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Interview

Raymundo Sánchez, Partner, A.T. Kearney, Mexico

22.05.2014 / Energyboardroom

An eminent partner from one of the leading management consultancies sheds light on the implications of the Mexican energy sector reforms and explains why oilfield service contractors stand to gain the most from the changes being implemented. He also outlines the unique characteristics that firms need to possess to succeed in the shale gas segment and describes how indigenous enterprise will have to emulate the Texan mentality.

A.T. Kearney is a global management consulting firm that focuses on strategic and operational CEO-agenda issues facing businesses, governments and institutions across the globe. As Partner at A.T. Kearney, could you please begin by introducing the firm in Mexico?

We actually first started doing business in Mexico back in 1992 and established an official local office two years later. In 1995 we were bought out by Electronic Data Systems, a US information technology services group. During our first years, the Mexican office was concentrated on delivery projects for our North American clients. In 2005, A.T. Kearney underwent a management buyout and ownership of the firm was recovered. From that point onwards, having representation in Mexico was considered to be of high strategic importance and the local office received higher levels of investment that allowed it to double in size roughly every second year.

With a global presence in more than 40 countries, how would you describe the strategic importance of the Mexican outfit in relation to your regional and global growth opportunities?

A.T. Kearney’s core business focuses on the North America and emerging markets. One feature that makes Mexico strategically attractive is therefore its proximity to both the US, which is the biggest consulting market in the world, and the emerging markets of Latin America (notably Brazil and Colombia). At the same time, Mexico is an emerging market in its own right with massive potential in a range of sectors including energy.

Can you describe the scope of activities in the Mexican office?

A.T. Kearney is well regarded for its operational strategy throughout the Americas and this holds true for Mexico too. In the Mexican market, some of our main competitors usually concentrate on strategy while other consulting firms typically place more emphasis on implementation. We, on the other hand, are well positioned to cover the link between the two. We not only have the capabilities to devise strategy at CEO and C suite level, but also to translate that into methods that are integrated within the client’s organisation and to assist with the execution of that strategy.

We have first-hand experience in consulting for energy sector companies throughout Mexico and though some of our competitors have good energy practices, many of them lack in depth knowledge of the Mexican market. We have the capabilities to do strategy and then the ability to convert this into an implementation plan and to execute it. We have done that in several geographies and this remains a distinctive capability that only A.T. Kearney possesses.

We have a very good base of clients and a vision 2020 strategy which is to double the size of the firm. In Mexico we are actually growing faster than the market as we establish our rightful share.

In the light of the historic energy reforms, what, in your opinion, are the most important changes? And what benefits do you expect these to generate for the country and its stakeholders?

In the energy sector, we’re at an exciting juncture because we’re witnessing the most radical reforms in many decades. The Mexican government recognised the hard reality that they didn’t have enough financial resources to continue to fund Pemex so as to reap the full benefits of the country’s oil and gas potential. They realised that the pie could be much bigger if only they opened up the market to international technology, know-how and techniques. There was, of course, an attempt to do this back in 2008, but at that time the political will was lacking. This time was different and a constitutional amendment was enacted that opens up the energy sector while at the same time allowing the state to exert some control over the inflows of investment and enjoy the rewards of an enhanced market.

The main risk now is complacency. Though the secondary laws can’t reverse anything written in the constitution, the risk is that the lawmakers fail to establish the right incentive structures and that would be detrimental to investment. Just because foreign investors are showing excitement about what they see as excellent prospects in the newly liberalised energy market doesn’t mean their participation is guaranteed. Once the initial optimism has subsided, they will look upon Mexico as a part of their investment portfolio and the country will have to compete with many countries (like Angola, Brazil, Canada) and deep water opportunities on the American portion of the Gulf.

If the right incentives concerning the rule of law, tax regulation, warranties and royalties are not in place, then the investment that Mexico wants to attract will flow elsewhere. The bottom line is that Mexico must be competitive as an investment destination relative to alternative energy markets round the world. The constitutional amendment proclaims the destination we want to arrive at, but it is the secondary legislation that gives you the mechanics that enable you to reach that destination.

Meanwhile the finance ministry will have to find a way to attract new investment with a reasonable level of royalties while, at same time, determining a transition pact for Pemex that will allow the company to compete with private sector actors. As revenues from the private sector increase, state dependency on taxes from Pemex will need to decrease by an equivalent amount and establishing this balance will be a true balancing act.

How easy will it be for Pemex to make the transition to a competitive state entity?

Pemex and the government should look towards Norway, Brazil and Colombia as examples in how to maintain a strong profitable national oil company (NOC) while at the same time striking the right balance in terms of liberalisation in order to attract the right players. Statoil is one of the best examples of a well-managed transition to open markets while simultaneously supporting the establishment of a robust NOC.

Pemex recently submitted their demands for ‘round zero’ and what they asked for correlated very closely to what we at A.T. Kearney have been forecasting. The company is interested in deep water, but knows it has neither the financing nor the know-how and technology to run the risks alone so is seeking partners. The same applies to shale gas which is why they want to retain some of the Chicontepec assets. They are placing their resources in the areas that they see as the most profitable such as some of the mature sites where the cost structure is most favourable, but at the same time are keen to keep a foothold in those fields of the future where production is low today, but the potential going forward considerable.

How do you envision the future for A.T. Kearney? Where will the future growth come from?

Growth will come from several places. The most obvious growth spot is Exploration and Production (E&P) with the majors and International Oil Companies (IOCs) going after the deep water. We will also be working with independents focusing on mature fields and shale gas. The service provider segment will also be very interesting and could well turn out to be the biggest winner from the reforms. The increased activity across the market is sure to translate into extra contracts for both international firms like Schlumberger and Halliburton and the equivalent national service providers.

Meanwhile we expect to see companies from different parts of the world (especially Latin America and US) coming in to take advantage of knowledge gaps and apply tried and tested techniques used in similar geographies. In order to effectively exploit shale, for example, you need to have unique characteristics. Having the right mentality is decisive. In the shale sector, drilling operations must not be seen as an art whereby you drill each well differently according to the geological formations, but rather as a production line. Some of the independent companies in Texas have exactly this type of mind-set and capabilities. The name of the game is how fast you drill, how well you design your well prototype and how quickly you incorporate new information to decision making. Many integrated IOCs are used to operating in a different manner trying to minimize the full risk of the reservoir and optimizing drilling investment with a full knowledge of the field; they may struggle with the mindset required to capture this opportunity.

Our expectation is therefore that the growth will come from very different quarters. Because of our comprehensive experience in the market, we will be able to assist both the newcomers and the companies already present take advantage of these new opportunities.

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

 

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