Jose Pablo Rinkenbach, Managing Partner, Ainda Consultores, Mexico
Jose Pablo Rinkenbach, Managing Partner of Ainda Consultores discusses the company’s vast experience in the energy sector, the gap that it filled upon its founding in 2006, and what critical steps must be taken to solidify its position as a leader in the market.
We have to take into context the way the contracts have been developed because individually, we cannot say that one form of contract is superior to another.
Historically, since the beginning of the last century up until the 60s, concessions were most prevalent in the industry. Subsequently, concessions were phased out in favor of production sharing agreements that allowed the national oil companies that used them to gain access to resources they lacked, including technology, know-how and human resources. By then, production sharing agreements were primarily used by countries like Indonesia and those in the Middle East, whereas the US and Norway, for instance, adhered to the concessions model. In the 90s, as the state and its national oil companies became more knowledgeable about its reservoirs and grew increasingly capable in exploiting them, they were in a position to provide private oil companies with less economic rent, paving the way for service contracts and some profit sharing agreements.
Looking at Mexico, we see that the country is characterized by a diversity of its resources. In the northern region, we have shale as well as unconventional gas and condensates in northeastern Chicontepec. In the southern region, we have mature oil and gas fields, while to the east in the Gulf of Mexico (GoM) we have both shallow water and deepwater resources. Each of these different regions or resources will require a different contractual agreement in order to maximize their development. As we pointed out, shale in the north will be best developed through concession agreements whereas the Chicontepec unconventional is likely to employ production sharing agreements since Pemex is already operational there and has accumulated knowledge of the fields there. In the mature southern fields, the less aggressive production sharing agreements seem like the most likely option. Either that or they will adhere to the comprehensive contracts for Exploration and Production (CIEP) they currently employ there, with some adjustments. In the deepwaters of the GoM, either concession or production sharing agreements is the way to go. Finally, in the shallow waters of GoM, we can expect to see CIEP contracts as well as production sharing agreements.
In sum, I would say that Pemex has amassed a wealth of experience in the shallow water fields of the GoM and the degree of opportunities available there. The big question for Pemex in this regard lies in the way it views the business. So far, they have leaned towards more of an engineering view of the business rather than a commercial view. Changing this paradigm in terms of their organizational culture is critical.
With the establishment of the firm, Ainda Consultores, what market gap do you seek to fill?
Prior to establishing Ainda Consultores, I held a role in Mercer Management Consulting with a focus on projects related to energy and operations. However, in 2006 many of the partners at Mercer departed. Thus I decided to bring together my former colleagues from Mercer, and established Ainda Consultores as a strategy consultancy. Since then, Ainda has been transforming itself to become a leading business advisory in energy in Mexico. In fact, our first engagement was the design of Pemex’s strategy regarding the spin-off of its drilling unit.
With our strategic partner CBM, we have been committed to provide differentiated advisory services to energy companies as well as firms involved in the sector, such as private equity funds, investment banks, and service companies. Our services are unique in that we provide integrated multidisciplinary services that include in depth technical and commercial aspects offered by diverse teams that include petroleum engineers, geologists and reservoir engineers, as well as mathematicians, lawyers and economists, among others.
In contrast to global consultancies that offer generic services, we offer solutions and deep knowledge of E&P economics. Ainda not only offers the design of specific projects, but their implementation as well. For instance, we developed and implemented Pemex E&P new drilling contracting scheme. Up until now, the two projects where we implemented the new contracting strategy expect productivity gains of around USD 1.2 billion.
During 2007 we were involved in analyzing the energy sector and designing the key elements to reform it. Mexico’s 2008 energy bill as we developed it was unfortunately not fully implemented due to political reasons. However, the milestone energy reforms of 2013 basically constituted what we had designed and recommended back in 2008.
After this, we began to look at Chicontepec—a petroleum system in Mexico northeast of Mexico City, which used to be Pemex’s horror story. The key flaw in their development strategy was that they used a shotgun approach for drilling and production: drilling a vast number of wells in the hope of success with little reservoir analysis. As a result, we designed a number of field labs with the aim of changing the way Pemex handles its production contracts. Traditionally, Pemex was fixated on carrying out all aspects of its business on its own; undertaking a range of drilling activities with the hopes of producing a given amount of oil. At Chicontepec, Pemex was previously producing approximately 100 barrels per day (bpd) per well, which quickly fell to and hovered at about 30 bpd for some years. At the same time, Chicontepec had a dismal recovery factor of 5.5 percent. However, looking at fields that are comparable in characteristics to Chicontepec, we were able to determine that Chicontepec’s recovery factor could be enhanced by a factor of four. This translates into multiplying Mexico’s reserves. To this end, we suggested the formation of a number of individual, yet collaborative, operational field labs that would work together to maximize the field resource potential while viewing their third party service providers as allies rather than contractors. This translated into changing Pemex’s business model in that it would first focus on its business model, then its technology requirements, followed by the support functions and finally the organizational requirements. After establishing the five field labs, Pemex was able to realize a highly significant increase in Chicontepec’s production levels in the thousands of bpd while also reducing the company’s drilling activities. As of mid 2013, those labs represented a third of Chicontepec’s entire production.
Ainda has extensive experience in the energy sector in the definition of public policies as well as business strategies. Having said that, what is the relative importance of the energy sector to your performance?
We began operations as strategy consultants focusing on infrastructure; including airports, marine ports as well as the railroad and energy sectors. Some of the key projects we were involved in included the economic and strategic analysis for the federal administration in order to define Mexico City’s new airport location as well as the integration of business prospect for the sale of one of the biggest airlines in Latin America, with yearly income in excess of USD 3 billion.
Since ten years ago, I have been focused on getting a stronger foothold in the energy sector through our alliance with CBM. In doing so, we have seen a shift in our consulting services from a strategic viewpoint, to a more operational manner. For instance, in 2009 we were committed to identifying the projects that would act as the tipping point for Pemex E&P. We held a number of meetings with Pemex’s key decisions makers in which 16 exploration and production projects were selected and we then supported them in their design and implementation. Since Pemex was experiencing a decline in its production levels, coupled with a sharp increase on the cost side, we aimed to trigger a tipping point that would at least flatten the decline in production and reverse the company’s rising cost trend. In one such project we designed, we were able to achieve an estimated 30 percent decline of the cost on the service side alone, coupled with a reduction in the time function of the drilling activities by some 50-60 percent. The reduction of the drilling time is critical since approximately 50 percent of Pemex’s CAPEX is in drilling. Ultimately, this translates into an adjustment of Pemex’s annual drilling budget of about USD 4 billion by up to 30 percent!
Thus, we have effectively changed Pemex’s paradigm of execution capacity. After all, the current energy reforms are a result of Pemex’s inability to fully exploit its opportunities due to the lack of resources, from capital and human resources to processes and equipment.
Since its formation in 2006, Ainda has certainly come a long way, forging a close partnership with Pemex over the years. Looking ahead, how would you like to position the firm over the foreseeable future during these historic times for the country’s energy industry?
Our current ambitions are directed at transforming ourselves in order to become a unified company with the engineering side, to provide a comprehensive range of advisory services to not only Pemex, but also financial institutions as well. Given the reforms, the latter sector will be very well positioned for growth as the financing of projects begins to take off. By way of our past experience in raising finances for a project in Chicontepec, we quickly came to the realization that most financial institutions of all sizes in Mexico lacked the faintest understanding of exploration and production economics. They simply did not know how to value such projects. In this regards, we intend to address this knowledge gap in the industry and help these organizations gain the know-how they need to leverage the opportunities headed their way.
On the other hand, we also intend to strengthen our foothold in the logistics aspect of the industry in which we have developed a deep understanding through past experience. We developed a proprietary logistics model to determine the amount and type of vessels to maximize net present value, drilling production wells, and for major work over operations.
In sum we intend to solidify our position in the market as a leading business and economic advisory firm in E&P not only at a strategic level, but also on a tactical and operational level.
We are well position to be a bridge of communication between the two ends of a spectrum: technicians on one side and investors & lawyers on the other side.