Mexican energy reforms: The test for Pemex

Long seen as a proxy for Mexico, oil company Pemex faces new challenges after the implementation of President Peña Nieto’s landmark energy reforms. If senior management can meet them, it could be the start of a long road to the eventual IPO of one of the world’s most powerful energy firms.

For the first time in 76 years, Mexico’s oil and gas industries are being opened up to private companies, thanks to the government’s energy reforms. President Enrique Peña Nieto signed the new energy law – the standout legislation of a plethora of far-reaching, systemic reforms from the 20-month old administration – on August 11.

Far beyond the reform of the financial sector, telecommunications and education, it is the most important (and probably the most politically sensitive and difficult to implement) step towards achieving the president’s vision for Mexico.

Two days later, on August 13, the government announced the results of ‘Round Zero’ – the first phase of those energy reforms, which outlined the oil reserves (current and future) that would be allocated to Pemex, and determined which would be scheduled for future auctions (the first of which will be auctioned in ‘Round One’ in the first half of next year).

Round Zero had been scheduled for September; the date was brought forward to two days after the reform’s promulgation in a clear indication of the urgency that the president is placing on moving swiftly into the implementation and execution stage. Peña Nieto says he expects the reforms to lead to foreign direct investment of $50.5 billion by 2018.

On August 12, between these two landmark days for Mexico’s soon-to-be-displaced-as-a-monopoly-national-oil-company, some of Pemex’s senior management meet Euromoney. At 5pm on an unusually inclement Mexican summer day, Rolando Galindo, investor relations director, Roldolfo Campos, Pemex’s treasurer, Mario Beauregard, CFO, and others group together in a meeting room on the 14th floor of its headquarters in downtown Mexico City.

Given the meeting’s proximity to the announcement of Round Zero, introductions transition immediately into discussion about the results of Pemex’s request for oil rights, which will be announced to the country the next day, as well as to an eager audience of global, private sector companies that were quietly – but probably ravenously – watching from the sidelines.

Pemex had sought to retain the right to 83% of Mexico’s 24.8 billion proven or possible reserves (of which 12.5 billion are proven) and 31% of the 112.2 billion of total prospective barrels. Either the room is full of skilled poker players or genuinely no one knows what has already been decided. Euromoney’s presumption that there must have been leaks – or at least hints – from CNH, the hydrocarbons regulator, to those in the room ahead of the announcement is convincingly denied.

Instead, there seems to be lingering surprise that Round Zero has been moved forward one month. “I guess that shows the government’s capacity for execution – I am pleasantly surprised,” says Galindo.

“That’s right,” adds Beauregard, “but the most challenging times are ahead of us”. The next 75 minutes of the meeting explored those challenges, how Pemex sees its new operating strategy and, by extension, the opportunities that lie ahead for the private sector, both nationally and internationally.

Javier Artigas, head of BTG Pactual’s Mexico office, typifies the private sector’s echo of surprise at the speed of progress achieved to date.

“The energy reforms are better than anyone expected and we were concerned about timing,” he says, speaking earlier the same day. “But now that it has been announced, by the end of the year we will see the bidding process rules and regulation [for Round One] and soon we will see the designation of the Pemex board and the commissions that will regulate the new law. This time things are really happening, and with a sense of urgency that is very important.”

Artigas is not alone in reporting that a large number of companies from Latin America, the US and Europe have been visiting Mexico to explore likely opportunities in oil exploration and production (E&P), gas, electricity, transportation and infrastructure.

“Like never before,” says Artigas, “and I have been in this business for 30 years. It’s not the portfolio investors, it’s the real economy companies. We have been taking them around, and then they have been going back to do their homework and wait for the rules. Those rules came in line with or exceeded expectations. So they will be back. They will come back on Monday.”

The Round Zero announcement was good news for Pemex. The company has retained all of its requested 2P rights and 67% of its request for prospective resources, of which 18.2 billion barrels have been assigned from conventional, shallow areas and just 3.9 billion from the total 60.2 billion barrels of unconventional resources – which include the large deep-water resources in the Gulf of Mexico.

Analysts agree that Pemex has been given more than enough to be going on with. Also, there is nothing preventing Pemex competing in subsequent rounds of auctions – just as there is no prohibition on Pemex creating joint ventures with oil companies to develop any of the reserves it has just been granted.

“Some people have said that the fact that these reforms remove our monopoly is very bad [for Pemex],” says Beauregard. “Well, yes and no. It’s not bad in that being in a monopoly requires [the company] to invest in all activities in the value chain – it doesn’t matter if that investment is productive, efficient or creates value – you have to invest.”
For the full article visit Euromoney Magazine

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