Mexico is experiencing a historical moment marked by a period of macroeconomic stability and high growth expectations in the short term. The structural reforms implemented in the past year further accentuate a market of 116 million people with an average age of 26 years, open to world trade with 12 free trade agreements with 44 countries. Last year a record was established in attracting foreign direct investment, reaching USD$38 billion. KITE Invest sat down with the CFO of PEMEX, Mario Alberto Beauregard, to get an insider’s perspective of Mexico’s energy sector and the implications of the energy sector reform.
KITE Invest: What is your opinion on the structural reform process initiated by the government and its ability to drive economic and social growth in the medium and long term?
Mario Alberto Beauregard: The reform process that this administration started is a process that signifies a difference in comparison to many other countries. Generally countries make reforms when they are in a moment of crisis, and in the case of Mexico this whole reform process began in a moment of great stability, although there were sectors in the Mexican economy that required this type of initiative. The legislative process of constitutional change, new legislation and amendments to existing laws took less than two years to be adopted by the Chamber of Deputies, Senators and local congresses, and today they are already in an implementation phase.
KITE: Given that we are in the implementation phase, when do you think Mexicans will begin to see tangible results from these reforms?
MAB: This is a gradual process. To the extent that it is implemented, we are going to feel the benefits of the reforms. For example, in the case of energy reform, for me the most important part was carried out, after the signing of the free trade agreement twenty years ago. We find ourselves now in the process of implementing the first round; with the results of the first phase coming in July and the second phase in September. With these results we will start seeing a clear trend towards increased investment in the country by new companies that are now be able to enter the sector. It is a gradual process that is going to be noticeably felt from this year onwards.
KITE: What is your assessment on the regulatory and legal frameworks, which will provide security to investors when investing in Mexico?
MAB: Much has been done with the legal framework. Mexico, a country having only opened its energy sector when most countries had already done so, did not start from scratch, but it can still learn from other countries’ experiences.
In the case of the Mexican energy reform, several constitutional articles were modified first and then 22 pre-existing legal systems were modified, as well as others that were newly created.
KITE: What role will these regulatory bodies consider so that they can operate in an orderly fashion in the energy sector?
MAB: I think one of the great successes of the energy reform is that it established new regulatory measures, while others already existed, these new regulations were given a clear mandate, and they will grow stronger and gain greater autonomy. For example, you have a Department of Energy that is charge of dictating energy policy and has other regulatory arms that contribute to its function: the National Hydrocarbons Commission for the ‘upstream’ part, the Energy Regulatory Commission for the ‘downstream’, and others where each has a clear goal of what their role is. This helps to improve the quality of the process of implementing the energy reform.
KITE: What kinds of investments opportunities are waiting for companies intending to operate in Mexico?
MAB: Must be companies that show financial and technical capacity to do the work required in exploration and exploitation of hydrocarbons.
KITE: And, how much of that regards infrastructure logistics?
MAB: The same. Here in Mexico we have the very important challenge to increase the logistics of storage and the transport of hydrocarbons, and although we already have it partially established, we believe that there is an area of significant opportunity for new businesses to come and develop new infrastructure.
KITE: By January 2017 there will be the liberalization of fuel importation. How will this change the rules with respect to competition within the sector?
MAB: PEMEX is the only operator today that can have service stations, and what we are doing before the sector’s opening is preparing ourselves for this environment of competition through a total redesign of the parking service networks that we have.
KITE: Regarding the estimates of the increased production of crude oil, according to our information, there will be an increase of production of 2.5 million barrels daily to 3.5 million or 4 million barrels daily. Therefore, do you believe that increased production, as well as the expectations of attracting FDI will be met and are feasible?
MAB: For PEMEX the production estimate is 2,228 million barrels daily on average during the year. We think that to the extent that the reform will be implemented, production, at the aggregate level of the country, will increase and we plan that PEMEX’s own production will gradually resume an upward path. This is because with the opening of the sector one of the great benefits is that PEMEX is now able to associate with new companies, either to acquire new technologies or to attract capital, and thus exploit other areas. This will enable PEMEX in the coming years to develop its business better and increase oil production as well.
KITE: If you were to set a list of priorities regarding the new companies that PEMEX can be associated with, in terms of human capital, technology, or expertise, which ones would you assess as more important at this time when choosing future partners?
MAB: PEMEX has allocated different fields. There are some areas in which we are experts, such as shallow waters, where we have extensive experience and where perhaps the priority is to attract capital in order to exploit these fields. There are other areas that require certain technologies that we do not have, such as in the case of deep water. As a result, depending on the type of field, the type of partner is defined.
KITE: There is much talk of falling oil prices and how it could affect the success of the energy reform. Minister Pedro Joaquin Coldwell assured that Mexico remains competitive despite the low prices of crude oil. What are your thoughts on this?
MAB: Mexico has an incredible geology. Of all the areas assigned to PEMEX we have a production cost designated to exploration and development, of approximately USD$23 per barrel. At the price of $50 a barrel there obviously comes a very interesting margin for the entire oil industry. For these reasons, Mexico remains competitive at these prices.
KITE: With the moment that the United States is undergoing on matters of energy and current production levels of producer countries, what is your view of the market in the upcoming year?
MAB: I think the market is undergoing a structural change where oil prices will continue at relatively low levels for the next two or three years; we do not expect prices to return to levels of USD$100 per barrel in the short term, and therefore, our investment plans are adapting to this price scenario. Gradually we are seeing these price levels, the level of activity in the sector particularly in the US, and especially in areas of shale, are all coming down. This will affect oil production and can give a floor to the price of oil.
Another issue that is relevant, and has been a key factor in explaining the drop in oil prices in recent months, has been the weak economic activity in several areas of the world, particularly in Asia and Europe. Eventually and given the monetary and fiscal policies being applied in these regions, they are going to see a rebound in economic activity, and therefore, reflecting in an increased demand for hydrocarbons.
Both of these factors, a reduction in the supply of hydrocarbons and an increase in demand for hydrocarbons, we believe will lead us to a scenario of slightly higher than current prices.
KITE: The British Oil & Gas industry is experiencing a turning point after 50 years of production. The size of new fields discovered are much less than expected and production has fallen by 37% from 2010 levels. Do you think that now more than ever the two markets have a strategic importance for each other?
MAB: Sure. In fact, that’s why partnerships are so important. With the UK, it has been seen that the areas or fields where oil is removed are geologically more complex, they need much more sophisticated technology than we need; however, eventually Mexico will be moving into more complex areas, such as deep water that is not yet fully exploited. I think that there could be very significant synergies, so together we could maximize the exploitation of oil in those areas.
KITE: Where are the greatest opportunities in Mexican Oil & Gas, and not only for big oil companies but also for smaller outfits?
MAB: I think mainly in partnerships with PEMEX. Our organization has already been assigned different areas and now we will enter a process of seeking external partners who have the “expertise” in certain areas. In the short term this is the main opportunity that exists in the market.
KITE: After a 77-year monopoly of the sector, how have the people who work for PEMEX, considering that this is such a radical change, taken the transition?
MAB: That’s a great question, because part of the challenge facing PEMEX is adapting to a new competitive environment after a 77-year monopoly. Within PEMEX the initiatives that are being carried out by our CEO, Emilio Lozoya, have seen a profound cultural transformation where he is working closely with people to adapt them to these new market conditions and competition. It is important to point out that this involves a change in mindset; we must seize the opportunity provided by this new opening, as we are no longer a monopoly and we must become a successful company in the market.