Guillermo I. García Alcocer, Director General of Exploration and Exploitation of Hydrocarbons, Sener, Mexico
“Mexico’s dependency on foreign gas imports was actually a key driver in instigating the change. Even though the oil production that we lost over the course of a decade equated to the entire production of a country like Colombia, the rising price of oil overcompensated for the decline in volumes and so failed to really impact the national psyche. While declines in production were steep, the increases in prices were even steeper so the effects were barely noticeable.” Guillermo I. García Alcocer, Director General of Exploration and Exploitation of Hydrocarbons, Sener, Mexico.
Having been highly commended by the President’s office for your contribution to the national energy reforms, what has been your role in shaping those reforms?
I was essentially part of a large team of technicians. I hold ten years’ experience working in the Ministry of Finance and my background is as an economist. Seven years ago, I joined SENER and set about identifying best practices in energy policy around the world. As benchmarks, we analyzed the Brazilian, Nigerian, Colombian and Norwegian systems and even drew examples from a diverse range of contexts including those of Gabon and Israel. Over time, we compiled many case studies and one of our main contributions was to interpret this information and deliver it to the lawmakers.
Almost all of the stakeholders in the energy industry that we have interviewed claim to have been surprised by the extent and depth of the reforms. How did such radical change come about?
We were, ourselves, pleasantly surprised at the way in which the politicians embraced our proposals. The energy reform is a positive example of politicians taking into account the advice of technical experts on best practices in order to determine what is most beneficial for the country as a whole.
Our main challenge was to meet these expectations and provide the decision makers with innovative ideas on how to move away from a state monopoly to build a new industry and its corresponding regulatory structure.
I actually had the privilege of beinga board member of Pemex and therefore hold an insider perspective on how corporate culture has been changing within the company. Current Pemex CEO, Emilio Lozoya Austin, is an exceptionally market-orientated individual and has been making real headway in transforming the corporate mentality of the company from that of a monopoly to that of a competitive entity.
What were the original objectives behind the reforms? And is the legislation that has now been approved by Congress fit-for-purpose to achieve those original objectives?
In Mexico, we have experienced a long trajectory of declining field production volumes. Maximum production actually peaked in 2004 at 3.4 million barrels per day and we were reliant on big fields in shallow waters. Meanwhile Pemex had become a real champion in shallow water production, which represented much more of a technical challenge back then than it does today. Even the Norwegians came to Mexico to study Pemex’s techniques and methods. Nevertheless, nothing could reverse the normal lifecycle of these fields, and the production in the mega-oil field Cantarell declined from 2.1 million barrels per day to only 400,000 barrels, which represented a significant drop. Oil is, of course, an important source of income for the government with almost 30 percent of the budget coming from oil appropriations and therefore the main objective of the reform is to stimulate greater levels of production.
To date, Pemex has been doing a solid job at maintaining production at a relatively constant level for the fifth consecutive year; but by opening up the sector, we will allow Mexico to go much further in exploiting her energy potential. The current situation, in which we possess 44,000 million barrels of reserves, but are still reliant on LNG imports at high prices, is obviously unsustainable in the long-term and liberalizing the industry should help to transform this state of affairs.
Our objectives, at SENER, were to come up with a reform that would better enable the country to access its untapped reserves, while at the same time, maintaining Pemex’s status as a national jewel by unleashing the company to focus on what it does best: production in shallow water. Far from being weakened by the reform process, Pemex will also have the opportunity to realise its full potential by being able to fully participate in joint ventures and technology transfer and thus enhance the efficiency of its operations.
Mexico’s dependency on foreign gas imports was actually a key driver in instigating the change. Even though the oil production that we lost over the course of a decade equated to the entire production of a country like Colombia, the rising price of oil overcompensated for the decline in volumes and so failed to really impact the national psyche. While declines in production were steep, the increases in prices were even steeper so the effects were barely noticeable. Volatile gas prices, on the other hand, and concerns about energy security have made a big impression on both the politicians and people and this has ultimately provided the incentive for the radical changes we are witnessing today.
How important are the reforms for Mexico’s energy security and industrial development?
If we analyse the value chain, we can see problems with gasoline whereby Mexico is importing approximately half of what eventually appears in the pumps at the filling stations. We are effectively exporting oil to other countries and having them process it and add value before buying it back, so a significant number of jobs, investments and profits are simply lost abroad. One important aspect about the energy reform process is that it is forecast to improve Mexico’s growth by a whole percentage point by the end of the current administration’s first term in office. Mexico’s growth rate forecast for 2014 is expected to be in the region of three percent so an additional percentage point would equate to growing the economy by a third. The end result will be massive.
Mexico will also benefit from the same shale gas phenomenon that has generated an additional 1.7 million jobs in the United States over a four-year period. We are confident that, unlike China and Argentina, the country will be able to duplicate the sorts of benefits being reaped just over the border. Mexico’s advantage is its proximity to American providers. This means we have ready access to the facilities, petrochemicals and modalities needed to execute the fracking process. We also believe there is a very strong possibility that some of the providers, in time, will base part of their operations in Mexico.
Now that the amendments to articles 25, 27 and 28 of the constitution have been passed and approved, what are the next steps to finalize the reform process?
In the same manner as the telecommunications reforms, we abandoned the idea of just altering existing articles within the constitution. Instead, we are adding a strong new section of secondary law (the 21 transitory dispositions included in the constitutional energy reform approved in Mexico in December 2013), which essentially draws up the industry and regulatory frameworks. This means that all the fine details from rules governing contracts and payments to protocol for separation of pipelines from Pemex are all addressed and codified. It may well be challenging to compile these sorts of secondary laws, but it would have been even more risky to attempt to proceed with the liberalization of the sector by just relying on the amendments to three articles. Having comprehensive secondary laws in place will keep the reform process on track, ensure that the original intent of the lawmakers is adhered to and prevent any backsliding.
What will be the next steps once the secondary laws are approved and implemented?
According to the roadmap, the secondary laws should be approved by April. We hope and expect to receive backing from the PAN, but even if that is not forthcoming, the ruling party will be able to secure the requisite majority with support from coalition partners. Then there is a third stage in which the executive branch establishes the agreed regulatory system, which should be complete by the end of the year. The aim is then to have the bidding rounds underway by mid-2015. This can be a lengthy process because you first have to conduct roadshows to engage with the energy industry and determine the incentive structures that will appeal to the various stakeholders. First contracts need to be awarded by 2016.
Another important part of the process is “round zero,” which is about awarding Pemex whatever the company has the capacity to develop profitably. Pemex requested what they think they should be entitled to and we will award them those assets that match best with the company’s capabilities. Any well that produces less than 150 barrels a day, for instance, is not for Pemex because of the lack of scalability, but could nevertheless still be of interest to private sector players.
According to the constitution, Pemex will maintain ownership of commercial discoveries where the company already has existing programs of investment in place. Pemex will also have the right to conduct the farming of whatever assets the company eventually keeps and will be expected to utilize private sector expertise to carry out that farming. This means we don’t have to wait until 2016 for the private sector to come in and start work on Mexican fields. International companies will be keen to embrace the chance to work with Pemex and also to have the possibility, through joint ventures, of bidding for their own blocks. We also hope to see more Mexican firms in both the service provision and operating sectors. Encouraging the growth of local operators is one of our priorities.
Across North America, Canada possesses tar sands, the US holds an abundance of shale and now Mexico has its newly liberalized energy sector, all of which will unlock significant resources. What is Mexico‘s positioning within this North American energy revolution? And what will be the implications for Mexico’s role in the global energy markets?
The reforms represent a game changer. Other Latin American countries such as Brazil and Colombia are very worried because we are becoming a very strong player and they will have to adapt their own strategies accordingly. One advantage we have over highly regulated countries like Brazil is that, if there is a public need for a field to be developed, then my office can sign an entitlement paper and Pemex can start work with immediate effect.
Meanwhile, we will have to work closely with our North American partners to coordinate a regional energy strategy. The dynamics of trade are already changing. In the past, 90 percent of our oil went directly to the United States, but as they have grown their own production industry, that figure has reduced to around 70 percent and we are now exporting to China, India and Singapore. We are optimistic that the region as a whole will not only develop strong levels of energy self-sufficiency, but will actually become one of the major energy exporting hubs of the world.