Mexico's rate of change

In early February, Mexican President Enrique Peña Nieto shook things up at the country’s oil company, Petróleos Mexicanos (Pemex), immediately replacing then-CEO Emilio Lozoya Austin with Mexico’s director of the Social Security Institute (IMSS) José Antonio González Anaya, a highly respected economist who has held positions at the World Bank and at Stanford University in California.

Newly appointed Pemex CEO José Antonio González Anaya at IHS CERAWeek 2016. Photo: Audrey Leon/OE.

Peña Nieto, in addition to several senior Mexican officials, made an appearance at this year’s IHS CERAWeek in Houston in late February to talk about the country’s energy reforms and implementation, a signal that Mexico – despite the global downturn in oil prices – is still very much open to foreign investment.

“Just like I committed myself to achieve the energy reform, now I am committed to accomplish its full, effective and timely implementation,” Peña Nieto told the CERAWeek crowd in Houston.

And with changes at Pemex necessary to the reform’s success, Peña Nieto acted quickly to replace Lozoya as head of Pemex in order to get the company’s reforms completed faster.

“They are sending an enforcer (González),” says Francisco J. Monaldi, a fellow in Latin American Energy Policy for the Baker Institute at Rice University. “The fact that the president was willing to move one of his most trusted persons (Lozoya) to execute this, it means he means business.”

Monaldi told OE that González was chosen to get the IMSS healthier, and now he’s been “chosen to do surgery on Pemex.”

“It’s an over-bloated company with more than 150,000 employees and declining production,” Monaldi says. “And all this was true before the oil price collapsed. They needed the reform because oil production was lagging, and significant, dramatic investment was needed.”

Pemex hit its production peak of 3.8 MMb/d in 2004, according to the US Energy Information Administration, and hasn’t achieved anything close since. According Pemex’s own numbers, the company produced 2.2 MMb/d in December 2015.

Mexican President Enrique Peña Nieto speaking at IHS CERAWeek 2016. Photo: Audrey Leon/OE.

Monaldi says that reforming Pemex is the biggest piece of the Mexican energy reform. “[Mexico] has only opened very risky or relatively marginal oil fields for private investment and they have kept most of the best areas and proven reserves in the hands of Pemex,” he says. “But if Pemex does not reform, then they will have a very difficult time changing the sector and increasing production.”

A key to boosting production and the company’s financial health will be the long-awaited farm-outs and potential joint venture partnerships, which Lozoya was criticized for not moving fast enough to accomplish.

Monaldi described the situation with Pemex as an “emergency.”

“I’m sure that he (Lozoya) understood the basic thrust of the need for the reform, it’s tremendously difficult because you have a very powerful union,” he says. “It’s a politically very complex environment in which anything you do might lead the detractors of the reform to use it politically and any major overhaul of the company will face significant backlash, and I think that made Lozoya lose momentum.”

And that loss of momentum led to delays, which made the Mexican government lose patience with Lozoya, Monaldi says.

The road ahead for his replacement, González, is long and difficult, and contains obstacles such as steep budget cuts (Pemex’s budget will be slashed by US$5.4 billion/100 billion pesos this year) and deep arrears to service providers. High on González’s agenda is finding ways to cut corporate expenditures, and prioritize investments. And one way to accomplish the latter is to make sure the farm-outs go ahead as planned.

Monaldi stressed that the farm-outs should be a priority in the fight to reverse declining oil production.

“These (farm-outs) are the only one where you could have some change within the next five years,” Monaldi says. “The deep offshore could take 7-10 years to deliver output. This, I think, is a priority, and was a part of the reform that was lagging with respect to what we had expected.”

And at IHS CERAWeek, González seemed assured that he could right the ship at Pemex, and told the audience he was dedicated to finding the right partners for the company.

“We have to bring partners in,” he said at CERAWeek. “One of the messages I have gotten from people here is that we should try to establish a timeline so we know what we’re going to do in the future. I don’t have this ready but we will try to do one. One of the nice things that the National Hydrocarbons Commission with the Ministry of Energy has done is that they have set a timeline of when rounds come in, and we have to provide a plan and say what the rules are that we will engage so that we are very transparent about what our criteria is.”

González, when asked during his CERAWeek appearance about partnerships and how private equity firms and hedge funds who are interested in Mexico could be of assistance, the newly placed CEO made it clear he would prefer partners who can bring technology, expertise and operational experience to the table.

“We are certainly in need of financial resources,” he said. “But, if we can get efficiency gains through operations, through technology, in the business that we are in: the oil business, that’s even more profitable for Pemex and we would be much more interested in that.”

Lourdes Melgar, of Mexico's Ministry of Energy, speaking at IHS CERAWeek 2016. Photo: Audrey Leon/OE.

At a separate panel discussion at CERAWeek, Lourdes Melgar, Mexico’s Deputy Secretary of Energy for Hydrocarbons, discussed the actual farm-out process, stating that Mexico is aware that the process is not exactly what the industry is used to. However, the Energy Ministry is currently working with Pemex’s new leadership on migration of certain fields, stating that the company has already presented some proposals but the department will work with González to set clear priorities.

Juan Carlos Zepeda, president of Mexico’s National Hydrocarbons Commission (CNH) told the same panel that essentially it is up to Pemex to determine how many farm-outs, the number of fields, and take that to the Ministry of Energy. Then, Mexico’s Ministry of Finance will set the terms, and CNH will run the bidding process. He clarified that they (CNH) do not pick the partners.

While the aim had been to hold the bid round for the farm-outs in parallel with phase four of Round One (the deepwater round, which Peña Nieto announced would take place in December), Melgar acknowledged it has been much easier to move forward with the contracts that do not involve the state-owned company, calling the farm-outs process, so far, “arduous” and “more painful than we ever imagined” because the learning curve has been slow.

“We are working with Pemex to present the farm-outs,” she said. “We believe it is part of the strategy to strengthen Pemex, and we are sitting down with the new CEO and we are working with him on this. I can’t give you a date, but what I can tell you is that we are committed to issue the farm-outs as soon as we can.”