Jose Olarte, President, Legotec, Mexico
“Mexico’s incoming energy reforms are certainly fueling the oil and gas communities’ optimism. Once implemented and Mexico’s oil and gas monopoly is relaxed, international investors are expected to inundate the local market, creating a wealth of commercial and partnership opportunities,” Jose Olarte, President, Legotec, Mexico.
Legotec is specialized in maintenance and refurbishment of components for drilling rigs, as well as the manufacture of downhole tools. Given the dynamic nature of the oil and gas industry, what have been some of the company’s most interesting recent developments?
Since 2009, business has been increasingly challenging primarily as a result of the difficulties encountered in the geologically difficult Chicontepec formation, a petroleum system north-east of Mexico City, containing Mexico‘s largest certified hydrocarbon reserve, totaling more than 19 billion barrels of oil equivalent. The difficulties surrounding the development of the Chicontepec fields have led to the migration of Pemex’s operators, and to some degree, its third party service contractors further south to Villahermosa in the state of Tabasco in order to exploit less challenging resources there.
I personally feel that this was a result of the political controversy surrounding the Chicontepec project that had begun several years ago, which saw Pemex invest several billions of dollars while widely missing production targets. This migration saw big name players such as Key Energy and Weatherford, among others, lay-off its people and cease operations there. As these companies are some of our key customers, we have also felt the trickle-down effects of this instability and have witnessed a decline in activity. Adding to these complexities is the fact that Mexico has recently seen the inauguration of a new president and subsequently the assignment of a new management at state-owned Pemex. The shuffling of these high level personalities introduces a degree of volatility in the commercial and operational aspects of Pemex’s monopoly business, which in turn has a knock-on effect on a wide majority of industry participants. For instance, we were recently awarded a refurbishment contract for some of Pemex’s drilling rig components in July of 2013. However, we simply cannot commence operations because of issues in Pemex’s budget. The same applies to the other three contracts that we have pending with Pemex. Despite that, in a seemingly unfair manner, we are still expected to maintain all of the human resources and infrastructures required to honor these contracts, putting a further strain on our operations.
Would you say 2013 was a challenging year for the company?
In fact, 2013 has been one of the most challenging years for us as a company, and we are all looking forward to putting that behind us and pursuing new opportunities. Considering that the worst is now behind us, I also believe that those that have successfully navigated this year’s challenges are very well positioned for growth in the 2014 and beyond. Largely as a result of the energy reforms, we are very optimistic about the future of the local oil and gas industry.
On a brighter note, I am pleased to announce that Legotec has very recently earned its American Petroleum Institute (API) certification Spec Q1 and we intend to leverage that to penetrate international markets. In fact, we are the only company of our type in Mexico to have achieved such recognition. In a way, this will help us to diversify our markets and reduce our exposure to local market fluctuations. From our Reynosa Plant, we intend to supply API certified tools as well as drilling rig downhole assembly components to the global markets. Perhaps most importantly, Mexico’s incoming energy reforms are certainly fueling the oil and gas communities’ optimism. Once implemented and Mexico’s oil and gas monopoly is relaxed, international investors are expected to inundate the local market, creating a wealth of commercial and partnership opportunities. This is particularly true in our case when you consider Legotec’s track record, experience in the local market and the high caliber certifications it has earned.
Do you therefore view the reforms more of an opportunity or a challenge?
Like with any change, the reforms do present a challenge for the local industry but these certainly are outweighed by the opportunities. As international oil companies (IOCs), for instance, begin to enter the Mexican market, they will look to work with experienced local players that are familiar with the local market dynamics. By contrast, international oilfield service providers typically sourced their tools and equipment from abroad and only contracted Mexican companies for maintenance and repair services.
However, now that Mexican companies, including Legotec, gain international recognition through certification and experience, foreign companies are more likely to look towards us as their primary suppliers. Having received the API certification in Q1 of 2013, we expect to gradually increase our base of international customers expected to join the Mexican market. In addition to enjoying the benefits of being closely located to their suppliers, international players in Mexico will also be able to significantly reduce their cost base by working with local suppliers.
Not only will the reforms bring in new clients, but also new competitors in your field. What consequences do you expect there?
Increased competition can always be viewed as a challenge but we do not like to look at it in that way. Instead, I believe that this will encourage us to improve our competitiveness through the enhanced quality and specifications of our products and services, enhancing our growth prospects. After all, a lack of competition can be dangerous as it often leads to complacency. However, the opening up of the market will change all that, as local companies strive to match the standards of the international industry.
Furthermore, the opportunities present in the market are far too many for any one company to satisfy alone and as such, we welcome our international counterparts. The cake is going to be very big and we cannot eat it all, there will be plenty to go around for everyone.
As a fully Mexican company, Legotec enjoys an obvious competitive advantage. However, with a presence in Colombia and the US, what differentiates you abroad? What’s your competitive advantage there?
For one, Mexico and the US share the North American Free Trade Agreement (NAFTA), which facilitates commercial trade between the two countries (and Canada). This allows us to import our raw materials from abroad into Mexico tax free, where they will be transformed into high value goods and re-exported back to the US. This allows us to achieve a significant cost advantage over others given the lower labor costs here.
Simultaneously however, an inherent disadvantage with these lower labor costs is the misconception that these lower costs are associated with lower quality levels. Broadly speaking, these perceptions are misguided and we are dedicating a lot of time and effort to educating our customers, demonstrating that our products and services do indeed adhere to the international standards.
What are some of the international markets you are currently considering?
Together with some close partners in Pakistan and the Middle East region, we are considering the establishment of a manufacturing plant in Dubai, UAE. This plant will be dedicated to that regional market which has been demonstrating an impressive growth trajectory and has a multitude of attractive markets in close proximity to one another. Similarly, we are in talks with Kuwait’s national oil company who is interested in having us serve as one of their equipment suppliers and manufacturers. In Colombia, we are working with ProExport, the country’s facilitator for foreign investment, on enhancing our presence there.
In addition to partnerships, and perhaps more importantly, we are working closely with ProMexico, the Mexican Government institution in charge of strengthening Mexico’s participation in the international economy. Together with them, we have realized good synergies in our internationalization efforts and are optimistic about the potential opportunities that will follow. Such government support is very important for local companies looking for opportunities abroad and is a great complement to traditional expansion strategies that help Mexican organizations expand their footprint.
So partnerships form an important part of your growth strategy then?
Of course. Villahermosa, the capital city of the Mexican state of Tabasco, is currently growing at such a fast pace that we lack the capital to fully capture the opportunities present there. This is precisely how our potential international partners can contribute and capture some of the local market themselves. For instance, we are currently forming a joint venture with a Venezuelan company active in our line of business so that we can better capture the available opportunities. As I mentioned, the share of opportunities present in Mexico are far too large for anyone company to capture on its own. Fundamentally, this fact is reflected in the energy reforms, which indicates that Pemex alone does not have the resources or capacity to fully develop Mexico’s oil and gas resources and potential.
As Mexico finds itself at a cross roads, what ambition do you have for Legotec over the foreseeable future?
Overall, our objective is twofold: to strengthen our position in our domestic market while also expanding our international footprint. On the domestic front, we intend to position ourselves as the partner of choice for international investors that can assist them with the tedious tasks associated with setting up a business in Mexico, allowing them to focus on their core operations. Not only will this help them enter the market with greater speed, but will also allow them to realize significant cost savings by sharing the assets and resources we have across the country in multiple locations. In short, we want to be the business enablers of foreign companies in Mexico.
On a broader note, we want to communicate to the world to trust in Mexico, its people and its potential as a growth market. We would like to invite them to see the capabilities and professionalism of our people and how they can support their local growth ambitions. We want to address some of the misconceptions some people might have about the country and ask for the opportunity to demonstrate otherwise.
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