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Interview

Harry Bockmeulen, Director General, Petrofac Mexico

07.04.2014 / Energyboardroom

“It is this focus on enhancing recovery factors that will drive production growth in Mexico over the medium term since output from new exploration and production will take about a decade or so to materialize.” Harry Bockmeulen, Director General, Petrofac Mexico.  

 

In the two and a half years since establishing its presence, Petrofac has become the first foreign company to operate state oil fields in Mexico for more than 70 years, making it the second largest producer in Mexico behind Pemex. To what do you attribute this success?

Mexico’s 2008 energy reforms introduced what is known as ‘integrated service contracts’ (or Contratos Integrales de Exploración y Producción—CIEPs) that were implemented in 2010. These contracts were designed to incentivize the development and enhance the production of mature fields in Mexico that have an important potential in hydrocarbon volume. Needless to say, these contracts did not go so far as to attract the major operators, or any exploration and production company that wanted to hold reserves. Instead, the contracts appealed more to the service companies that are prepared to operate the fields without title to the hydrocarbons.

For Petrofac, earning the responsibility of field operations of the Magallanes and Santuario blocks in south-central Mexico in 2011 was therefore a result of the gradual liberalization of the local market in which we were the fortunate winners of the first round of CIEP bids. Of course, this entailed a lot of hard work for many of the people involved in these projects at Petrofac and we are happy to reap the fruits of that.

Subsequently, in 2012 we were also able to win another two blocks in the second round of bidding. These included the Pánuco and Arenque contracts, an integrated services contract in partnership with Schlumberger, covering four mature onshore fields and a contract to improve the recovery factor and increase production from the offshore field, respectively. The areas that have been assigned to us possess a good deal of potential, which we have been working on developing ever since.

When Petrofac was awarded the Magallanes and Santuario oil fields in October 2011, you were the only employee in the country. What challenges did you encounter in setting up the entire team when you took over operations in February 2012?

I was fortunate enough to have a fairly large network of people that I could approach to join our team in Mexico. In this regard, I did not encounter too many challenges in that process as I was focused on selecting the first line of managers, who in turn were responsible for recruiting the rest of the team we have here.

In parallel, Petrofac’s experience, particularly in the North Sea where we are active in many duty holder contracts, we have built up a team of professionals who have a wealth of experience in transition standards. In other words, our experiences endowed us with a comprehensive blueprint of the elements and processes needed to take over the operation of fields. Shortly after the Magallanes and Santuario contracts were finalized, we had a transition manager come to Mexico that was responsible for aligning all the processes, systems and procedures needed to operate those fields. In the meantime, we were more focused on acquiring the right talents to fulfill our responsibilities.

Besides that, I personally encountered no particular challenges in quickly setting up a business in the country. Mexico is a perfectly normal place to do business and I experienced no particular bottlenecks or bureaucracies.

Last year, Petrofac established a joint venture with Schlumberger to jointly develop the Panuco fields with Petrofac as the lead operator. Why was it important for Petrofac to enter into this partnership?

The joint venture was essentially triggered as a result of events outside of Mexico where Petrofac and Schlumberger were discussing a global alliance. The overall goal of this partnership was aimed at enabling us to pursue these types of opportunities and Mexico happened to be among the first places to apply to that.

Our partnership with Schlumberger looks to leverage the core competencies of our organizations to provide our clients with a comprehensive set of services. Schlumberger have a profound knowledge of subsurface activities, while Petrofac is strong in building infrastructure, managing surface facilities, and so on. This is essentially how we run our joint venture here in Mexico; Schlumberger provides the subsurface team, while Petrofac handles the operations side of things.

Mexico represents Petrofac’s first operational office in the Americas. How would you assess the relative strategic importance of Mexico to Petrofac’s regional or global operations?

Although demonstrating strong potential, our Mexican outfit is still not very significant in the context of Petrofac’s global operations. However, within Petrofac’s Integrated Energy Services division, Mexico is one of two main hubs along with Malaysia. Comparatively, Mexico was able to reach such a position with speed, illustrating our commitment to the country. In addition to this, I believe there are still an abundance of growth opportunities in the country. Finally, Mexico also serves as a model and base of operations from which we are exploring growth opportunities elsewhere in Latin America.

Being the first foreign company to operate state oil fields in Mexico for more than 70 years, to what extent has that deal helped to shape the energy reforms we see today?

It is difficult to say what the government or Pemex interpreted from the success, or otherwise, of these first contracts. I believe their general focus was on how they could best help Mexico move forward in terms of developing their hydrocarbon resources and the changes needed to make that a reality. Among others, this included private capital participation and it could be said that the Magallanes and Santuario contracts were a successful form of that to a certain degree. That is, although those terms were attractive to service companies like Petrofac, they were not appealing enough for the oil majors. The latest reforms are designed to address specifically those issues.

As a whole, it should be noted that what happened in December of 2013 with the new energy reforms was far more impressive than anyone ever anticipated and we are very excited to be here experiencing that.

As the latest energy reforms take shape, what investment opportunities do you see for Petrofac?

After Pemex exercises the so called “round zero”, which gives the national oil company first rights to explore and produce crude at the country’s onshore and offshore fields, the other areas will be put up for bidding. This creates the opportunity for investors to participate in Mexico’s exploration and development projects, helping to accelerate the level of activity in the industry with the goal of increasing overall production levels.

For Petrofac, we have plenty of investment opportunities in the contracts we already hold. These contracts run for 25 years and we have only just begun operating them. Our job is not yet done and there is still plenty more to be done. Whether the terms and conditions of these contracts remain unchanged for the duration of their life span will be determined as a result of the forthcoming secondary legislations.

In any case, should the domestic market become more open as a result of the reforms and present us with the right opportunities, we would certainly be interested in pursuing them. Having already established our organization and infrastructure here in Mexico, we can be quick to respond to any opportunities that might arise.

Because the changes that were incorporated into to the constitution were comprehensive and detailed enough, many have suggested that the details of the yet to be defined secondary laws are to some degree inconsequential. Do you agree with this view?

Not entirely, because there is little that can be done without the secondary legislations. The changes in the constitution do indeed provide a detailed framework of the reforms and all the respective transitory provisions, but that in itself is not enough.

On the other hand, my discussions with local counterparts have given me the sense that people at Pemex and the relevant government bodies are overwhelmed by the magnitude and pace of change sweeping the industry. As a private company with an established presence in the country, the secondary legislations are critical in outlining what can and cannot be done in the industry. Although the general consensus agrees that the secondary laws will promote international participation and investment, we would be hard pressed to make any strategic decisions before we have had the opportunity to study these closely.

Is it possible that the secondary legislations could void some of the far-reaching advancements made by the reforms so far?

That is highly unlikely. The reforms have now gathered too much momentum for that to happen. However, I do believe that the legislators are perhaps a little unprepared for what was achieved in terms of the scope and depth of the reforms that have left the industry wide open. They now need to determine precisely what it is that they want to achieve with the reforms.

Besides the reforms and the promise of opportunities it brings, what are some of the biggest challenges facing the industry as it moves forward?

Some of the areas in which there are still noticeable challenges include working the local communities, the landowners, access and security.

In terms of security, I am not referring to civil security in Mexico per say, but rather of the safety of the oil industry’s infrastructure. With the exception of Petrofac, the only operator in the industry today has been Pemex. With regards to its field assets, either it or the government has or has not cared for its assets. However, when the market is liberalized and you have upwards of fifty different companies with some kind of infrastructure in Mexico, they are probably going to demand some sort of state protection of their facilities or assets. However, I am not certain if the country is geared up to providing security forces dedicated to the protection of critical infrastructure, for example. It might not be a high enough priority for them to care for someone else’s assets that they have sold off earlier, as was the case with us. In our case, we would prefer not to protect our infrastructure with armed forces for obvious reasons. We instead want to know that the state is taking care of that role, but the fact of the matter is that this is a problem that will only multiply as more foreign players enter the marketplace.

Another challenge that is not unique to Mexico alone is of course where all the people are going to come from to support the growth of the industry. The underlying problem for Mexico is that it does not produce enough petroleum engineers. The number of petroleum institutions in the country is minimal and the young talents they produce are often under qualified.

At the moment, we are adequately staffed to meet our responsibilities but it has been hard to locate personnel of the desired caliber. Unless immediate action is taken, this issue is only going to explode as more employers enter the market.

Adding to the human resources issue, is Pemex facing the risk of having its employees poached by new entrants once they establish a presence here?

That might be true to some degree. Simultaneously, however, Pemex looks after its employees rather well. As a result, it can be surprisingly difficult to attract local talents to leave Pemex, in favor of another organization. If you were to consider the size of the state-owned entity, and their scope of activities, it is clear that there is an abundance of career development opportunities, both on the technical and administrative sides.

As Petrofac continues to spread its roots in the country, what opportunities or capabilities are you looking to develop?

Globally, Petrofac is a provider of infrastructure services to the oil industry and our core business line is still Engineering & Consulting Services (ECS). In Mexico, however, ECS is not yet part of our portfolio of services, per say. That is, we have a joint venture with Doris Engineering of Houston in which we are advisors to Pemex for specialized technical assistance and supervision for the construction, installation, commissioning, testing and start-up of deepwater subsea wells and infrastructure for the Lakach project. This project therefore represents our first engineering foothold in Mexico, and we are exploring opportunities to develop our ECS business in anticipation of the vast infrastructure projects taking shape over the next decade or so. In doing so, as a service provider to the oil majors around the world, we intend to be able to provide all the traditional services they are familiar with around the world, here in Mexico as well.

In parallel, we are also keen to continue providing Pemex with the same kind of operator services we have delivered so far. We possess all the skills of an operator, with a team of about four-dozen subsurface professionals and have experience in operating up to six rigs concurrently. Unlike your typical operator, however, we do not necessarily seek title to the reserves. Resource ownership has been at the center of the energy reform debate and we feel that this neutrality gives us an edge over traditional operators.

One major issue here in Mexico is the dismal recovery factors that are far below the global average of 30–35 percent (when you took over Arenque field, it was 11 percent). What improvements has Petrofac been able to make in this space?

In between its fields, Petrofac has already begun raising the recovery factors of the Magallanes and Santuario blocks and in the Pánuco field as well. We have observed a steady growth in production levels, across all three areas, now that we have gained some traction there since recently taking over in 2011 and 2013, respectively.

The recovery factors of each well were key elements in our assessment of those projects before placing a bid. Because Pemex had foregone those fields only at primary depletion, and because they, as an organization, try to maximize the use of their limited resources, this illustrates that the state-giant simply had more attractive projects to pursue. Had it not been for the vast wealth of hydrocarbons in Mexico, which, until recently was easily accessible, Pemex would have been an entirely different entity, and recovery factors would have been higher. It is technological and financial resources that will help to drive recovery factors up in Mexico. As such, it is the mature and other technically challenging fields that are likely to constitute the portfolio of assets Mexico will offer to foreign operators. It is this focus on enhancing recovery factors that will drive production growth in Mexico over the medium term since output from new exploration and production will take about a decade or so to materialize.

How would you describe the importance of promoting local content to successfully gain a foothold in Mexico’s oil and gas industry?

Developing local content is indeed an important aspect of doing business in Mexico. The contracts we now hold, for instance, have a number of clauses which detail the lower limits of national content, training as well as social investment requirements.

Although some might argue that such obligations can lead to inefficiencies or corruption, I disagree. I see this as beneficial because it has helped us to really look at what we can do, and what we need to do before finally going ahead with the program in close collaboration with Pemex.

So far, we have had to invest a given amount in each area we are present. In doing so, we have had to assess the best ways in which we can make each of these a good investment. This creates a win-win situation for us and the communities we invest in, since they are able to derive a real benefit from the initiatives we promote.

With a track record littered with ‘firsts’, how do you aim to leverage your first-movers advantage and continue to expand Petrofac’s presence in Mexico?

We are indeed keen to leverage the fact that we already have a presence in Mexico. The energy reforms will only create further opportunities for us that we would certainly like to explore. We only see positive developments taking shape following the implementation of the reforms, both for Mexico as a whole, and Petrofac.

Given the right capabilities, anyone can make it in Mexico so long as they commit to building a presence in the country. As in many other countries, one cannot expect to breeze in and out, hoping to strike a good deal. A local presence is paramount and makes a world of difference.

 

To read more interviews and articles on Mexico, and to download the latest free report on the country, click here.

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