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Interview

with Juan José Suarez Coppel, CEO, PEMEX E&P

12.09.2011 / Energyboardroom

In 2009, you were appointed the CEO of Pemex a company surrounded by so many pressures and influence (politics, fiscal, trade unions). Was it not like a poisonous gift?

I spent six years – from 2000 to 2006 – working for Pemex. I therefore knew what I was getting into when I had the privilege of being asked to work in this position. I have worked in both the private and public sector and even if this job can be frustrating, it is the most interesting and rewarding job I have ever had.

What have been your priorities over the course of the past 2 years?

When I arrived at Pemex, we had experienced several years of steep decline in oil production. As such the main priority was to make sure we were doing the right investments and taking the right decisions to stop this trend. We also pursued our exploration efforts in order to reach our target of 100 percent replacement ratio by 2012.

The other part of our strategy was to turn around the situation in downstream. In past years petrochemicals and refining activities were in deficit. Hence we took decision to return to profits.
Our last point was to operate operational changes in order to reach a more flexible, efficient and agile organization.

What is the overall line and target for increasing E&P?

Pemex today produces 1.4 billion barrels in both oil and gas liquids. Our development costs are about $15 per barrel and the refining cost is reaches $1.5 to $2.5 per barrel.
We need to invest between $15-18 per barrel to maintain these levels of production. Therefore, we need to invest $22 to 24 billion every year to maintain our level of production.
When it comes to crude, we produce close to 2.6 million bpd, and I believe that by the end of the year, we will be producing steadily 2.6 million. Our plan is to reach 2.7 million bpd by the end of 2012 and hit 3 million bpd by 2017-2018. This will of course require significant investments and we therefore need to invest in addition to these $22-24 billion planned.

Besides we have a lot of opportunities to increase our gas output. In the past, a lack of investment drove to the decline in non associated gas production in the Veracruz and Burgos basins. But today we have discovered very significant gas fields in deep water. We expect production to start by 2015.
I believe we also have opportunities in our shale gas potential. We are optimistic about all these developments and we will continue making efforts to increase gas production as Mexico needs this gas.

This is the basis of our development strategy. As every company involved in extraction we need to think about the future now. This is why we are choosing to invest heavily in E&P!

Pemex just introduced the incentive contracts. What has been the reaction to these contracts and what novelty do they bring?
Our constitution does not allow us to enter into joint ventures. PEMEX was working on penalty bases without incentives. And that now this has changed. In 2008 within the frame of the Energy Reforms, we got more flexibility in contracting. This flexibility allows us to contract private operators for our oil and gas fields.

The incentive contracts have two main components: the first is a “cost recovery” factor while the second is a “pay per barrel” factor. These two elements have different effects on incentives and it is important to keep both, and play around with them.
Unfortunately, we still suffer from a lack of competitiveness regarding fiscal terms. Given that we have been trying to have these contracts as close to non-recourse as we possibly can, this often creates a situation in which the cash-flows make the recovering of these contracts very tough

Having said that, deep water will happen. We started investing considerably in the exploration deep water in 2004 and back then, we acknowledged this wasn’t going to happen overnight. But I am glad to say that we are now going to start developing our first deep water field – Lakach – and we are confident production will resume in 2015. We are very excited about Mexico’s deep water potential.

The investment plan announced by Pemex mainly focuses on E&P, aren’t the refining and petrochemical infrastructures neglected as a result?
Everything else might look dwarfed but this is a wrong perception. We are investing what we need in refineries, putting very important investments in the next few years. We are building new processing capacities in Minatitlán refinery, and we are revamping Tula. In general, we are putting a lot of money into maintenance and bringing up to speed up our overall refining system.

Furthermore, we are putting more money into petro-chemicals as there are a lot of opportunities. North America has the cheapest natural gas, we absolutely need to take advantage of that situation.

Despite the stop in oil output decline last year, Pemex once again generated losses. What can explain this situation?

This is more a result of both our fiscal and social obligations than of our operations.

Furthermore, Pemex is responsible for the payment of LPG’s subsidies – close to $7 billion/year. The pricing prices that we receive for the products we sell in Mexico (gasoline, diesel andother) is calculated with the logic of international prices plus logistics to protect Mexican consumers from our monopoly. That logistical adjustment has to be approved by our tax collector. This costs us another $5-6 billion every year.

On addition one third of our payroll goes to pensioners – that is to say all the people that have worked with us throughout history which amounts to 70,000 people and which cost us another $3-4 billion.

This represents more a debt than an operating cost. These cost caps, which we cannot deduct from our taxes, make us pay about $6 billion more than what we would pay with a regional tax scheme.

If you add all those elements I just mentioned, of course losses are big. For instance, last year we lost about $4.5 billion. But if you add all this up, with the adjusted P&L, we actually make about $15 billion. We pay a lot of dividends to our shareholders – a good $18 billion of dividends on top of the taxes we pay.

Having said that, certainly there are a lot of opportunities to increase our profitability and that is what we see as one of our main responsibilities – getting profitability downstream and ensuring profitability & cost-reduction across the board.

From my viewpoint too many people have a say on how Pemex is run. When there are too many cooks in the kitchen, no one is responsible for how the broth tastes. The big difference from how we run Pemex and how other NOC and oil companies are run is that in the latter, you have one cook. You then have to make sure he has the ingredients that he claims he needs, and then if the broth is not good enough, after a couple of trials, you get a new cook.

Most certainly we need to run Pemex more as a business entity, as an enterprise, so we can get the results out of the company. Rather than focusing on how to get most taxes from the company we should concentrate on ensuring that Pemex has the financial, technical and human resources to valorise Mexico’s potential.

We need to be able to run the company as a company. We do not need a new company, we just need the flexibility to run this company as we should in order to create value for our shareholders.

How do you see the future of Pemex and what is the model for the company?

On the one hand, you have Petrobras and Statoil where the majority of the shares and control over the votes are owned by a government but still they act as private companies.

Generally speaking, the way a company is run should not be affected by who the owner is. One would like the people running the company to create value for shareholders independently of whether they are governments, sovereign wealth funds or regular individuals.

So yes, on the one hand, Pemex should be like a Petrobras – a big company with the government as the majority of shareholders, but a company able to compete with other companies.

Another example is Saudi Aramco, in which the company and the resource are owned by the same individual. The company does its job by maximizing the value of the resource and you do not need special regulatory bodies. At Pemex there are just too many regulators.
There has to be a decision about whether we wish to come closer to the models of Saudi Arabia or Brazil. But that is a political decision while our job is to run Pemex properly.

The issue right now is that we have a huge opportunity to increase the value that we can get from the industry by just running Pemex properly. Regardless of politics we need to strengthen, develop and invest in our company.

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