to moving

energy market?

forward with an active agenda. In my opinion they should

A: At this time and due to the lack of an efficient

focus their next steps on strengthening the whole legal

transportation and storage system, many refined products

framework.

such as gasoline and diesel are transported via trucks, which is an inefficient and expensive transportation system.

Q: Which customers are most attractive for NHG?

New regulations will be required to increase inventory

A: NHG likes to work with companies from beginning to end

and storage infrastructure in Mexico to avoid potential

by obtaining permits, allowing clients to merge and establish

shortages. Storage and the construction of pipelines are

joint ventures, acquiring financing and offering many more

hot topics and will require billions of dollarsâ&#x20AC;&#x2122; worth of

transactional services. Financing is one of our specialties.

investment. We are therefore analyzing the economic and

Multinational companies tend to have in-house counsel

regulatory framework in this area to help companies finance

departments with diversified services and 200-300 lawyers

such infrastructure projects.

highly specialized in public bidding and contracts. If they do need us, we will be happy to work with them but we want

Q: What kind of financing tools have been successful in

to focus on clients that require innovative solutions, such as

the Mexican market?

the midsize companies from Round 1.3. We can offer them

A: There are three main financing tools that have been

experience from our many years working with PEMEX and

successful here. One is banking, another is private equity

its contractors. We know the region and the market and

and finally the public markets via the issuance of bonds on

can give them a competitive advantage as they integrate into the Mexican market. Law firms usually wait for clients to come with questions and work proposals. We are not like

Nader, Hayaux & Goebel (NHG) is a Mexico City and London-

that. NHG likes to contact prospective clients at an earlier

based law firm specializing in corporate and financial

stage and offer them the possibility to expand their business,

counseling, with an emphasis on M&A, energy, banking and

by knowing and connecting them with other companies to

structured financing deals

create added value and synergies.

INSIGHT

CONSULTANCY EVOLVES INTO INVESTMENT FUND JOSÉ RINKENBACH Founding Partner at Ainda Consultores

That PEMEX does not have a team devoted to dealing with

sectors. “Ainda offers expert knowledge of the Mexican

third party business interests is a red flag for the former

industries and Goldman Sachs offers its strength as one of

monopoly and it could also face difficulties working as

the largest investment funds in the world,” Rinkenbach says.

an equal as it turns itself into a productive and profitable

The investment fund will work based on CKDs, which are

company, according to Mexican consultancy Ainda

financial instruments used by the Mexican Stock Exchange

Consultores. PEMEX is used to subcontracting and ordering

to fund projects in sectors with long-term investment

companies rather than working as equal partners, says José

perspectives. “Ainda will be like a private equity fund but

Rinkenbach, Founding Partner at the consultancy.

public,” says Rinkenbach.

“PEMEX’s objective is to become a profitable company. It

Investment in the oil and gas sector is where most of the

might sound like a simple idea but it is a complex change

firm’s business will come from in the coming years and it

to make,” Rinkenbach warns. While much attention is being

has enlisted a high-profile list of industry experts to form

paid to the alliances PEMEX will form, there is not enough

its investment committee. The investment fund will focus

focus on the rest of its business. “When it comes to alliances

on production, rather than exploration, due to the financial

PEMEX should focus on deepwater because this is where it lacks experience and knowledge,” he says, but adds that most of its focus should be on the areas where it can be profitable independently. The state-owned company “should channel the majority of its resources into offshore shallow waters and southern areas with light crude oil reserves.” Rinkenbach also points to the cultural mindset at PEMEX as a challenge. “PEMEX is on a good path with the alliances it is making,” he says. “But the real challenge is the shift in cultural mindset that is required for it to be successful.”

“

risks involved in purely exploratory projects.

PEMEX should channel the majority of its resources into offshore shallow waters and southern areas with light crude oil reserves”

Rinkenbach also believes that service providers to the

The company executive says alliances are also a key to

upstream sector should “integrate vertically to create

the success of the consultancy’s own agenda as Ainda

conglomerates and expand their services to the entire

Consultores applies its “Mexican-specific know-how” in the

E&P value chain,” as the industry has shifted its priorities.

newly opened oil and gas market while taking on a new

While in the past the company with the lowest bid would

direction. Historically focused on offering consultancy

often win a contract, today efficiency and productivity

services to oil and gas companies, the firm is now diversifying

takes precedence. Integrated solutions increase a service

with the ultimate aim of becoming an investment fund

provider’s ability to attain this, he says.

centered on long-term energy and infrastructure projects. “Our philosophy is partnering up. This will be key to taking

As well as betting on the investment potential of Mexico’s

on these big tasks,” Rinkenbach says. Alliances, he added,

oil and gas industry, Ainda Consultores is counting on the

are one of the best leverages for this.

country’s talented people. “We are taking our investments in Mexican human capital very seriously,” Rinkenbach says,

Ainda made a big step toward this goal in January 2016

with initiatives such as an executive course organized by the

when it signed a deal with Goldman Sachs’ Merchant

firm and delivered at ITAM. “Twenty-nine people graduated

Banking Division to make joint investments in the oil and gas,

last year from the program, which focused on investment in

power generation, transportation and water infrastructure

exploration and production projects.”

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INSIGHT

A CENTURY OF MEXICAN MARITIME EXPERIENCE DANIEL RUIZ CEO of Tomas Ruiz

As Mexico opens its waters to foreign oil operators for the first

In a field crowded with competitors both local and foreign,

time, local shipping agencies are set to become important

Ruíz references the advantages of choosing a Mexican

points of reference for naval companies in need of Mexico-

agent over an international one. Regulations and practices

specific knowledge and experience, says Daniel Ruiz, CEO of

can vary across Mexican ports, so it is vital to enlist the

Coatzacoalcos, Veracruz-based Tomas Ruiz, a family-owned

assistance of local agents who are familiar and can deal with

firm with close to a century of representing the owners of

the particularities and requirements of the local authorities.

vessels in Mexican waters.

Another important factor to take into account are the connections a shipping agent has with others across the

360

Shipping agents, Ruiz says, are primarily problem solvers

country. Tomas Ruiz has a comparative advantage in this area

whose services are most required when an issue arises. “It

because as well as representing vessel owners, the company

is easy to be an agent when everything is going well but

uses its close links to maritime authorities nationwide to

when something goes wrong, things change,” he adds.

connect clients with the people who can help them, Ruíz says.

Expertise is the main factor for companies when deciding on which shipping agent to rely on. Promptness is another

Links with other companies is something Tomas Ruiz’s CEO

key because clients can be assured that Tomas Ruiz will be

hopes to expand in the coming years. “We are definitely

on hand 24 hours a day. In urgent situations, it is the vessel

open to partnerships with international companies,” he says,

owner who needs to be kept up to date. “As agents, we must

pointing to a past project with Kuehne + Nagel as evidence of

be constantly available for our clients, even if they call at two

the firm’s determination to get involved in private initiatives.

“

o’clock in the morning.”

Since the reduction in vessels arriving here we have to adapt to new trends, and sell our expertise instead”

At the moment, the agency is working with CFE on a pipeline that will run from Brownsville in southern Texas to Tuxpan in Veracruz. Ruiz describes his agents’ detailed industry knowledge as the reason for their involvement with CFE, which asked them to complete 60 pages of questions about the project. Ruiz also cites gasoline storage as a potential future area of opportunity due to new entrants such as OXXO. “Although PEMEX will continue importing gasoline due to the cost of

Founded in 1909 in Coatzacoalcos, the company is

revamping refineries, in five to 10 years, this new competition

managed by third and fourth generation descendants of

will open up a need for storage space due to the country’s

its original founders. Ruiz highlights values that reflect the

lack of infrastructure,” he says. This, he says, may even present

firm’s familial roots, defining their most important qualities

an opportunity for PEMEX to rent out its tankers.

as “expertise, honesty and communication.” The firm operates across four Mexican ports: Coatzacoalcos, Dos

Tomas Ruiz is getting more involved in similar ventures,

Bocas in Tabasco and Cayo Arcas in Campeche, all three

selling its industry know-how rather than solely providing

in the Gulf of Mexico, as well as Salina Cruz in Oaxaca’s

shipping services. “Since the reduction in the number of

Mexican Pacific Coast.

vessels arriving here, we have to adapt to new trends and sell our expertise instead,” Ruiz says. The company is showing

Cayo Arcas and Dos Bocas are Mexico’s main oil exporting

its adaptability by positioning itself as an obvious choice for

ports, handling most of the country’s close to 1.2 million b/d

incoming private companies looking for dependable and

of crude sales to the international market in 2016.

expert shipping agents.

VIEW FROM THE TOP

INSURANCE AS THE STAKES GET HIGHER JUAN SEGURA President and Director General of Aon Risk Solutions Mexico

Q: How is Aon changing its views and practices to deal

has always issued subcontracts on behalf of Mexican and

with the complex environment stemming from the

foreign companies for different services. Thus, the Mexican

market’s opening?

reinsurance market grew to respond to the also expanding

A: The Energy Reform is undoubtedly a major shift that totally

oil and gas market’s needs. Aon Mexico’s expertise and

modifies the way energy companies do business in Mexico.

capabilities increased accordingly, both in insurance and

This situation is further impacted by the need to comply with

reinsurance consulting services. We are reinsurance brokers

local regulations. Additionally, as technology advances and

and advisers for offshore oil platforms, drilling contractors,

allows access to more remote and geographically complex

storage tanks, well control contractors and major integrated

locations, the investments required and risk exposure

companies, whether upstream, midstream and downstream.

increase exponentially. The shift from shallow to deepwater exploration and drilling alone has extended exploration and

Q: What challenges does the development of a Mexican

production periods to eight to 10 years in length. And as we

deepwater industry present to insurance companies?

know, the industry is relying on deepwater exploration to

A: The development of a deepwater industry is definitely a

boost production in the long term.

major challenge for the Mexican insurance market, considering that the Mexican side of the Gulf is mainly an unexplored area.

Given these major changes, the industry requires expert

The initial factors that will impact insurers and reinsurers will

advisers not only for the new global players but for many

be the high exploration costs this will involve and the length

other contractors that previously worked for PEMEX and that

of the projects. The high and long-term exposure will increase

now have the opportunity to operate oil or gas fields and

the uncertainty for potential Mexican carriers to underwrite

grow their business significantly.

the risks and provide coverage. On the other hand, the global reinsurance market’s soft trend with no obvious signs of an

While our customers benefit from being represented by

upturn in prices will counteract the local market’s position.

the largest and most focused broker in the energy industry,

The main challenge will then be to achieve price stability for

both in Mexico and globally, the industry’s evolution in

insurance policies as the deepwater industry evolves from

Mexico requires global experience with local service and

exploration to production.

capabilities. Anticipating these changes in the industry for many years, Aon has been working on strengthening our local

Aon’s local and global experience in the energy industry will

capabilities and services. We have been working to provide a

allow us to foster and lead the approach to new requirements

more focused and accurate approach to the evolving needs

and challenges. By working with the largest exploration and

of energy companies, new industry regulations and stricter

drilling companies in the world as well as with the top global

environmental and legal repercussions, among others. In

carriers (reinsurers and underwriters), we have access to

addition to ensuring the continuous preparation, education

firsthand information on deepwater, such as updated data,

and updating of our local Energy Practice teams, we have also

lessons learned, best practices and problems encountered.

partnered with specialized and leading firms to complement

We can secure the best options for our clients, keep them

our capabilities and provide specialized advice on legal

updated with information about their industry and approach

matters or to provide automatic underwriting capabilities.

the market strategically with mutually agreed goals.

Q: How does a company like Aon insert its services into a market that is not very familiar with reinsurance?

Aon is a global provider of risk management, insurance

A: Mexico has always had an important energy industry

brokerage, reinsurance and human capital solutions. Through

with specific and varied reinsurance requirements. Although

its more than 72,000 employees around the world, Aon unites

only PEMEX owned and operated oil and gas projects, it

to leverage its customers’ results in more than 120 countries

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VIEW FROM THE TOP

INDUSTRY CHANGES NECESSARY TO DRIVE PRODUCTION GRACIELA ÁLVAREZ CEO of NRGI Broker

Q: What capabilities has NRGI developed over the past 25

At NRGI Broker we have contributed our knowledge and

years and what is its core value proposition?

experience to ASEA on a consultancy basis and we have

A: We are responsible for insuring the main contractors

also been responsible for insuring winners of Round One.

in the PEMEX E&P marine area. This stems from the

362

moment PEMEX began its decentralization and in the

Q: What are the insurance, operational, safety and technical

initial exploitation of the Cantarell well, one of Mexico’s

challenges faced by Round 1.4’s winners?

largest. This provided us with valuable experience and the

A: Deepwater operations are new for Mexico and they carry

management capacity that is our competitive advantage

great challenges in industrial safety and environmental

today. As well as allowing us to offer a value proposition

protection. We must remember that the oil and gas industry’s

to new players and become designated ASEA consultants,

worst disasters have happened at sea, as was the case with the

it also allows us to have command of the rules operators

fire and explosion on the Deepwater Horizon platform. This

must comply with.

catastrophe had serious environmental consequences. The experience allows us to envisage the challenging environment

Q. What insurance trends have emerged with the opening

for deepwater operators and for regulators to ensure activities

of Mexico’s oil and gas market?

are carried out under best international practices.

A: The Energy Reform is fostering a huge transformation across the industry. Although the results will not be

Q: How do the insurance needs of companies differ in

evident in the short term, these changes are necessary

onshore, shallow waters and deepwater?

to modernize Mexican oil and gas facilities and to drive

A: There are no significant differences between the

the drilling of new offshore wells and increase production

insurance coverage needs of operators onshore compared

at onshore fields.

with shallow waters, deepwater or ultra-deepwater operators. Normally, the latter are more complex and

In terms of insurance, one of the biggest changes arising

therefore require higher insurance additions because they

from the reform is the establishment of mandatory insurance

also require insurance for special boats and equipment used

for companies looking to explore and extract hydrocarbons

in maritime operations.

in the country. Operators must have insurance covering civil and environmental responsibility, with the objective of

Q: What solutions does NRGI offer companies entering

protecting people, facilities and the environment.

the onshore market? A: Every operator has different needs corresponding to

The insurance sector must respond to the insurance

the specific characteristics of its block. At NRGI Broker we

needs of private companies and offer an integral scheme

customize comprehensive insurance plans specific to the

that includes specific coverage and amounts. This

location, depth and drilling of the well, the duration of the

must encompass not only traditional industry coverage

work plan and other factors.

like construction, drilling and well control, vessel and equipment insurance but also insurance, which new

Q: How does NRGI Broker work directly with clients on risk

regulations deem mandatory.

management and mitigation? A: We do not attempt to replace our clients’ risk management and regulation compliance divisions but we do try to act

NRGI Broker specializes in insurance and surety bonds for the

as a facilitator to help them comply with the applicable

Mexican energy sector. It develops custom-made solutions for

rules regarding environmental baselines (LBA) or the

companies operating in the energy sector, including vessel,

implementation of the Environmental Protection, Operative

construction and engineering and catastrophic risk

and Industrial Safety Administrative System (SASISOPA).

INSIGHT

INSURANCE ONLY AS GOOD AS THE BROKER

Gustavo Moreno Director General of Sespec

Armando Moreno Commercial Director of Sespec

The fact that Mexican industrial companies are paying

the effects of climate change and aging infrastructure,

their premiums to their insurers does not mean they are

both executives consider risk management strategies

doing all they can to prevent incidents from damaging their

of the utmost importance for a company’s success.

operations, says Armando Moreno, Commercial Director

“All companies need to know that risk management

of Sespec, a Mexican company with more than 30 years’

consultancy is going to help them reduce insurance costs

experience in risk management across a range of industries,

and the chance that an accident happens,” says Gustavo.

including petrochemicals, mining, automotive and tourism. Lower insurance premiums are not the only financial Moreno and his brother, Sespec’s Director General Gustavo

advantage that Sespec’s service offers. “We can also help

Moreno, are experts in managing risk and providing insurance

companies to be more profitable by extending the lifespan

brokerage services to companies involved in complex and

of our client’s assets,” Sespec’s Director General says.

technical projects. They have successfully helped insure

Through careful assessment of a firm’s infrastructure and

much of Mexico’s infrastructure during the past decades.

the risks involved, Sespec compiles big data spanning a

As the oil and gas market opens to private companies for

company’s entire operations. This allows them to identify the

the first time, the brothers highlight the vital importance of

extent of maintenance work different assets require, helping

risk management practices and explain why the services

companies to assign their budget in the most efficient and

offered by Sespec will be indispensable for any oil and gas

accurate way. Careful monitoring of infrastructure also

company hoping to capitalize on Mexico’s Energy Reform.

promotes higher safety standards and prevents unnecessary downtime, and more importantly, serious accidents.

“An insurance company is only as good as your insurance broker,” Gustavo says, highlighting that a company will pay

Risk management is vital to prevent losses that insurance

less in insurance premiums if their broker knows how to

alone cannot replace. “In every accident, there are additional

correctly manage risk and negotiate.

costs which insurance companies are not able to cover,” says Gustavo, referring to the loss of human life, environmental

As a risk management and brokerage firm, Sespec takes a

damage and permanent market losses. It is here where

background role in the insurance process, first working with

risk management professionals step in to fill the gap that

its clients to identify and analyze a company’s risks, then

insurance firms cannot, putting preventive procedures in

developing prevention programs to mitigate or eliminate

place before the worst occurs. Tragic accidents over the

them. Their service primarily helps companies obtain the

past years in the Mexican oil and gas industry are a stark

most adequate and cost-competitive insurance premiums,

reminder of the need for the type of service Sespec offers

while also increasing their profitability and reducing the

and the ultimate cost companies pay if they don’t invest in it.

chances of serious accidents. Past successes include halving the insurance premium paid by the federal government to

Public infrastructure in Mexico is getting older, so the risk

insure Mexico’s highways.

attached to them is increasing, says Armando. The stringent government budget cuts in recent years are an additional

Sespec identifies risk based on two variables: sensitivity

reason to invest in insurance and risk management, he

and location. Assessing sensitivity involves determining

argues. “The less money there is, the more need there is to

the state of an asset and the likelihood of any failing or

maintain your assets” and avoid larger costs.

potential maintenance work, while surveying location involves determining the hostility of an environment.

Sespec prides itself on an expertise honed over decades of

With so many risk variables to take into account in the

experience and says its unique combination of engineering,

Mexican oil and gas industry, such as fluctuating oil prices,

insurance and risk management experience sets it apart.

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GROWING COMPANIES WILL NEED RISK STRATEGIES Michael Günther Director of Energy and Infrastructure for Marsh Brockman and Schuh

364

Sebastian Aguayo Subdirector of Energy, Marine and Aviation for Marsh Brockman and Schuh

Q: How advanced is the Mexican oil and gas industry’s

MG: International oil Majors approach risk management

approach to risk management?

differently. When Marsh Brockman and Schuh helps IOCs with

MG: Marsh Brockman and Schuh knows PEMEX’s approach

risk management, we talk about risk transfer and risk financing.

well and we think it has a very good risk management

Buying an insurance policy is a way of financing risk but it is

strategy. Compared to other Mexican companies, the NOC

not the only way. Very big companies tend to operate with

has an effective structure in place to deal with risk. Round

insurance captives, which is a fully-owned insurance company.

1.3 saw the entry of many new Mexican companies into the

In the open market, they only buy insurance coverage well in

market, in most cases in joint ventures with Canadian or US

excess of what they are retaining. Companies do this based

companies. Even though they are small now, they are the

on their extensive experience investing worldwide. Creating

future Mexican oil producers and will grow in size. They will

and managing an insurance captive is a specialized field in

also need risk management processes. On the other hand,

insurance and smaller companies do not require one.

the deepwater round welcomed international oil Majors that understand risk management very well already.

Q: How do Marsh Brockman and Schuh’s products and services add value to a clients’ cost-efficiency, safety and

SA: The Mexican oil and gas market is about to welcome

productivity?

many new players as operators. It is a great opportunity

MG: Marsh Brockman and Schuh has thousands of oil and

for these new companies to incorporate advanced risk

gas clients around the world. Every company is different

management into their DNA.

but they always compare in terms of managing risk and insurance limits. Marsh Brockman and Schuh’s size and

Q: How does Marsh Brockman and Schuh persuade clients

expertise mean we can provide this comparative data very

to see risk management as an investment rather than a cost?

quickly. Marsh Brockman and Schuh has followed the global

MG: Marsh Brockman and Schuh carried out a study two

insurance industry trend of building up a very large database

years ago analyzing the loss statistics of the global oil and

that allows us to monitor trends. We offer different services

gas industry over the last 30 years. The study found a strong

around Big Data analysis, helping companies discover the

correlation between the dates of main losses and falling oil

optimum premiums for their operations. Marsh Brockman

prices. Significant peaks in worldwide oil and gas claims

and Schuh offers specialized engineers who can help

followed around six months to one year after the prices

our clients with Probable Maximum Loss Studies (PLMS)

fell. While it is not the only factor, the study concluded that

should they lack the in-house knowledge. We also offer

companies who enter into heavy cost-saving programs

claim-recovery services that help companies recover losses

because of low crude prices also cut maintenance costs and

quickly and get the most money back.

lay off experienced people. We do not have a crystal ball but we warn clients about the possible results of cost-cutting

SA: Marsh Brockman and Schuh’s goal is to become an

strategies on their financial outlook.

outsourcing solution for the risk administration needs of new companies entering the Mexican oil and gas industry.

Q: Who will disseminate risk management knowledge to

As well as providing their insurance policies we offer a range

new Mexican companies?

of additional services on top of the original transaction, like

SA: To achieve international standards new operators can go

ensuring the policy complies with Mexican regulations. This

it alone or ask an IOC for help, which will happen naturally

guarantees the policy will be approved, lowering the trial

in joint ventures. Or they could also come to specialists like

and error nature of the whole process and in turn increasing

Marsh Brockman and Schuh. We can inform our clients about

efficiency. Marsh Brockman and Schuh goes into the process

what their competitors are doing in other countries, because

as if we were a participant, asking all the questions of our

we interact with many companies in more developed regions.

clients to ensure we offer the best service.

Q: How effectively have Mexico’s oil and gas authorities

Q: How will Marsh Brockman and Schuh’s 3D Plan boost

considered risk in the terms of each licensing round?

demand in Mexico over the coming years?

SA: There is significant focus on safety and security,

MG: Marsh Brockman and Schuh’s 3D Plan is an approach

environmental preservation, liability assignment and

that is about listening to the client before we create or

corporate responsibility in the contracts produced to

sell an insurance policy. We find out the client's concerns,

date. Mexico is not starting from zero in this area because

goals and the risks involved. We use our Big Data

we have examples from around the world to work with.

solutions to design a tailormade insurance policy. This

The authorities have been successful so far but the real

process is especially important in the oil and gas industry

challenge for them will be to ensure the regulations are

where the stakes are high in terms of environmental and

being supervised and enforced effectively.

financial losses should anything go wrong.

Q: What gaps do you detect in the Mexican oil and gas insurance market? MG: When PEMEX held a monopoly over the market it had its own insurance, so there was no need for the development of an oil and gas insurance market here. The key region for analyzing oil and gas risk is still in London and there are few Mexican oil and gas underwriters. This could lead to the need to bring international knowledge to Mexico.

When PEMEX held a monopoly over the market it had its own insurance, so there was no need for the development of an oil and gas insurance market

Operator Extra Expense cover is an example of where

SA: Marsh Brockman and Schuh expects to see an

foreign knowledge could help in Mexico. This coverage

increase in demand for our 3D Plan. Existing companies

is required by law and ASEA requires each winner in the

are increasing their service offerings and becoming

licensing rounds to have this coverage but a local market

more integrated, while IOCs are establishing offices

for this type of cover does not exist. A company can get

here in Mexico because they want to capitalize on the

a local policy but only by going to London to sit down

opportunities of the opening market. Capital is being

with the experts who really understand the risks involved.

deployed by firms and Mexican entrepreneurs and there are many opportunities both in upstream with Round

Mexican authorities know the insurance market in

Two and in downstream with the opening of the gasoline

Mexico needs to evolve. Minimum coverage limits can be

market.

expensive but authorities offer the option to reduce the limits greatly if the client provides a Probable Maximum

Q: How has Marsh Brockman and Schuh’s merger with

Loss Study. Specialized engineers are required for these

Mercer brought you closer to your clients and helped

studies and ASEA will need to look abroad to source

retain talent?

this talent.

SA: As human resource specialists, Mercer has accumulated a lot of knowledge about that side of the

SA: Although they have been consulted and have given a

oil and gas industry, while Marsh Brockman and Schuh

nonbinding opinion on the matter, the National Insurance

brings physical and technical expertise to the table. The

Commission (CNSF) should be playing a bigger role.

combination of our knowledge allows us to approach oil

Mexico is currently following the US licensing model but

and gas companies from almost all angles.

the authorities are not involved enough in the process. MG: Marsh & McLennan Companies (MMC) formed a Q: How could local and international oil and gas insurers

group to offer a breadth of services to the oil and gas

work together to improve the market in Mexico?

industry. Each segment deals with a different party in our

MG: Specialized insurance for oil and gas is available

clients’ companies. While Mercer approaches the human

all over the world, and Lloyd’s of London is a premium

resources department, Marsh Brockman and Schuh deals

market place. They have syndicates registered in Mexico

with CFOs and treasurers, meaning we can see companies

so these coverages are available through reinsurance

from many angles.

here, but the majority of the underwriting for these oil and gas insurances is performed outside of Mexico. International and Mexican insurance companies should

Marsh Brockman and Schuh is the world’s leading company

collaborate to find common interests and work together

in insurance consulting and risk management, with offices in

to develop the necessary local knowledge in insurance

130 countries, including Mexico, and an oil and gas practice

proceedings.

offering personalized solutions for all aspects of the industry

365

Sapura Energy Laying pipeline KMZ-76, Ciudad del Carmen, Campeche, Sapura Energy

FUTURE OUTLOOK

With oil prices making a comeback in the market largely thanks to OPEC’s agreements and international cooperation, the industry has an opportunity to consolidate the Energy Reform’s promise and jump into a new era of productivity. Authorities, now threading more easily into their new roles, are proving to be key players in the successful evolution of this new Mexican oil and gas era. With Round One behind and Round Two becoming a reality, the official opening of the market to private participation begins to throw a light onto the new configuration of the Mexican oil and gas industry and what it should look like in 2018.

This chapter discusses Mexico’s position internationally and looks at the potentially critical events on the horizon for clues about where the industry should be looking next. The industry’s leading voices share their insights, while delving into ways the industry can turn challenges to advantages.

367

CHAPTER 14: FUTURE OUTLOOK 370

VIEW FROM THE TOP: Aldo Flores, Ministry of Energy

372

MAP: Areas Included in the Five-Year Plan

374

VIEW FROM THE TOP: Pedro Joaquín Coldwell, Ministry of Energy

375

VIEW FROM THE TOP: Carlos de Regules, ASEA

376

VIEW FROM THE TOP: José Carrera, PEMEX

377

INSIGHT: Nicolás Borda, Haynes and Boone

378

VIEW FROM THE TOP: Jorge Leis, Bain & Company

379

VIEW FROM THE TOP: Ernesto Marcos, AMESPAC

380

VIEW FROM THE TOP: Luis Vielma, CBM

382

VIEW FROM THE TOP: Palma Mendez, Wood Mackenzie

383

VIEW FROM THE TOP: Ixchel Castro, Wood Mackenzie

384

VIEW FROM THE TOP: Benjamín de la Cueva, Golfo Energy

385

VIEW FROM THE TOP: Thibaud Cadieu, NES Global Talent

386

VIEW FROM THE TOP: Yisel Varela, Access to Energy

Alejandra Bueno, Access to Energy

388

VIEW FROM THE TOP: Luis Puig, Petroexpertos 5000

389

VIEW FROM THE TOP: Johannes Hauser, Mexican-German Commerce

and Industry Chamber (CAMEXA)

369

VIEW FROM THE TOP

A BRIGHT FUTURE FOR OIL AND GAS ALDO FLORES Undersecretary of Hydrocarbons at the Ministry of Energy

Q: What did the Energy Reform accomplish before you

by industry participants. Another important change is

started as Deputy Secretary of Hydrocarbons in August

the streamlining of the bidding process itself, including

2016 and how did this shape your priorities?

the simplification of requirements for participation and

A: The Energy Reform’s main, early achievement was the

nominations. Furthermore, we standardized the bidding

approval of a new legal and institutional framework that

schedule, and will hold two bidding cycles per year. This

helped launch the country’s exploration and production

allows us to speed up the process to get to greater volumes

strategy, as embodied in the first three bidding cycles of

of production and exploration.

Round One. That in itself was a major achievement that Q: What are the main parameters that you would use to

years. I began participating during the deepwater bidding

describe the success of Round One?

cycle of Round One. The experience of the initial three

A: The main purpose of Round One was to establish the

cycles, plus the new framework, informed our thinking about

seriousness and credibility of Mexico’s new E&P institutions.

the next stage of our E&P strategy. The lessons learned

For me, Round 1.1 was a success because the authorities

helped us improve the contractual structure included in our

showed they were competent, transparent and scrupulous.

new Five-Year Plan and streamline our processes. Indeed,

We applied the lessons learned to the next bidding rounds

we are moving from innovation to standardization, which

and cemented the country’s reputation as a principal

is a main priority.

destination in the global oil and gas market. The extent to which we keep attracting competitive, global companies

Q: What are the most important changes in the new Five-

that are willing to risk their talent and resources to

Year Plan?

participate in Mexico will be an ongoing measure of success.

A: The new Five-Year Plan deploys a strategy to bolster E&P companies’ confidence for continued investments in

Q: What are the main concerns for potential operators

Mexico. A key change is the opening of the full portfolio

about future rounds and how are you addressing those?

of 509 blocks and 82 production fields to nomination

A: From the beginning, we have been responsive to the private sector’s concerns. This has helped us identify opportunities for improving the structure of the rounds and contracts. We will continue doing so. Naturally, the

2.196

2.072

2.037

2.006

1.944

2.267

emphasis has shifted from reaffirming our commitment to 2.130

2.429

2.5

2.522

2.553

2.548

2.577

2.601

PEMEX CRUDE OIL PRODUCTION (million b/d) OIL PRODUCTION

implementing the Energy Reform to discussing specific aspects of the implementation process. We will continue to engage with the private sector and industry experts to make sure that we have the most competitive framework possible.

1.5 1

Q: What can be done in the short term to make more progress towards production, reserve replacement,

0.5

investment and local content targets for upstream?

Business Plan Source: PEMEX

Improvement

2021

2020

2019

2018

2017

2016

2015

2014

2012

2013

2011

2010

0 2009

370

changed the energy sector as we knew it for almost 80

A: The licensing rounds are among the necessary steps to achieve more exploration, more production and more demand for domestic services and supplies. Two and a half years ago, there was only one operator, while now we have almost 50 with signed contracts. This first step was

essential to increase levels of investment in exploration

production potential up for auction, creating incentives

and production. The new Five-Year Plan is our strategy to

for the construction of storage and transportation

leverage market dynamics, through the nomination process,

infrastructure and improving the quality of downstream

to speed up investments, production, reserve replacement

services by creating a market that is driven by the right

and achievement of local content targets.

incentives and prices for projects to be developed.

Q: What can be done from a policy perspective to

We hope to launch an unconventional resources round

accelerate PEMEX’s progress in transforming its 83 percent

by the end of 2017, provided the regulation and other

share of 2P reserves into tangible production increases?

elements needed to move forward are in place. We broke

A: The policy framework is designed to help PEMEX use

new ground in this process so we have had to spend a

migrations to attract technical expertise, cutting-edge

considerable amount of time making sure the regulations

technology and fresh financial resources. PEMEX has over

and contractual structure for these types of blocks are

400 asignaciones, the resources awarded to it in Round

ready. In any case, we are accepting nominations for

Zero. The company is already bringing its acreage into the

unconventional onshore and offshore blocks and we

competitive field through migrations to the contracts regime.

expect to make the announcement in June.

Q: How can the success of the Trion farm-out and its

Q: Is there willingness to offer more generous terms to

implementation be a stepping stone to accelerating the

accelerate the development of the natural gas sector?

farm-out process?

A: We have adjusted the contractual terms according to

A: The Trion farm-out confirms that partnerships are an

the risk-reward opportunity of projects. The royalties for

effective vehicle for bringing in resources, technology,

deepwater projects are different from those for shallow-

expertise and talent that complement those of PEMEX.

water or onshore blocks. Risk matters, the size of the block

Trion is already a pillar of success considering the amount

matters, so all of this will be factored in.

of investment it will bring. There will be more farm-outs in the year ahead and I am very optimistic that they will draw

Q: What role will local content play in the development

significant attention considering the resource base involved

of the supply chain and are the requirements moving

and PEMEX’s own expertise.

targets? A: Mexico already has a diversified supply chain that

Q: Some have argued that it would have been more

developed alongside PEMEX. As demand for local services

beneficial for Mexico if the work program had had a larger

and supplies increases, I am confident we will see new

weighting in the bidding process for Round 1.4. What is

investments made to meet the sector’s sophistication and

your view?

standards competitively. We are seeking to have foreign

A: Naturally, there are different viewpoints on what the

sourcing complement local content providers and have set

best way to balance these two key variables and we

up a progressively ambitious schedule to meet local content

are evaluating the trade-offs. A case can be made for

requirements. We also introduced flexibility in this schedule

emphasizing the work program but it must also make a

to differentiate onshore and shallow-water projects from

convincing argument to allay the concerns of securing the

more complex deepwater and unconventional ones, as well

state’s income through royalties. We will continue to revisit

as the projects’ life cycle needs.

this subject as we improve the contractual framework and the awarding formula.

Q: When should we expect reserves replacement to reach 100 percent again?

Q: The Energy Reform will likely be a key topic in the

A: Like the rest of the industry, PEMEX’s investment

upcoming presidential elections. How might this influence

in reserve replacement dipped during the downturn

the next rounds?

in international oil prices but it has since stabilized and

A: The implementation of the reform will be completed in

PEMEX’s replacement rates are improving. Also, with the

2017, with the opening of all the energy markets. We have

private sector’s help, we should see improvements even

already set up a schedule for the upstream bidding cycles,

sooner. It is important not to confuse a short-term trend

all of which will be launched before the election takes place.

with a long-term plan.

Q: Following the cancellation of Round 1.5, what role should unconventional resources play in Mexico’s natural

The Ministry of Energy is charged with executing energy

gas strategy?

policy to ensure the competitive, sufficient, high-quality,

A: Our natural gas strategy involves the full value chain,

economically viable and environmentally sustainable supply of

which means putting more blocks with natural gas

energy required for the development of the nation

371

MAP: AREAS INCLUDED IN THE FIVE-YEAR PLAN DEEPWATER

Sector

372

Type

Prospective Volume (million boe)

Remaining Volume (million boe)

Area (km2)

Number of blocks

Perdido Area

Exploration and Production

1,661.6

36,860.7

Cordilleras Mexicanas

Exploration and Production

2,130.0

33,171.8

Salina del Istmo

Exploration and Production

2,802.7

47,191.0

Salina Basin

Production

500.1

102.3

Sector

Type

Prospective Volume (million boe)

Remaining Volume (million boe)

Area (km2)

Number of blocks

SHALLOW WATERS

Burgos Shallow

Exploration and Production

1,289.7

21,075.4

Tampico-MisantlaVeracruz

Exploration and Production

1,477.9

217.1

16,249.0

Shallow Southeast Basin

Exploration and Production

787.5

743.4

10,671.1

Shallow Southeast Basin

Production

17,874.2

1,050.2

Salina Basin

Production

2.9

34.5

Source:CNH

UNCONVENTIONAL ONSHORE

Sector

Type

Prospective Volume (million boe)

Remaining Volume (million boe)

Area (km2)

Number of blocks

Sabinas-Burgos

Exploration and Production

7,560.3

452.9

19,271.6

Tampico-Misantla

Exploration and Production

23,766.7

20,869.7

23,693.0

Tampico-Misantla

Production

5,633.8

486

CONVENTIONAL ONSHORE

Sector

Type

Prospective Volume (million boe)

Remaining Volume (million boe)

Area (km2)

Number of blocks

Sabinas-Burgos

Exploration and Production

440.0

296.3

10,165.7

Tampico-Misantla

Exploration and Production

5.6

67.2

2,172.4

Veracruz

Exploration and Production

176.1

41.0

5,761.3

Southeast BasinChiapas

Exploration and Production

582.8

125.9

10,382.8

Sabinas-Burgos

Production

49.8

120.6

Tampico-Misantla

Production

8.7

34.8

Veracruz

Production

14.5

Southeast BasinChiapas

Production

692.8

423

373

VIEW FROM THE TOP

MINISTRY HOPES BIDDING ROUNDS CEMENTS ITS LEGACY PEDRO JOAQUÍN COLDWELL Minister of Energy

374

Q: What role will farm-outs play in PEMEX’s overall

to be of interest. We continually promote the exchange

future and how can the process be accelerated?

of information, generating the right conditions to provide

A: Now, PEMEX can share with its partners the geological

the confidence necessary for companies to express their

and financial risks, along with experience and technical

opinions and, above all, ensuring they know that their

and human capabilities. Through these alliances, PEMEX

proposals are taken into account. We are in a continuous

will be able to better manage its portfolio of investments

process of Improvement, always adapting to market

and access financing and cutting-edge technology for

conditions and offering competitive conditions with

the development of those projects in which it has already

respect to other parts of the world where oil blocks are

made initial investments and which, due to the high

also being tendered. We trust that being a competitive

degree of complexity and the high levels of investment

and reliable market is what makes it attractive to invest in

required, had not previously been possible to carry

the country and this is evident if we observe the evolution

out. This is especially true of deepwater fields, which

of our bidding processes.

typically require strategic alliances due to the high risk, high investment and high complexity.

Q: What is the Ministry of Energy’s strategy to solidify the legacy of this administration in the oil and gas

For PEMEX, farm-outs allow it to finance projects,

industry?

mitigate risks and acquire technology and achieve greater

A: In terms of hydrocarbons, the predictability of

efficiency and competitiveness, as the areas are the result

tenders and the reliability of the adjudication of areas

of a competitive, open and transparent process.

are fundamental to guarantee their permanence and future success. For this, a bidding system was designed

Q: What improvements can be made in the areas of

under the highest standards of transparency, avoiding

contract regulation, administration and investment

discretion at all times and involving several institutions

protection in the upcoming licensing rounds to further

in the whole process.

attract foreign investment? A: The Energy Reform brought about a radical and

With the Energy Reform, new institutions were created

substantial change in the Mexican oil industry. Thus, the

and existing ones strengthened. The National Energy

participation of the private sector is imminent in the

Control Center (CENACE) and the National Center for

exploration and production of hydrocarbons, which will

Natural Gas Control (CENAGAS) function as technical

accelerate and increase the country’s development. We

bodies for the formation of energy markets. The Mexican

have well-defined objectives and these are to increase

Petroleum Fund (FMP) manages oil revenue, ASEA ensures

production and increase our reserves.

that environmental safety standards are met, while CNH and CRE have acquired new regulatory powers. All these

Just as companies participate in exploration and

players define the rules and processes to encourage

production activities, we also encourage the industry to

competition and the arrival of new participants.

provide us with feedback, not only on the regulation and administration of contracts, but in all areas we consider

There are challenges to tackle to improve the design and day-to-day operation of regulatory bodies. Recently, the OECD published a specialized study, which suggested

The Ministry of Energy is charged with executing energy

improving inter-institutional coordination, minimizing

policy to ensure the competitive, sufficient, high-quality,

duplication and consolidating the legal framework, in

economically viable and environmentally sustainable supply of

particular that set out by ASEA, which consists of 11 laws

energy required for the development of the nation

and 12 regulations.

VIEW FROM THE TOP

REGULATOR FACES VULNERABILITIES, PREPARES FOR CHANGE CARLOS DE REGULES Executive Director of ASEA

Q: How far along is ASEA in establishing itself and what

A: Our second priority has to do with the rules under

are its next challenges?

which we operate. We were formed two years ago but

A: The first stage of ASEA is completed. Mexico now

without clear and efficient operating guidelines. Instead

has an up and running regulator. The next step involves

we were born with different laws and rules that define

ensuring that this remains in the long run, because today

how the environmental authorities in Mexico handle

this agency has three vulnerabilities. The first has to do

environmental impact and risk assessment and how they

with the nature of our institutional framework. As opposed

deal with waste, for example. These were created in the

to CRE and CNH, we do not have an internal corporate

1990s but we need to look to the future. This industry

governance where decisions are taken between different

and all of its regulatory framework is future-based. We

individuals and analysts and discussed in boards of

must integrate not only environmental protections but

directors. Also, the agency does not have a long-term

also safety management. We need to acknowledge that

appointment for commissioners or board of directors,

risk must be assessed differently for different projects. We

meaning that the director of the agency can be removed

need to produce one single optimized ruling that defines

any time with no questions asked. Since the current head

how this institution will perform its mandate. This will

of the agency is making decisions under the current

involve compiling the 11 existing rules from the 1990s into

institutional framework, that is a vulnerability in terms of

one single set. We will gain tremendous efficiency and

continuity of regulatory policy. We need to work on that

transparency in doing that.

and make sure we take steps to become more similar to CRE and CNH.

Our third priority is to make sure that this agency is more and more financially sustainable. That was one of the

Q: What is your assessment of the risk of a new

recommendations from the OECD for all three regulators.

government using ASEA to block deepwater investment?

Namely, the need to have sufficient forward financial

A: This is a scenario we need to ensure cannot happen.

planning capacity to support strategies for the next three

The way to do this, backed by OECD publications, is

to five years. We must build the trust that enables us to

by guaranteeing the regulator’s independence and

collect the resources for the services we provide in a fair

minimizing the potential for the industry to be taken

way that represents their current value.

over by politics. I think it can be done and I am totally convinced that we will make an intelligent proposal to

We are already up and running and dealing with operators

achieve it under the leadership of the Ministry of the

every day. Of course, there will always be more work

Environment.

coming to our desks. But this will be covered given our new systems and digitizalized platforms. We recently

When Congress designed the agency there was sufficient

launched our “Electronic Clerk Office” (Oficialía de Partes

time for the initial model to be put into operation and

Electrónica). The first step for a regulated entity is to

assessed. With that stage now completed, there is

adequate evidence to take the next step. We believe

digitally from their computers. ASEA is ready to cope with

this is the same natural progression that CNH and CRE

the new demands from operators coming into the market.

went through when they reached similar stages. We think Congress is aware of this and is also probably receptive to our proposals.

ASEA, Mexico’s national industrial safety and environmental protection agency for the hydrocarbons industry, is in charge of

Q: Besides gaining independence similar to CRE and

disseminating regulations and enforcing compliance of public

CNH, what are ASEA’s priorities?

and private sector companies involved in the oil and gas industry

375

VIEW FROM THE TOP

STRATEGIC ALLIANCES WILL BRIDGE INFRASTRUCTURE GAPS JOSÉ CARRERA Director of Alliances & New Businesses of PEMEX

376

Q: What role are alliances and JVs expected to play in

A: Typically, we like to play a backstage role in these

PEMEX’s future business plan?

activities, advising our partners and providing corporate

A: Transparent and competitive alliances will have a vital role

support where needed. We do not offer technical assistance

in helping to strengthen our downstream and midstream

but rather act as a sounding board to aid the construction

units. We have the expertise to establish the financial and

of business plans and legal and financial packages and

legal mechanism to make a concrete alliance or joint venture.

structuring. We are involved in the farm-out projects but

We are already working on a number of initiatives from our

only to a limited degree because the requirements and

different business lines, which should be ready to enter the

regulations for farm-outs are clearly set out in applicable

market during the summer of 2017. We recently made an

law. We are much more heavily involved in the downstream

alliance for the hydrogen plant in the Tula refinery.

and midstream segments, for example, which are not as regulated by law. Our role is to devise a financial and legal

This is a landmark transaction because PEMEX will hold

package that reflects best market practice.

no share in the project. Once we gain traction, we expect to announce further deals for various projects throughout

Q: How seriously are foreign companies looking at the

2017. We want to support and encourage the private sector

opportunities in Mexico’s oil and gas industry?

to develop greenfield assets that will be needed by off-

A: The interest is accelerating quickly. It starts with

takers, including PEMEX, in the next two to three years. This

developing infrastructure because this helps to make field

works well for the entire industry because we can focus our

bids more viable and this will always attract international

resources on our core activities.

players; it is a domino effect. If the private sector is aware that infrastructure already exists, it makes the licensing

Q: How will you decide the winning bid?

rounds and farm-outs more attractive in that particular

A: It is based on the tariff the company will charge for

region. The more interest there is in the fields, the more

its service. During the bidding round, we detailed the

interest there is to build infrastructure. We have seen a

compression services we need over a specific timeframe.

tremendous amount of interest in offshore and onshore

We are awaiting the details of the proposals. Whichever

projects, whether it is to build new facilities or take over

company offers the lowest tariff and complies with all

old ones from PEMEX.

the technical aspects will in all likelihood be awarded the project. We have designed the process to be as pragmatic

Q: How do you see PEMEX’s role evolving over the next

and simple as possible. It is essentially the same protocol

five to 10 years?

we followed for the nitrogen plant sale. In the unlikely event

A: Five years is a relatively short time for a company the

that we receive two identical proposals, then we will look

size of PEMEX but we will be focusing on strengthening

at the timeframe and choose whichever enterprise can

our core activities. We need to make use of our financial

complete the job in the shortest time period.

and human resources in non-core activities more efficient by offloading responsibilities to experts. One example is

Q: To what extent is the new businesses division at PEMEX

gas compression. All over the world, private companies

involved in the farm-outs?

provide gas compression services for the neighborhood. Also, a big chunk of the world’s refineries do not have their own hydrogen plants, instead buying services from third

Petróleos Mexicanos (PEMEX) is the most important company

parties. Hydrogen, gas compression and water treatment

in Mexico, an international reference in the field of hydrocarbons.

are all areas where industry players usually rely on experts

Its activities involve the entire production chain, from exploration,

rather than doing it themselves, and PEMEX is jumping on

production, industrial transformation, logistics and marketing

those initiatives.

INSIGHT

MANHATTAN QUALITY, HOUSTON SERVICE, MEXICO CITY PRICE NICOLÁS BORDA Partner at Haynes and Boone

The Energy Reform has brought about powerful changes to

are instead requesting legal opinions on which they later

the legal and business environment in Mexico, transforming

base their actions. This process takes only a few weeks and

the Latin American country from a decades-old state energy

is less expensive and less contentious. Otherwise, arbitration

monopoly into a multiclient scene with private and public

awards could take at least six months and in some high-

players interacting and doing multimillion-dollar deals. It is

profile cases like Commisa and KBR, almost a decade and

an all-out effort to develop the long-stagnating oil and gas

tens of millions of dollars in costs, legal and arbitration fees.

sector, among others, with an influx of new money and ideas. While the lawyer praises CNH for its well-designed contracts, Precisely because of the countless new players entering

he is realistic about the certainty that some disputes will

the market from various backgrounds and geographies, it

arise as the market evolves. “One of the most important

is not only drilling, exploration and engineering that will be

things for Mexico to protect is a level playing field for all

on the rise in years to come. There also will be an increasing

parties,” Borda says. The monopolies the government holds

need for expert legal counseling to bring all parties into

over infrastructure like storage facilities and pipelines mean

agreement, says Nicolás Borda, a partner in charge of the

the regulators and antitrust commission need to collaborate

Mexican Energy Practice at Houston-based law firm Haynes

to avoid undue discrimination and establish a level playing

and Boone.

field for new market participants.

“As the market matures and more players enter all segments,

Efforts to make this infrastructure available to private parties

we will see much more activity not only on the transactional

are already underway. The results of PEMEX Logistica’s open

and regulatory side but also on the dispute resolutions side,”

season were announced on Feb. 15, 2017 and Haynes and

Borda says. Legal disputes will also multiply as the billions

Boone’s Mexico City office branch was heavily involved in

of dollars committed to the sector through CNH’s licensing

this process, assisting the participants with import permits

rounds begin trickling down into real-world operations. The

from SHCP and SENER, marketing permits, prequalification

types of litigation cases Borda expects to tackle will be as

process, proposal submissions, obtaining taxpayer IDs

varied as Mexico’s new oil and gas market.

and all the corporate work from incorporating the SPVs, registrations, POAs, corporate books and issuing stock

One legal wrangle he expects to deal with more regularly,

certificates.

especially as private companies sign contracts with regulators and PEMEX, is administrative litigation, the kind

The various open seasons, licensing rounds, energy

of litigation between a private party and the government.

commodity risk management, new infrastructure and other

“This type of case could arise for several reasons. COFECE,

industry regulatory changes mean more specialized legal

Mexico’s antitrust commission, CNH, ASEA and CRE, among

experts are needed in Mexico. To answer this need, the firm is

other regulators, can issue penalties and sanctions, which

implementing policies to attract new talent and will continue

private parties will likely contest,” Borda says. Commercial

training its associates, with the intention of specializing them

litigation between private partners and also treaty arbitration

in specific areas of the energy sector.

are trends likely to increase, he adds. With 15 global offices and a presence in London, New York, As well as more bench-side litigation, Borda says that many

Texas Denver, DC, California, Chicago and Shanghai, Haynes

oil and gas companies are turning to mediation services

and Boone is ready to offer its international expertise to the

to settle disputes rather than instigating full-fledged

Mexican oil and gas market as it evolves. Borda sums up

arbitration. “Parties do not want to spend time and money on

the firm’s global perspective, saying they are proud of its

contentious arbitration proceedings,” Borda says. Companies

“Manhattan quality, Houston service and Mexico City price.”

377

VIEW FROM THE TOP

PERFECT STORM HITTING A PEAK JORGE LEIS Partner and Lead of the Oil and Gas Practice in the Americas for Bain & Company

Q: What global factors will impact the oil and gas industry

too aggressive, in the hope of creating jobs, have had to relax

in the coming years?

them because of the near-death experience the industry

A: OPEC is a factor that must be considered as deeply

faced under those same regulations. in the aftermath,

impactful on the way the oil industry behaves, especially

relaxation tends to lead to either a new definition of what

with tight oil. Looking at OPEC production, forecasts range

local content is or a new level being settled to incentivize

from plus or minus 5 million barrels per day up to 2030. A

the participation of international companies in the market.

10 million-barrel spread has huge implications on the shape

378

of the supply curve; the more OPEC produces, the flatter

This relaxation must obey market needs and take into

the supply curve and the greater downward pressure on

account the countryâ&#x20AC;&#x2122;s infrastructure, robustness and

oil prices. Adding to that forecast the range of eight to 10

uncertainties. Fortunately Mexico and the US have a long

million barrels of tight oil expected to be produced by the

history of putting together a supply chain that benefits

US and we end up with a range of up to 20 million barrels

both countries. Even though international companies will

per day situated in the lower cost portion of the supply

be more comfortable introducing their own supply chain,

curve, turning it incredibly flat.

the truth is either most of that supply chain already exists in Mexico or the companies will soon see the benefit of using

About eight years ago we started seeing forecasts stating

a supply chain already here because of the economics and

that we were running out of oil and that the barrel would

timing advantages.

possibly reach US$250, leading companies to start exploring in so-called frontier plays with ever deeper,

Mexico has a big challenge in dealing with its nationalism

more complicated and expensive wells to meet demand.

and the rhetoric coming from the north side of the border

But that scenario did not come true. It is a consensus that

during the last few months is not making it any easier to

we are actually in an era of abundance when it comes to

deal with that. Small companies need to go outside, talk

hydrocarbons and considering also that we could be facing

with the big companies that will be entering the market, ask

peak oil demand in the next 10 years, we can understand

them what their needs are, understand them and embrace

that the oil and gas industry, especially in greenfield

the challenges no matter the nationalist rhetoric on either

offshore developments, is having to face incredibly risky

side of the border.

investments with 20 to 30 years to see a return. To avoid that, companies are transferring their capital from long to

Q: What are Bain & Companyâ&#x20AC;&#x2122;s plans in Mexico?

short-cycle investments.

A: We are in the business of creating value for our customers. Everything we do starts by considering the

Q: On a more local level, what scenarios and challenges

strategy that companies should follow. We help them

could arise given local content rules set by CNH?

discover the questions they need to ask to plan their next

A: Local content regulations will have to be adapted

moves and understand the tradeoffs of their decisions. We

according to the countryâ&#x20AC;&#x2122;s necessities and possibilities. We

have two main goals in Mexico. The first is to help PEMEX

have seen with our clients in Latin America and Africa that

succeed in this new economic and regulatory environment.

countries that implement local content regulations that are

Second is to help the multitude of players, both domestic and international, make the best out of the opportunities being offered by the country. Ten years from now we want

Bain & Company is a global leader in management consulting.

to see ourselves as a company that helped the Mexican

With local offices in Mexico City that have served all of North

industry thrive by helping its players to make the right

Latin America since 1996, Bain & Company has wide experience

strategic choices. We are a company that loves storms and

in all consulting and industrial areas

right now the waves are peaking in Mexico.

VIEW FROM THE TOP

MAKE THE MOST OF REFORM OPTIONS ERNESTO MARCOS President of AMESPAC

Q: What impact did the fall in oil prices have on

A: The payment of invoices for finalized services was

AMESPAC’s members?

straightforward. PEMEX simply extended the payment

A: On average, the service providers and contractors that

dates and is now up to date with them. Problems arise

make up AMESPAC have had to reduce their personnel by 70

when projects are suddenly cancelled before being finished

to 80 percent since 2014 due to lower oil prices. Companies

as this results in more costs that need to be documented

that are still active are trying to recover delayed fees from

and legally processed. This process takes a long time to

PEMEX. The only way to energize the industry is by making

resolve and if companies lack operational resources they

the most of the options made available by the Reform. This

can sometimes go unrecognized.

includes possible alliances with service providers and this is something we have tried to do through AMESPAC.

Q: What legal action can suppliers take against PEMEX’s payment slowdown?

Q: How have Mexican service providers reacted to the

A: Most providers did not resort to legal action to recover

difficult times and what financial structures are available?

delayed payments from PEMEX because the state

A: In the early stages of the crisis, Mexican oilfield service

company was often the only client they had. International

companies in AMESPAC tried to maintain their technical

companies facing this issue in Mexico accepted that if they

capacities, such as keeping their engineers, geologists and

demanded the payment from PEMEX it would be the last

other experts, and instead sold physical assets. But low oil

contract they would ever have with the company, and

prices and PEMEX’s reduced activity hit hard and they were

would basically amount to leaving Mexico. Mexican firms

forced to lay off personnel. Another reaction service providers

do not even have this option. The process is improving

had was to diversify and become operators. This is why Round

for two reasons. On one hand, PEMEX officials have the

1.3 was so competitive, with aggressive bids involving high

responsibility to fully follow up any debt with providers

royalty rates that made some contracts unprofitable. That

in a transparent way because they are civil servants

round displayed the appetite of service providers to keep

controlling public assets. On the other, providers are no

their companies afloat and put their expertise to good use as

longer threatened with losing their only client because

operators of mature fields. It was in essence a survival tactic.

PEMEX is no longer the only industry player.

Another fundamental issue faced by oilfield service

Q: What will be the most pressing need in the Mexican oil

companies has to do with PEMEX’s contract migrations,

and gas industry in 2017?

which are considerably delayed. This is because PEMEX

A: We say that 2017 will be the year of the midstream sector.

is still finalizing account settlements. In the past CIEP and

Mexico has only two days of supply in storage infrastructure

COPF contracts established that PEMEX was not obliged

for gas. Many aspects of the Energy Reform can help by

to pay contractors if its cash flow was insufficient. When

encouraging strategic alliances and selling assets, for

it comes to migrating PEMEX service contracts into

example. Think of gasoline supply to Baja California, which

production contracts under CNH, complications arise when

PEMEX has covered at great cost with imported product.

settling the expenditures of all previous operations. The

Instead the market should be allowed to supply this area and

last reaction of service providers in Mexico has been to

PEMEX should abandon that costly obligation.

focus on their own evolution and how they can transform into acceptable and preferred contractors for the new, international operators entering the Mexican market.

The Mexican Association of Oilfield Service Providers (AMESPAC) promotes the interests of its 50 member

Q: By October 2016 PEMEX had paid most of its delayed

companies in the Mexican oil and gas sector, fostering the

invoices. How has this impacted AMESPAC’s members?

development of national and regional oilfield service providers

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VIEW FROM THE TOP

AVOID THE DANGER OF OVER-REGULATING LUIS VIELMA President and General Director of CBM

Q: What issues could arise as Mexico implements new oil

be a consideration. Mexico must inform its people so they

and gas regulations?

can see how regulations align with worldwide standards.

A: One concern is over-regulation, which must be avoided.

Mexico must also avoid lagging behind. It cannot wait for

Remember what happened with the Deepwater Horizon rig

US regulations to be implemented. For guidance, Mexico can

explosion: after the accident, regulations were tightened

turn to regulations being implemented in the North Sea, the

by the Obama administration. The tighter rules forbid the

Persian Gulf or Brazil, to name a few.

burning of gas during the testing phase of a well. This forced

380

companies to have ships at the ready to collect gas from the

Q: What should be CNH’s next focus now that the regulations

first day onward. Renting a ship can cost up to US$50,000 a

have been published?

day and tests usually take up to 45 days to know whether the

A: CNH needs experienced and talented people as it

well is economically viable. Spending approximately US$2.7

administrates contracts and works to ensure companies take

million extra does not make any economic sense. This is a

appropriate risks as well as safety measures. The agency is

perfect example of an extreme situation leading to over-

working hard to manage priorities and is on a learning curve

regulation. Normal practices in the sector allow the burning

as the rounds progress. Round One went well, everybody

of gas for up to 60 days in what is known as short tests, which

recognizes that, and now it is preparing for Round Two. But

allow the company to correctly diagnose production capacity,

stating the regulations and making sure they are implemented

define critical flow and fluid quality and to get to know the

are two completely different things and CNH is not yet ready

reservoir’s conditions and dimensions.

to do that.

Q: What adverse effects could over-regulation cause in

It is hard to imagine CNH effectively making sure that

Mexico?

companies follow the regulations if it is not close to the

A: Mexico must be careful when handling these situations

companies’ operations. Decisions need to be taken and

and must avoid over-regulating on its side of the Gulf. If that

answers given in less than 24 hours. CNH also cannot allow

were to happen, wells might run into problems due to a lack

the process to be centralized in Mexico City. The agency

of information, news of which would immediately spread to

will therefore need offices in Villahermosa, Ciudad del

Houston and be shared worldwide with every major company.

Carmen, Reynosa and other cities where the action is. If

This in turn would create a bad impression with investors

CNH’s overall structure is well-organized and the proper

looking for opportunities in Mexico. Under-regulation,

regulations are in place, then making sure the regulations

however, is not as worrying because most companies have

are followed should be easy.

internal best practices that tend to be aligned with worldwide industry standards.

CNH needs to slim down as an organization, with skilled talent that has a deep and structured knowledge of regulations.

Q: Talking about the possible need for under-regulating

It does not need to have specific technical knowledge

compared with the US, how should CNH handle this?

because having such departments would create a slow and

A: Although experts will look favorably on under-regulation,

inefficient organization. The talent should therefore have

public opinion could create political pressure, which must

general technical knowledge about their regulatory area while working with neutral organizations, whether public or private, that can offer highly specialized and independent consulting

CBM is a Mexico-based oil exploration and production

services. This would allow CNH to be more efficient and faster.

consultant, centered on the upstream sector. It offers strategic advice, including how to improve well production and business-

Q: How can a company like CBM help both CNH and private

model design in the Mexican market

companies be successful?

A: International private companies such as BHP Billiton,

also have the opportunity to help build Mexico’s future in

which will work with PEMEX on the Trion project, have been

the oil and gas industry by working closely with institutions

successful in other countries and have plenty of knowledge in

like CNH. CBM would like to be on the front lines of support

their areas of expertise but they lack experience with Mexico’s

for developing the regulations that will benefit both Mexico

regional geography and culture. We can help and support

and the private sector.

incoming companies with their integration process. Another area of opportunity for CBM is project management. PEMEX and BHP are just getting to know each other and they could run into problems over which activities will be developed by which partner. In these cases, CBM can play a project management role. We can rely on our experience working with PEMEX and international companies to foster a smooth and productive interaction between companies by creating effective communication and decision-making. Q: As a supplier and operator, what does CBM expect from the Energy Reform? A: With regulations, implementation is as important

The Macondo Prospect Block on the US Gulf of Mexico was the site of the Deepwater Horizon drilling rig explosion in 2010

as the rules themselves. How a country implements its regulations will determine their success. It is essential, for

Q: What are your goals and how do they align with Mexico’s

example, to know how a company will be held accountable

ambitions?

in the aftermath of the bidding process. Here is another

A: Thanks to the price of oil plummeting to around US$40

example: CBM helped CNH develop rules involving areas

a barrel, private companies have been forced to tighten

such as drilling, well integrity and product shipment but

their budget belts. This is the world they now live in and our

the government agency has yet to develop an integrated

business reality must align with theirs. It is our goal, therefore,

reservoir management system, which should be the base for

to stay competitive and attractive. To do that we are reviewing

the whole E&P regulation.

our practices to further lower costs and diversify the range of services we offer. We already are leaders in the upstream

As for Mexico, the government must stick to the current

area, doing reservoir analysis, well design and production

pace of the Reform’s implementation while recognizing

optimization, but we also want to start operations in the

that any errors can be corrected along the way. Mexico’s

midstream and downstream segments too, amplifying our

institutions and agencies also need to understand they

services portfolio. CBM also has a new training center that

cannot work with newly arriving companies in the same

will allow our customers to lower their capital needs while

way they worked with PEMEX because that could affect

offering their employees the opportunity to boost their

the country’s image and future. Having said that, companies

knowledge and skillset.

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VIEW FROM THE TOP

GLOBAL OIL AND GAS INTELLIGENCE PALMA MENDEZ Country Manager Mexico of Wood Mackenzie

382

Q: Which type of companies is Wood Mackenzie best

Q: Which segment of the Mexican oil and gas market does

positioned to help in Mexico?

Wood Mackenzie predominantly deal with?

A: We are well positioned to help companies of all sizes.

A: Wood Mackenzie’s activity in Mexico is not limited to E&P

We already work with oil Majors around the globe so we

companies. We deal with the entire supply chain, including

understand the challenges they face in other countries

downstream, midstream, petrochemicals, refined products,

and in Mexico specifically. We can extend our services

metals and mining. We treat every sector equally with

to smaller companies as well. A good example is the

our services and information and consultancy structure.

aggressive additional royalty rate involved in the bidding in

We are seeing a big rise in demand for our consultancy

Round 1.3, which affected many smaller sized companies.

services in projects involving refined products and gas as

This probably occurred due to a lack of a previous model

well as infrastructure. We have different types of products

or experience in this type of bidding. Wood Mackenzie

for each segment. Wood Mackenzie’s clients come to

can step into the process to advise clients on the best

us with questions regarding Mexico’s infrastructure, its

way forward.

distribution network and regional-specific requirements, for example.

Q: What new directions will Wood Mackenzie focus on, given the Mexican market’s changing nature?

Q: What feedback did Wood Mackenzie receive from its

A: In the future we want to focus more on teaching

clients participating in the various licensing rounds?

the Mexican industry how to compete and how to use

A: Our analysts made very good projections during Round

technology to its advantage. I feel that both the public

1.4 based on many conversations with the participating

and private sectors need information so they can make

IOCs. We also had no doubt that the Trion farm-out would

decisions in the most informed and transparent way for

be a success, although we may have underestimated the

the benefit of the whole country. Wood Mackenzie puts a

dimension of the eventual investment. Almost all of the

lot of emphasis on not just offering our core services of

companies which took part in Round 1.4 used Wood

information and consultancy but also to bring knowledge

Mackenzie’s services as a basis for assessing global

to the country. Our industry training programs achieve this

opportunities in oil and gas, including comparing the

and we want to expand on them. Without base knowledge,

competitiveness of fiscal regimes in different markets. This

even if clients have information, they do not have the

is always the first step before a company buys access to

capabilities to make strategic decisions.

any data rooms, for example.

Q: How does Wood Mackenzie offer its services to its

Q: How do you evaluate PEMEX's efforts in promoting

clients?

foreign investment in Mexico?

A: Wood Mackenzie offers its services in two main ways:

A: PEMEX is certainly heading in the right direction and

one is our services and information area and the other is

its new management structure shows that both in terms

consultancy. Services and information consists of reports

of collaboration and openness. For the country, it is

that are updated every month, quarterly or six monthly.

fundamental that PEMEX partners up with other companies

They are generated by our global network of analysts

through farm-outs in the fastest and most efficient manner.

and used by companies to make important decisions.

The cogs are in motion and it has started with speed

If the client does not have its own staff to carry out

although there are still challenges in terms of cultural shifts.

these analyses, or it lacks experience, it may require

PEMEX’s CEO has been very clear and those lower down

our consultancy services. We really want to support

understand that opening the market to promote foreign

companies in training their staff to make their own well-

investment is good for Mexico. There is still a mentality

informed decisions.

of “why should we share production?,” but just a little bit.

VIEW FROM THE TOP

GAUGING THE FUTURE FOR GAS, REFINERIES IXCHEL CASTRO Manager of Oil and Refining Markets for Latin America of Wood Mackenzie

Q: What does PEMEX’s five-year plan released at the end

their profitability in the short run through production

of 2016 mean for its refineries?

normalization, performance improvement and the potential

A: The plan emphasizes PEMEX’s need to focus on truly

production of lighter crudes, even if it means importing them.

essential activities and to look for potential synergies with the private sector. The first challenge will be to improve

Q: How could the possible renegotiation of NAFTA or

refining production and reach levels close to the average

aggressive US trade policies impact Mexico’s gasoline

of the last five years, meaning approximately 65 percent

market?

capacity. This will decrease imports but will surely not be

A: Blocking gasoline imports from the US to Mexico would

enough to close the gap imported products currently fill.

affect the domestic market as much as it would affect the

We have already seen the first results coming from auxiliary

refineries on the Gulf’s coast, so it is unlikely to happen.

services outsourcing but patnerships to reconfigure Tula,

Other measures such as the introduction of additional

Salamanca and Salina Cruz will have the biggest impact.

taxes would be reflected in consumer prices in Mexico, and

Those projects will not be finished in the next five years

could, depending on their magnitude, make supply from

but they will need to start soon if Mexico truly wants to

other regions more competitive, like Europe for example.

fight the current refining products deficit it suffers.

Managing close relations with possible European suppliers is something Mexico has done in the past and could be

Q: What factors make Mexico an attractive prospect for

reactivated if necessary. In the end, the question is not

investors in refining compared to other Latin American

whether the local market can be supplied or not but how it

countries?

would affect the final consumer price. This will depend not

A: Mexico’s main advantage is its size. Mexico is the main

only on the region but also timing and quality regulation.

gasoline importer in Latin America and will remain so for

In any case, a sudden lack of gasoline would have other

the next 20 years unless new refining capacity is built.

economic effects and would push the development of

Furthermore, its geographical location, economic stability

alternative modes of transport in the long run.

and reliable market with plenty of scope for growth for internal fuel providers makes it even more attractive.

Q: How do developments like BP’s plan to open 1,500 new gas stations over the next five years impact the

Q: How do the shutdowns of Mexico’s refineries impact

market?

their competitiveness and trader interest?

A: This can be considered the first step toward a more

A: In 2016, refining production in Mexico reached a historic

attractive and reliable Mexican market. BP’s participation

low. Lack of reliable auxiliary services and nonprogrammed

in the Mexican market follows several other similar

maintenance work meant that PEMEX could not benefit

projects that have been announced but that are not yet

from the attractive margins brought about by low crude

ready to provide a reliable and independent gasoline

oil prices, while other North American refineries did. These

supply. Besides having other companies opening gas

problems contribute to Mexico’s inability to produce more

stations here, the next step will be to have gasoline

valuable fuels such as cleaner gasoline and diesel.

produced and imported by private parties in the different distribution centers.

But low production is not the only factor to consider. Because there are still three refineries with zero conversion capacity, PEMEX continues to produce more fuel oil than

Wood Mackenzie is a global leader in commercial intelligence

the local market needs. This defect has intensified because

for the energy, metals and mining industries, providing objective

CFE is retrofitting its fuel oil generation plants to natural

analysis and advice on assets, companies and markets as well

gas. Investors see this as a huge opportunity to increase

as insight so companies can make better strategic decisions

383

VIEW FROM THE TOP

THE FUTURE OF OIL AND GAS EDUCATION BENJAMÍN DE LA CUEVA Director of Golfo Energy

384

Q: How is the government creating incentives to encourage

Q: How is Golfo Energy working to fill the training gap?

people to pursue oil and gas training?

A: We have been working in higher education for nearly 20

A: Training is not Mexico’s strong suit yet. In the past it

years. We send Mexican students abroad, choose the right

mainly centered on sending Mexican professionals to train

programs for them, provide counseling and oversee the

abroad, which was too expensive and also created language

admissions process, assisting with visas, accommodations

barrier issues. The government produced a document called

and such. This service is free for the student because we are

the Strategic Human Resources Development Program

an extension of the university. A benefit of the aforementioned

(Programa Estratégico para el Desarollo de Recursos

scholarships is the low demand, meaning many applicants are

Humanos) published by the Ministry of Energy, CONACyT

awarded the grant if they meet the criteria.

and the Ministry of Education. It is the main reference for the Mexican government on training. The document stated

When identifying potential applicants, we discovered

that Mexico needs 130,000 highly trained professionals to

they were not necessarily at top universities. In the oil and

respond to the industry’s needs for the next 40 years. Of

gas industry in Mexico there are over 40 institutions and

those, 20 percent need to have higher education and 80

many are small and almost hidden in the Gulf of Mexico.

percent technical training. To support that program, the

We visited them, gave talks, met program directors and

government implemented the CONACyT-Ministry of Energy

offered scholarships. The biggest problem faced is the level

Fund, a massive fund to support the activities and priorities

of English language proficiency in Mexico, especially in the

of the Energy Reform. They allocated 60,000 scholarships,

oil and gas sector. It is much worse than in other areas. That

which include studies abroad for master’s degrees and

is partly due to where the students are located and partly

Ph.D.s. The typical master’s scholarship is MX$2 million

because of the nationalist tradition seen in Mexico around

(US$100,000). Those 60,000 scholarships also include

oil. There are many talented professionals who could benefit

technical training. Unfortunately, progress in the niche of

from these scholarships, such as in subsea engineering, our

technical training is extremely slow.

most popular program, but they lack the English grades.

Q: Where does Golfo Energy see the greatest opportunity

Q: To what extent will bringing in workers from abroad

for its services and what is its strategy to take advantage?

be a solution?

A: There is a large gap in the market for which we see an

A: That may be expensive but it will depend on the

opportunity as a facilitator. Through our partnership with

government, regulations and the risk appetite of companies.

ANZ Education we recognized an existing synergy between

We can contribute solutions to some of this by representing

the oil sector and education. We began to work on how we

technical institutions from around the world. We have

could strengthen this synergy. We have represented the top

discovered that to be successful the training needs to

universities in Australia and New Zealand for nearly 20 years

happen in Mexico. Sending one or two engineers abroad is

and we are now working with Scottish universities, which

different to training an entire group of mechanics or welders

are some of the best in the world for oil and gas. We are

because of language, costs and volume.

trying to create a hub of the best institutions in the world for oil and gas and energy here in Mexico.

It is also expensive to bring trainers here. We need to create teams of coaches here, rather than investing in moving people around. This team can train others, creating

Golfo Energy is a Mexican company offering consulting,

a domino effect. This is why we are beginning to look at

training and specialized services to the energy sector, formed

faster solutions. We are looking at what the Australians have

by associated consultants with extensive experience in the oil

done in Chile delivering programs in Spanish and we are

and gas business

assisting the Scottish qualification authorities.

VIEW FROM THE TOP

THE WORKFORCE OF THE FUTURE THIBAUD CADIEU Vice President Latin America of NES Global Talent

Q: How will automation and digitalization affect jobs in

find themselves in different stages in Mexico. We usually

the oil and gas industry?

start by profiling Mexican nationals with experience

A: It creates a brand new range of jobs. We have seen

abroad. We provide reinforcement for this talent pool

many companies create departments called “Production

by profiling Latin American candidates with similar

IT” or “Production Technologies,” solely focused on

qualifications and continue with a global search involving

designing software aimed at managing production or

our offices worldwide if at this point we have not found

even the drilling phases. It will bring about a shift in

what we are looking for. Quite surprisingly, when we

the required skills, with software engineers and related

sat with several Round 1.3 winners to discuss their

backgrounds making their way into the industry. We are

requirements, the technical skillsets and personalities

sure that companies will re-train their employees to adapt

they were looking for were quite different from one

to these changes.

company to another.

Q: What role can a company like NES Global Talent play

Q: What type of problems does NES help clients solve?

in including more women in the industry?

A: Finding local talent is one. Training is another. Finding

A: I believe the issue will revolve around the necessary

people worldwide is a quick fix that is going to work

education and training at every step. You need to make

for a few years. We expect our profiled candidates to

sure there are a fair number of women in those training

go beyond their appointed tasks once they are hired

sessions as well as people from rural communities.

and actually train Mexicans to transfer their knowledge.

Companies are much more sensitive to these issues

The economic context was quite challenging in previous

than one might think. Mexico remains traditionalist in

years but I believe conditions are now optimal to develop

some ways. There needs to be a strong effort to further

internal and external training programs.

incentivize women to work in the industry. The reform has been advertised and marketed to a very small group

Q: How challenging was it to set up an office in Mexico

of people but I remain convinced and fairly optimistic

in 2015?

that the new entrants will shake up everything on this

A: It was both a challenge and a blessing. Our activity

particular subject.

was very low in the upstream sector. Looking back, that experience gave us some time to learn Mexico’s

Q: What will be the main challenges for onshore

intricacies to properly launch our business and market the

operators In Mexico?

NES brand. With the exception of people who had worked

A. The main challenge for operators in onshore fields

with IOCs and in other countries, we were unknown in

will be the social environment. This includes dealing with

Mexico. We needed some time to create our network

unions, local communities, the ejidos and local authorities.

and make our potential clients aware. We have global

More often than not, our clients express an interest in

agreements with all the major IOCs and we are definitely

professionals who have dealt with similar environments

looking to leverage those relationships. Our clients know

in other countries. Obviously Latin America is a preferred

we can work with them here since we are compliant with

region due to the comparable social background. Canada

their international counterpart.

is also a recurrent choice because it has also dealt with indigenous populations. NES Global Talent is a manpower specialist that provides

Q: What is NES’ strategy when starting a new project?

candidates across the oil and gas, power, construction and

A: We sit with our clients and identify their needs and go

infrastructure, life sciences, manufacturing, chemicals, mining

through their business meticulously. All these companies

and IT sectors worldwide

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NO NEED TO REINVENT THE HUMAN TALENT WHEEL Yisel Varela CEO of Access to Energy

386

Alejandra Bueno Strategic Ally in Houston for Access to Energy

Q: What public or private initiatives will have the most

Q: Which hard and soft skills are Mexican workers most

impact on reducing the skills gap in the oil and gas

lacking in the oil and gas sector?

industry?

A: For over seven decades, the Mexican workforce was

A: When developing human capital there is no need to

responding to PEMEX’s needs and demands. If PEMEX

reinvent the wheel, but it is important to look at other

was not active in certain fields and technologies, such

jurisdictions and communities that have responded well

as deepwaters and unconventional areas, the Mexican

to the challenges resulting from the need for highly

workforce will most likely lack the skills required by such

specialized human capital, like that needed by the energy

activities, which has been duly noted by the legislators

industry. This is a complex process that if well addressed,

that established the goal of reaching 35 percent

could have a favorable impact on the next generation,

national content by 2025. However, the newly adopted

creating opportunities for our young workforce.

Hydrocarbon Law of 2014, intentionally left out the requirement of the deepwater E&P contracts.

Mexico has to look at what other successful regions have implemented in short periods of time. The Eagle Ford

The goals defined for the initial exploration terms in the

Shale play in South Texas is a good example. In an area

first tender for deepwater were marked at 3 percent, a

where there was little readiness in terms of human capital

quite low target compared to other fields such as the

availability, the state, the industry and academia quickly

mature fields tender auctioned in Round One, which had

developed a formula to train the required workforce in

an initial local content goal of up to 22 percent. It is yet

public schools. In general, Mexico has to look at schemes

to be seen what the goal will be for unconventional fields

where there is strong collaboration between the industry

to be auctioned later this year.

and the academia. A good example is the Energy Program that the University of Aberdeen has: it is remarkable how

Therefore, we observe that there are two key challenges

well the university interacts with the industry, saving costs

to address: first, the need to develop a service industry in

and providing solutions and opportunities for all involved.

areas where there was not or that had very little activity in Mexico, such as the deepwater and unconventional fields;

It is important to note that the federal government created

and second, this new service industry will have to adapt to

an initiative called the Strategic Human Capital Training

migrate from the mentality of the single client (PEMEX) to

Program for the Energy Industry. Under this program,

multiple clients. This again, brings relevance to the need

higher education institutions can obtain grants so they

of a good and well-established collaboration between

can enter into collaborative agreements with foreign

government, industry and academia. Access to Energy

institutions to train and improve the skills of the human

truly understands the importance of these interactions

resources for the energy sector (such as collaborative

and discussions and is constantly seeking to take an active

agreements with the Universities of Calgary, Arizona

role in these very important exchanges.

and Berkeley.) This program will also award more than 60,000 bachelor’s and Master’s scholarships and technical

Q: How can Access to Energy help reduce the risks

diplomas will be awarded until 2018.

companies entering Mexico’s oil and gas market face? A: If the Mexican Government is successful in establishing a good dialogue with the industry and the academia, there

Access to Energy is a multidisciplinary corporate service

will be sufficient skills available to address the needs of

shelter that integrates knowledge and experience to provide

the industry. However, we recognize that it is hard to plan

comprehensive tailored solutions that help its clients enter the

for future activities if they do not happen at the end as

Mexican market, from opening to operations

planned. For that reason, as previously discussed, we

believe that the lack of legal and operating certainty are

evaluate the attitudes and aptitudes of each individual,

among the biggest risks that a foreign company could

we began to build the database that was specific enough

experience in Mexico.

to meet our clientsâ&#x20AC;&#x2122; demands.

Although the companyâ&#x20AC;&#x2122;s focus is on human resources, it

With this database, we can make the recruitment process

also advises clients on tax matters, finance, bookkeeping

even more efficient. When a client requests a specific

and accounting services. In fact, Access to Energy offers

profile, we can easily identify people with that profile.

a diversified service for installing operations in Mexico.

We are continually receiving CVs from specialists in the

Some of the services offered include risk studies to advise

energy industry. We also participate in energy events

companies with reference to office locations, the type of

where academic institutions, students and recent

international employees that will be relocated and the

graduates from industry-related programs converge and

activities they will be carrying out, as well as security

exchange ideas.

measures to make employees as comfortable as possible. The advice offered by our company is essential to daily

Q: How does the firm expect to impact the Mexican oil

operations and recruitment budgets. All of our alliances

and gas sector during 2018?

are aimed at HR solutions because we believe the most

A: We hope to provide a service shelter, tailoring our

important asset of a company is its human capital.

services to efficiently meet the needs of our customers. This is an important factor for their success and will boost

Q: How does Access to Energy create its human capital

investment in the Mexicoâ&#x20AC;&#x2122;s national energy sector.

pipeline? A: We have a recruitment system wherein we created

We believe it is important to tackle the myth that our

a database with people who already had the required

country is a complicated place to get established. With

experience in the sector, who undoubtedly worked

the appropriate help it is a good place to do business. In

directly for PEMEX or for any of the companies contracted

the long term, we hope to become a positive factor that

by PEMEX to carry out specific services. We created this

enhances the confidence of companies investing in the

database by asking them to do an interview and send us

national energy sector along the entire value chain of

their documents, then we used this information to create

the hydrocarbons segment and in the electricity industry,

a profile. After performing a psychometric examination to

both in renewable and nonrenewable generation.

387

VIEW FROM THE TOP

HARNESSING KNOWLEDGE OF FORMER PEMEX EXPERTS LUIS PUIG President of Petroexpertos 5000

Q: How does the experience of its 34 founding members

impact in 2018. The regulatory institutions have been

differentiate Petroexpertos 5000 from other consultancies?

central to the implementation of the reform and we

A: This consulting agency was specifically created to

have collaborated with them to improve all processes.

assess the Mexican market and was modeled after

Regarding the midstream segment there is an initiative

Shell Global Solutions, whose members are retired oil

to speed up the marketâ&#x20AC;&#x2122;s liberalization process. There

and gas experts. Our main client is PEMEX but we look

are numerous winners from the private initiative but

forward to expanding our client portfolio as the market

as long as the government does not relinquish control

evolves. We have already provided our services to some

of fuel prices, private companies will remain excluded.

private international companies that seem to be more

If this issue is not addressed, the government will lose

appreciative of our services since the beginning of the

credibility.

Energy Reform and the resulting opening of the market. 388

The unfortunate low oil-price context in which the reform

Q: How can PEMEX reduce its increasing dependency on

took place slowed down the processes required for its

the US for the importation of refined products?

implementation.

A: Over 60 percent of the gasoline, 30 percent of the diesel and 50 percent of the gas Mexico consumes is imported.

Q: How can Petroexpertos assist incoming players to help

This makes us highly dependent and vulnerable to the USâ&#x20AC;&#x2122;

them operate under the new regime?

hydrocarbons supply. Mexico has many options to end

A: We have a group of exploration and production

this dependency, among which could be for PEMEX to

consultants who are retired PEMEX employees with

build small refineries, but the processes under which they

expertise in the operation of the Mexican market. We

would operate remain uncertain. Another option would

believe the effects of the reform will start to have an

be for PEMEX to partner up with private companies for the investment and technology required to build larger refineries. We have been working with numerous companies

Petroexpertos 5000 is a Mexican consultancy focused on the

to develop these types of projects and helping PEMEX

opening oil and gas market. It is made up of retired PEMEX

reach out to interested companies. We also created a group

employees and managers who lend their expertise to new

of experts to assess PEMEX regarding reliability along the

companies entering the market

refining process.

VIEW FROM THE TOP

GERMANY CASTS AN INVESTMENT EYE AT MEXICO JOHANNES HAUSER Director General and Official Delegate of the Mexican-German Commerce and Industry Chamber (CAMEXA)

Q: How have German companies responded to the opening

using specialized multiplicators in every industry line, like

of the Mexican oil and gas market?

the Mechanical Engineering Industry Association (VDMA),

A: Since the beginning of the Energy Reform, German

the Business Association of Latin America (LAV) and the

companies are increasingly interested in entering the

Bavarian Cluster of Chemistry.

Mexican market. This can be carried out by participating in public licensing rounds or by positioning their technology

Q: What is CAMEXA’s perspective of the industry’s

and products along the supply chain. The Energy Reform

certifications and requirements?

has been the key factor for the development of the market

A: The Mexican government strictly observes and regulates

and evolving business opportunities in Mexico. The progress

the requirements, which are constantly being reviewed.

can be identified through the increasing numbers of

These requirements apply to international and national

projects and events related to the oil and gas sector carried

companies. The Mexican government has high expectations

out by CAMEXA and the higher participation of German

for the new technologies, services and products brought by

firms in the Mexican Oil and Gas Congress (CMP).

foreign companies to Mexico. The requirements that must be met by companies that are planning to enter the process

Q: How are you preparing to help

of prequalification to participate in the

German technology and service

public licensing rounds are ambitious,

co m p a n i e s s e i ze t h e re s u l t i n g opportunities? A: To foster and promote German technology and presence within the sector we organize business delegations and German pavillions within the framework of the CMP.

US$9.9

billion: Germany’s 2016 trade surplus with Mexico. Germany is the Latin American country’s largest commercial partner in Europe

especially in upstream. These are challenging times for the oil and gas sector. Besides the lack of investment in modernization of plants and machinery, which important players within the Mexican sector are yet to

CAMEXA also forms part of the Global

implement, the ongoing change should

Cluster for Oil and Gas, which is an

be considered as a positive step with

initiative realized by the German Chambers of Canada, the

the expected requirements serving as an instrument to

US, Brazil, Norway, Russia and Saudi Arabia, among others.

guarantee and screen improvements.

The cluster’s goal is to promote and help German oil and gas firms reach out to lesser known international markets

Q: What role will the German industry play in developing

and identify the potential of new projects in these markets.

Mexico’s oil and gas sector? A: At this moment, the German industry in Mexico finds

Q: What are the main German technology trends in the

itself evaluating evolving potentials due to future licitations

sector and how do those apply to the Mexican market?

and the ongoing diversification of the petroleum sector.

A: Regarding the German firms we have already worked

However, there are some German products here already and

with, we can pinpoint their objective of introducing their

some machinery suppliers have been operating for years

technology to the Mexican value chain. To facilitate this

within the country’s oil and gas industry.

process, the German government has established a variety of support initiatives to aid small and mediumsized companies in diversifying their profile and placing

CAMEXA groups over 700 companies in Mexico, Germany

themselves in international markets, such as the export

and other countries with the main objective of promoting

initiative by the German Federal Ministry of Economy and

commerce between Mexico and Germany, the Latin American

Energy. German players tend to work in close collaboration,

country’s largest European partner

389

ACRONYMS Acronym Meaning 1P

Proven Reserves

Improvement CONACyT

2P ProbableÂ Reserves

National Commission of Science and Technology

Possible Reserves

CONAGUA

National Water Commission

AAR

Association of American Railroads

CONALEP

National College of Professional Technical

AIEVAC

Industrial Association of the State of Veracruz

COPFs

Contracts of Financed Public Works

AIM

Asset Integrity Management

Cathodic Protection

ANH

Colombian National Agency of

CRE

Energy Regulatory Comission

Hydrocarbons

Computed Tomography

ANP

Brazilian National Association of

DIN

German Institute for Standardization

Petroleum

DOT

Department of Transportation

API

American Petroleum Institute

DP2

Dynamic Positioning

APM

Asset Performance Management

DPO

Dynamic Positioning Operators

ARES

Surface Recognition and Exploration

E&C

Engineering and Construction

Authorizations

E&P

Exploration and Production

ASEA

Safety, Energy and Environment Agency

EHS

Environment, Health and Safety

ASME

American Society of Mechanical Engineers

EOR

Enhanced Oil Recovery

AUV

Autonomous Underwater Vehicles

EPC

Engineering, Procurement and

AWS

American Welding Society

b/d

barrels per day

EPCI

Engineering, Procurement, Construction

B2B

Business to Business

B2C

Business to Customer

EPCIC

Engineering, Procurement, Construction,

BOP

Blow Out Preventer

CAPEX

Capital Expenditure

ESP

Electrical Submersible Pumps

CEE

Hydrocarbons Exploration and Production

FCBA

Fair Credit Billing Act

Contracts

FID

Final Investment Decision

CENAGAS

National Center of Control for Natural Gas

FMP

Mexican Petroleum Fund

CFE

Federal Electricity Commission

FPSO

Floating, Production, Storage and

CIEPs

Integral Contracts for Exploration and Production

G&G

Geological and Geophysical

CITI

Industrial Innovation Center

HMI

Human Machine Interface

CKD

Capital Development Certificates

HOFIM

High-speed, Oil-Free Integrated Motor

CNH

National Hydrocarbons Comission

HPHT

High Pressure, High Temperature

CNP

National Productivity Committee

HVDC

High Voltage Direct Current

COFECE

Federal Commission of Economic

IEA

International Energy Agency

Competition

IFC

International Finance Corporation

Federal Commision for Regulatory

ILO

International Labor Organization

COFEMER

Education

Construction and Installation Installation and Commissioning

Offloading

IMP

Mexican Petroleum Institute

PMC

Protective and Marine Coatings

IoT

Internet of Things

Public Relations

IPN

National Polytechnic Institute

PSI

Pounds Per Square Inch

ISO

International Organization for

PSV

Platform Supply Vessel

Standardization

Quality Control

ISP

Internet Service Providers

QHSE

Quality, Health, Safety & Environment

Information Technologies

ROI

Return Of Investment

ITAM

Autonomous Technology Institute of

RO-RO

Roll On - Roll Off

Mexico

ROV

Remotely Operated Vehicle

Institute of Technology and Superior

SAGARPA

Ministry of Agriculture, Livestock, Rural

ITESM

Studies of Monterrey

Development, Fishing and Food

JIP

Joint Industry Project

SAT

Mexican Tax Authority

Joint Venture

SCADA

Supervisory Control and Data Acquisition

LBA

Environmental Baseline

SCT

Ministry of Communications and Transport

LNG

Liquified Natural Gas

SEDATU

Ministry of Agararian, Territorial and Urban

LPG

Liquified Petroleum Gas

LWD Logging-While-Drilling

SEDENA

Ministry of National Defense

MAC

Main Automation Contractor

SEDESOL

Social Development Ministry

MLC

Marine Labor Convention

SEMARNAT

Ministry of the Environment and Natural

MLP

Master Limited Partnerships

MPLS

Multiprotocol Label Switching

SIPAC

System for the Payments of Assignments

MSA

Master Service Agreements

Mega Watts

SISTRANGAS

National Integrated System of Transport

Development

Resources and Contracts

MWD Measurement-While-Drilling

and Storage of Natural Gas

NAFINSA

Nacional Financiera Development Bank

SPV

Special Purpose Vehicle

NAFTA

North American Free Trade Agreement

STEM

Science, Technology, Engineering and

NBBI

National Board of Boiler and Pressure Vessel Inspectors

SURF

Subsea Umbilicals, Risers and Flowlines

NDT

Non-Destructive Testing

TAD

Tender Assisted Rig

NOM

Official Mexican Norm

TAPS

Trusted Asset Protection Survey

NSF

National Science Foundation

UNACAR

Autonomous University of Carmen

OBO

Operated By Others

UNAM

National Autonomous University of Mexico

OECD

Organization for Economic Co-operation

UTT

Tabasco Technological University

and Development

VSAT

Very Small Aperture Terminal

OHSAS

Occupational Health and Safety

WJTA

WaterJet Technology Association

Assessment Series

ZEE

Special Economic Zone

OPEC

Organization of the Petroleum Exporting Countries

Mathematics

INDEX ABB 188

CSIPA 210

Access to Energy 386-387

Data Scavenger 231, 232-233

Ainda Consultores 359

DEISA 267

Allseas USA 293

Deloitte Consulting Mexico 32

Alpha Deepwater Services 55, 142

DNV-GL 258-259, 260-261

Amec Foster Wheeler México 174

Dorot Mexico 252-253, 260-261, 270

América En Triunfo 214-215

Dow Chemical 178

AMESPAC 25, 136-137, 172, 180, 379

Dräger Safety Mexico 135, 260, 268

AMEXHI 18-19, 24, 34-35, 45, 55, 62, 134, 198-199

Emerson 228, 291

ANIQ 334-335

EMGS 76-77, 85

Aon Risk Solutions Mexico 133, 361

Emusa 64

API Coatzacoalcos 328-329

Enerflex 37, 296

Aquipsa 243

Enersoft Consulting 233, 283

ARHIP 33, 351

Eni 8-13, 102-104

ASEA 21,78-79, 134, 252-253, 254-255, 260-261, 375

ERM 256

ASESA 191

Evonik Industries Mexico 286, 288-289, 322-323

Athena Consulting 66, 136

EY 31

Bain & Company 8-13, 28, 42-44, 54-55, 132-133, 208-

F. Ruiz e Hijos 316

209, 322-323, 378

Fieldwood Energy 56, 57, 102-104, 107, 196, 200, 208-

Baker Hughes 110-111, 112, 172, 226, 290,

209

Beicip-Franlab Mexico 88, 118

FMP 22-23

Beristain + Asociados 165

Gallástegui Armella Franquicias 8-13, 302, 315

BGBG Abogados 67

Gazel 276, 297

BHP Billiton 8-13, 42-44, 74-75, 78-79, 102-104, 126, 127,

GE 112-113, 290, 291, 324

128-129,

Geo Estratos 60-61, 152-153

Bonatti 276-277, 287

Geoprocesados 86, 209

BP Downstream 306-307, 308, 383

GlobalSat 245

Braskem IDESA 59, 196, 226, 330, 331

Golfo Energy 343, 384

Brunel 209, 343, 345, 350

Goodrich, Riquelme y Asociados 26-27, 54-55, 180-181

Bureau Veritas 257

Grupo Diavaz 8-13, 152-153, 155, 196, 197, 343

C&C Reservoirs 36, 238-239

Grupo Hosto 170, 180-181, 205, 321

CBM 380-381

Grupo IDESA 59, 196, 322-323, 330, 331

CENAGAS 276, 281

Halliburton 132, 160

CGG 82-82, 116-117

Hasue de México 218-219

Chevron 8-13, 110-111, 126-127, 130, 134, 340-342,

Haynes and Boone 180-181, 377

COBSA 170, 176-177

HCX 353

Compañía Petrolera Perseus 55, 158-159

Heerema Marine Contractors 146

Consorcio Emcro 206-207

Heidrick & Struggles 346

Control Flow 90

Hempel 266, 322-323

Corporativo Cemza 36, 182

Honeywell 227, 232-233

COSL Mexico 92

IHS Markit 29

CNH

IMP 34-35

Alma América Porres 36-37, 74-75, 76-77, 78-79,

Industrias Energéticas 292-293

102-104

Integra Marine Services 170, 211

Gaspar Franco 12-13, 52-53

io oil and gas consulting 119

Héctor Moreira 20, 45

IPS Powerful People 343, 348, 350-351

Juan Carlos Zepeda 18-19, 54-55, 145

Isquisa 329

Néstor Martínez 196, 198-199

Jaguar E&P 65

CRE 276, 308, 309, 310-311

Katoni 175

KDM Fire Systems 260-261, 271

PetroBAL 42-44, 57, 102-104, 107, 136-137, 196, 200

Kodiak Services International 244

Petroexpertos 5000 350, 388

KPMG Mexico 30, 136-137, 208-209

Petroindustrias Globales 225, 235

MAN Diesel & Turbo Mexico 187

Petrolink 189

ManattJones Global Strategies Mexico 354

PGS 76-77, 81, 87

Marcos y Asociados 8-13, 25, 136-137

PPG Comex 204

Marsh Brockman and Schuh 226, 233, 364-365

ProOil 230, 233

McDermott 114-115

QMax 93

McQuilling Mexico 185

R2M 237

Metrología Electrónica de México (MTE) 246

Rainmaker Global Business Development 355

Mexican-German Commerce and Industry Chamber

Renaissance Oil Corp 42-44, 62-63, 152-153, 157

(CAMEXA) 389

Rengen Energy Solutions 325

Monterra Energy 302, 320

Rock Solid Images 84

Ministry of Economic and Portuary Development of

Rodríguez Dávalos Abogados 180, 343, 356

Veracruz 352

Roma Energy Holdings 160-161

Ministry of Energy

Rosen Group Mexico 176-177, 284-285

Aldo Flores 8-13, 152-153, 370-371

SAI Derecho & Economía 322, 357

Pedro Joaquín Coldwell 14-15, 374

SAMSON Control 269

Murphy Oil Corporation 58, 126, 134, 138-139

Sapura Energy 120-121, 343, 350-351

Nader, Hayaux & Goebel 358

Schlumberger 81, 87, 144, 153

Nalco Champion 133, 140-141

Sespec 363

Naviera Bourbon Tamaulipas 221

SGS Mexico 262-263

Naviera Integral 201

Shockwatch 240

NES Global Talent 385

Sierra Oil & Gas 8-13, 54-55, 58, 102-104, 108-109, 126,

Net Brains 91, 226, 232-233, 236

136-137, 138-139, 196, 208-209, 327

Northwest Technical Solutions 264, 265

SITEPP 242-243

NRGI Broker 37, 126, 362

Spectrum Geo 81

O&L Offshore 220

Stanton Chase 36, 343, 347, 351

Oceaneering 126, 147

Statoil 8-13, 126, 136-137

Offshore Technical Compliance (OTC) 264

Strata BPS 152, 156, 276, 282

OH Maritime 116-117

Subsea 7 Mexico 145

Oiltanking 317

Sumimsa 180-181, 217, 226, 252-253

Onexpo Nacional 25, 313, 315

Talos Energy 8-13, 102-104, 108-109, 196, 208-209

Osbog 247

Taylors 183

Oxiteno Mexico 332

Tiger Engineering 216

OXXO GAS 312, 315

Tomas Ruiz 360

Paradigm 89

Transportes Aéreos Pegaso 190

PEMEX

TSC Offshore Group 94-95, 170

José Carrera 376

Tytal 318-319

José Antonio Escalera 74-75, 80

Unigel Mexico 333

José Antonio González Anaya 16-17

United Pipeline de México 286, 294-295

Gustavo Hernández 42-44, 127, 153

UTCAM 344

Juan Javier Hinojosa 105

Vallen Proveedora Industrial 213

Carlos Murrieta 260-261, 304-305, 322-323

Weatherford México 162-163

Juan Pablo Newman 340-342

Welltec 241

Miguel Ángel Servín 170, 172-173

Williams Scotsman 184

Pepperl+Fuchs Mexico 179, 226, 252

Wood Group 229, 232-233, 291

Perforadora México (PEMSA) 212

Wood Mackenzie 126, 303, 382, 383

Petricore 96-97, 180-181

WorleyParsons Group 171

FARM-OUT SPOTLIGHTS 106 Ayín-Batsil

131 Nobilis-Maximino

128-129 Trion

154 Cárdenas-Mora

130

154 Ogarrio

PEMEX - Chevron - INPEX Joint Venture

TECHNOLOGY SPOTLIGHTS 118

Beicip-Franlab: OpenFlow Suite 2016

309

CRE: Gasoapp

COMPANY PROFILE 203

Cotemar: Local Partner of Choice

PROJECT SPOTLIGHTS 207

Consorcio Emcro: Emcro Gains Stricter Certification for Mud Skips

294-295 United Pipeline: United Breathes New Life into Aging Pipeline Infrastructure

ADVERTISING INDEX 6 SENER

177 COBSA

186

Sapura Energy

Mexico Business Events

19 Osbog

194 Cotemar

Goodrich Riquelme Asociados

199

TSC Group

40 COSL

202

Rengen Energy Solutions

Geo Estratos

206

Consorcio Emcro

IPS Powerful People

210

Integra Marine Services

Jaguar E&P

215

América En Triunfo

66 PetroBAL

224 Emerson

Net Brains

230 Sumimsa

Spectrum Geo

238-239 C&C Reservoirs

96–97 Petricore

250 ASESA

100 QMax

255 DNV-GL

109

Talos Energy

263 SGS

113

Williams Scotsman

274

Rosen Group

115

Hasue de México

289

Evonik Industries Mexico

118 Beicip-Franlab

296

Wood Group

124 Schlumberger

300 Tytal

137

Corporativo Cemza / Marinsa

305

139

Murphy Oil Corporation

328 Oiltanking

143

Alpha Deepwater Services

335

150

Industrias Energéticas

338 Sespec

159

MAN Diesel & Turbo

368 BP

161

Roma Energy Holdings

381 CBM

164

Transportes Aéreos Pegaso

387

168

NALCO Champion

388 Deloitte

Grupo Hosto Braskem IDESA

Access to Energy

PHOTO CREDITS Inner front cover: PEMEX

88 MBP

4 PEMEX

89 MBP

14 SENER

90 MBP

16 PEMEX

18 CNH

92 COSL

20 CNH

93 MBP

21 ASEA

94 MBP

22 MBP

24 MBP

96 MBP

25 MBP

98 McDermott

Goodrich, Riquelme y Asociados

105 PEMEX

Bain & Company

107 MBP

Net Brains

TSC Group

29 MBP

108

30 KPMG

110 MBP

31 EY

111

Baker Hughes

32 MBP

112

GE Oil & Gas

33 ARHIP

114 MBP

Mexican Petroleum Institute

116 MBP

C&C Reservoirs

119

io Oil & Gas Consulting

Stanton Chase

120

Sapura Energy

Corporativo Cemza

121

Sapura Energy

Talos Energy

37 CNH

122 PEMEX

37 MBP

127 MBP

132 Halliburton

NRGI Broker

37 MBP

133 MBP

38 PEMEX

133

Bain & Company

45 CNH

133

Aon Risk Solutions

52 CNH

135 MBP

54 MBP

138

Sierra Oil & Gas

140 MBP

Bain & Company

141 PEMEX

Goodrich, Riquelme y Asociados

142

Alpha Deepwater Services

144 Schlumberger

Murphy Oil Corporation

Alpha Deepwater Services

55 MBP

145

55 MBP

146 MBP

56 MBP

147 MBP

57 MBP

148

153 PEMEX

Sierra Oil & Gas

Subsea 7

Grupo Diavaz

59 MBP

155 MBP

60 MBP

156 MBP

157

Renaissance Oil Corp

64 Emusa

158 MBP

65 MBP

160 MBP

66 MBP

162 MBP

67 MBP

163 PEMEX

70 COSL

165

78 CNH

166 PEMEX

80 MBP

171 MBP

81 MBP

172 MBP

82 CGG

173 PEMEX

84 MBP

174 MBP

85 MBP

175 MBP

86 Geoprocesados

176 MBP

87 MBP

178

Beristain + Asociados

Dow Chemical

PHOTO CREDITS 179 MBP

233 MBP

180

233 MBP

Rodríguez Dávalos Abogados

180 MBP

233 Honeywell

180 MBP

233

181

234 PEMEX

Haynes and Boone

Marsh Brockman and Schuh

181 MBP

235 MBP

181

236

Goodrich, Riquelme y Asociados

Net Brains

181 MBP

237 R2M

182

238

Corporativo Cemza

C&C Reservoirs

183 MBP

240 MBP

184 MBP

241 Welltec

185 MBP

242 MBP

187 MBP

243 MBP

188 ABB

244 MBP

189 MBP

245 MBP

190 MBP

246 MTE

191 ASESA

247 Osbog

192 PEMEX

248 McDermott

197 MBP

254 ASEA

198 MBP

256 MBP

200 MBP

257 MBP

201 MBP

258 MBP

203 Cotemar

259 DNV-GL

204 MBP

260 MBP

205 MBP

260 MBP

206

Consorcio Emcro

260 MBP

207

Consorcio Emcro

261 MBP

208

Bain & Company

261 ASEA

208

Talos Energy

261 MBP

208

Sierra Oil & Gas

261 PEMEX

209 MBP

262 MBP

209 Geoprocesados

264

209 KPMG

265 MBP

209 MBP

266 MBP

210 MBP

267 MBP

211 MBP

268 MBP

212 MBP

269 MBP

213 MBP

270 MBP

214 MBP

271 MBP

216 MBP

272 Enerflex

217 MBP

277 Bonatti

218 MBP

281 MBP

219

Hasue de México

282 MBP

220

O&L Offshore

283 MBP

221

Naviera Bourbon Tamaulipas

284

Rosen Group

222 Honeywell

285

Rosen Group

227 Honeywell

286 MBP

228 MBP

287 Bonatti

229 MBP

288

230 MBP

290 MBP

231

291 MBP

Data Scavenger

OTC Compliance

Evonik Industries Mexico

232 MBP

291 MBP

232

Data Scavenger

291

232

Net Brains

292 MBP

GE Oil & Gas

293 MBP

346 MBP

294

347

United Pipeline

Stanton Chase

296 MBP

348 MBP

297 MBP

349 ExxonMobil

298 Tytal

350 MBP

303 MBP

350 MBP

304 PEMEX

350 MBP

306 MBP

351 MBP

307 BP

351

Sapura Energy

308 MBP

351

Stanton Chase

309 CRE

351 ARHIP

312

352 MBP

OXXO GAS

313 MBP

353 MBP

314

354 ManattJones

Braskem IDESA

315 MBP

354 MBP

316 MBP

355 MBP

317 MBP

356

Rodríguez Dávalos Abogados

318 Tytal

357

SAI Derecho y Economía

319 Tytal

358 MBP

320 MBP

359

321 MBP

360 MBP

322

SAI Derecho & Economía

AINDA Consultores

361

Aon Risk Solutions

322 MBP

362

NRGI Broker

322

363 MBP

Bain & Company

323 MBP

364

Marsh Brockman and Schuh

323 MBP

366

Sapura Energy

323

370 MBP

Evonik Industries Mexico

323 PEMEX

374 SENER

324

375 ASEA

GE Oil & Gas

325 MBP

376 MBP

326 MBP

377

Haynes and Boone

327

378

Bain & Company

Sierra Oil & Gas

328 MBP

379 MBP

329 MBP

380 MBP

330 MBP

382 MBP

331

383 MBP

Braskem IDESA

332 MBP

384 MBP

333 Unigel

385 MBP

334 MBP

386

336

388 MBP

GE Oil & Gas

Access to Energy

340 PEMEX

389 MBP

344 MBP

390-391 PEMEX

345 MBP

Inner back cover: Braskem IDESA

CREDITS JOURNALIST & INDUSTRY ANALYST: Lucy Raitano JUNIOR JOURNALIST & INDUSTRY ANALYST: Arturo Mora JUNIOR JOURNALIST & INDUSTRY ANALYST: Diana Quezada EDITORIAL MANAGER: Tomás Sarmiento EDITORIAL MANAGER: Sara Warden EDITOR: Ricardo Guzmán López MANAGING EDITOR: Mario Di Simine PUBLICATION COORDINATOR: Fay Goijarts PUBLICATION COORDINATOR: Alberto Estrada COMMERCIAL DIRECTOR: Jack Miller GRAPHIC DESIGNER: Ailette Córdova JUNIOR DESIGNER: Mónica López DESIGN DIRECTOR: Marcos González WEB DEVELOPMENT: Omar Sánchez COLLABORATOR: Nadine Heir COLLABORATOR: Esteban Pages COLLABORATOR: Mariana Jiménez CIRCULATION MANAGER: Elizabeth Solis DIRECTOR GENERAL: Jeroen Posma

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