PEMEX CEO, Team Seen Favoring Rapid Adoption of Energy Reform

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PEMEX's executive team appears to favor energy reform, but sees the need for a level playing field in face of competition from private companies.

Petroleos Mexicanos’ (PEMEX) reaction to the implementation of energy reform in Mexico will hinge on fairness in competition, support of government in terms of taxes and regulation, and PEMEX’s basic production under Mexico’s new tax scheme, a former PEMEX executive and Secretary of Energy for Mexico said at a recent presentation.

PEMEX and his close team fully favor the speedy implementation of Mexico’s energy reform, said former PEMEX CEO and Director General Dr. Jesus Reyes Heroles at a presentation in Houston earlier this month. But convincing the company’s second, third and fourth layers of management and employees may prove an issue.

From Heroles’ perspective, PEMEX agrees with the elimination of PEMEX’s exclusivity over all stages of the exploration and production chain. But PEMEX sees the need for a level playing field in face of new competition, and internal disappointment over the excessive intervention of Mexico’s treasury.

However, the PEMEX community was exposed to an avalanche of ideas, comments, criticisms and proposals during the 2008 reform attempt.

“This avalanche provided an open discussion of ideas extremely useful for changing the company’s knowledge and culture,” Heroles noted.

Mexico and its main political parties did not go the easy route of false reform with their latest attempt to reform Mexico’s energy sector, said Heroles at a presentation by law firm Mayer Brown. Instead, they addressed the real issue, which is a constitutional reform.

The energy reform legislation passed in December 2013 to reform Mexico’s energy sector is just one of the significant reforms taking place in the country. The reform of Mexico’s energy sector – which has remained closed to private investment and where every barrel of oil is owned by the state – is anticipated to foster tremendous amounts of investment.

Major changes introduced in the energy reform include eliminating PEMEX’s exclusive right to exploit Mexico’s hydrocarbons, and allowing PEMEX to partner with other companies. PEMEX’s inability dramatically limited the company’s ability to meet its objectives, and to lag behind other major companies in areas such as technology, Heroles noted. The reform also opened Mexico’s electric power sector to private investment and participation.

Mexico’s legislation currently is working on the secondary regulations to establish production sharing and profit sharing contracts. In recent years, Mexico has had an excellent track record in staying with new policies, and the changes of the reforms being implemented as intended are high.

“Only time will tell if they work as intended,” said Jose L. Valera, partner in Mayer Brown’s Global Energy Group.

Energy reform will play a key role in the Mexican government’s strategy to accelerate economic growth and employment, which will require an increase in public and private investment. However, the secondary legislation will need to guarantee budgetary flexibility for PEMEX, Heroles noted. Historically, PEMEX’s net income has been negative, but before taxes and duties, the company historically generated positive results. The “confiscation” of profits by the Mexican Treasury has prevented PEMEX from having sufficient funds to invest in strategic projects.

PEMEX’s tax burden will need to be reduced by at least the equivalent of 1 percent of Mexico’s gross domestic product, and the counterproductive intervention of government in PEMEX’s budget management is necessary for the company to operate in a reformed Mexico energy sector.

Whether PEMEX pursues joint ventures with private sector companies in Round Zero bidding depends on the government’s allocation of resources to PEMEX. The participation of private companies in current areas of activity will be limited by public opinion and resistance by unions, who argue that work should correspond to rank and file, Heroles noted.

Heroles anticipates PEMEX will focus more on exploration and production activities versus midstream and downstream, a move in line with PEMEX E&P’s aim to concentrate on the most profitable areas. To maximize profit, PEMEX will participate in auctions for new areas, but mostly like in joint ventures with private companies. The exploration of new areas through joint ventures will be especially true for deepwater.

PEMEX’s lack of sufficient capital expenditures for midstream infrastructure has created bottlenecks through Mexico’s midstream infrastructure system. These bottlenecks can be found in Mexico’s gas pipelines and storage facilities, despite the fact that gas pipelines and storage facilities have been open to private investment since 1992, Heroles noted.

The update and expansion of Mexico’s transportation and warehousing of fuels, which has been closed for participation by private companies until now, is the most critical. Infrastructure needed in this area includes specialized port terminals with storage capacity, multi-product pipelines for imports and distribution in high fuel demand areas, and storage and distribution terminals in critical locations, Heroles said.

Mexico’s current pipeline systems are not integrated, and are saturated with supply and lack redundancy, Heroles noted. The country’s storage terminals are also poorly distributed around Mexico; some are not connected to the pipeline system. The greatest fuel deficit exists in central-west Mexico, which consumes the most fuels of any part of the country. Tuxpan port on Mexico’s eastern cost receives 70 percent, or 190,000 barrels of oil per day, of all of Mexico’s fuel imports.

Heroles believes that joint ventures between PEMEX and private investors could occur in Mexico’s refining sector. Due to its insufficient refining capacity, Mexico currently imports 50 percent of its gasoline and 20 percent of its diesel. Mexico’s current investments in its refining system includes ultra-low sulfur plants for gasoline that are under construction and for diesel plants, which are in the final planning stage.

The reform eliminated the difference between artificial differentiation between basic and secondary petrochemicals, which will allow new and existing exploration and production and petrochemical companies to carry out gas processing activities. Heroles sees numerous investment opportunities due to the abundance of North American natural gas.

Mexico could become a natural gas exporter in the mid-term outlook, depending on the response of private investors to shale oil and gas opportunities in Mexico, regional natural gas prices and PEMEX’s budget restrictions, Heroles noted.

In conclusion, Heroles sees PEMEX continuing as a leaner, more efficient key player in Mexico’s hydrocarbons sector, following the elimination of its drilling division, self-provision of health care for employees and streamlining of its operations. PEMEX will be more responsive to market conditions if it’s excluded from the federal budget, and stronger financially if the Treasury is willing to introduce a new tax regime.

“The constitutional reform is very good news, but its success will depend on secondary legislation,” said Heroles. “The creation of the ‘Empresas Productivas del Estados’ is a step in the right direction, but not enough to ensure a level playing field.” 

The taxation of existing and future areas, PEMEX’s financial and operational flexibility, and role and efficacy of existing and future regulatory agencies, will also influence PEMEX’s future success.



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