Exploration & Production ( E&P) – Gustavo Hernandez, Director General – Mexico
The recently appointed Director General for E&P explains the rationale behind Pemex’s Round Zero submission and how the state champion is preparing to counter a predicted human capital flight tendency in certain niche categories such as geoscience. He also passes judgement on the NOC’s ongoing restructuring.
You were initially made acting director in February. Then, in June, you were appointed permanent director for PEP. What have been your main focus and priorities so far during this short tenure?
Over those six months, the main focus has been about preparing Pemex for the challenges of reform. Having historically been the sole operator in Mexico by constitutional mandate, we now need to re-establish the company as a productive enterprise that is able to compete in a free market context. We therefore need to communicate this properly to the workers so as to gain broad-base acceptance for the internal restructuring and overhaul that must take place. We also need to clearly understand our revised role in this new perspective. I have been working very hard in preparing our people and compiling the requisite information that PEP has been called upon to submit to the new authorities and regulatory apparatus.
As Pemex embarks on this challenging and complex transition from a state monopoly to productive entity, how are you going to ensure that disruption to E&P activities is minimized and that productivity can be maintained at the 2.5 million b/d mark?
When the energy reform bill was signed off by the president, we embarked upon one of the more interesting periods in Pemex E&P’s history, because, for the first time ever, we had to undertake a thorough evaluation of what we were going to do with our oil and gas assets. This process of analyzing which exploration areas and production fields that we would like to retain represented the first step towards building the new Pemex and transforming our way of thinking. As we have never before needed to fight for acreage, this involved a paradigm shift in mindset. Round zero represents, without doubt, one of the most important decisions in entire lifespan of Pemex.
One structural shift that we were rapidly exposed to was centralization of Pemex’s procurement. Frankly we were a little surprised to be the first division of the company to be subjected to these changes because the synergies to be gained from centrally procured jack-ups and drill bits that are only used in upstream are much more limited than the value-additions to be realized from having single procurer of turbines and valves which are commonly used across the whole value chain. When the changeover came it was a pretty sharp shock. Nevertheless we handled this smoothly by gaining acceptance on the part of PEP’s personnel and are very much looking forward to the tangible benefits to be accrued from having a single ‘shop window’ for all contractors. Adaptation is a trademark of this industry and that is how we ensure a seamless transition. There is centralized procurement in Shell and Exxon Mobil, but not in Statoil and Ecopetrol. Pemex has to identify the approach best suited to its unique situation and that is exactly what is happening.
Another potentially disruptive by-product of the reform that we are managing positively concerns the possible flight of human capital. Pemex is aware that its recruitment efforts have to be firmly focused on sourcing and retaining PEP personnel in the initial stages because there is going to be a high-risk of losinggeo-scientists, reservoir engineers, geophysicists and geologists who will be in great demand by the new enterprises entering the market and requiring local talent. We are already restructuring our pay-scales to bring them in line with market salaries and have initiatives in place to counter any flight tendency.
Pemex’s internal consolidation plans have been devised to link in harmoniously with the various deadlines of the energy reform and the pace of change has been set at a rhythm whereby we can simultaneously deliver on our production targets. All in all, changes are being enacted in a remarkably stable and smooth manner. Pemex sees a very bright future ahead in which it will be able to concentrate on its core task of being an operator unburdened by having to worry about energy security or providing the bulk of state income.
Can you please explain the rationale behind the selection of fields that you have put forward to SENER in your Round Zero request? And how will this render Pemex stronger, more efficient and more competitive?
The constitution placed the first requirement on Pemex, affording us only 90 days to nominate those fields and exploration areas that we feel we have capacity to operate alone or via assignations. Pemex will remain the only entity to possess assignation titles whereas all other operators will be participating as contractors. By mid-March we had successfully conducted a full analysis of the potential of every field and had held meetings with SENER and the CNH to share this information and present our first draft. SENER’s initial feedback was that we were asking for too much so we resolved to focus on those strategic areas that we felt absolutely had to be granted. Our proposal was submitted to Pemex’s board of directors which referred it to its specialist delegate committee on investments for review. Subsequently our request was formally presented to SENER which has 180 days to unveil their decision.
We have committed to producing 2.5 million b/d. This is an obligation that we have with HACIENDA to provide the taxation income from oil and gas production so naturally we are demanding those assets that will allow us to maintain those levels of production without interruption. According to he constitution, Pemex has the right to retain these productive areas such as Chicontepec which accounts for roughly 60,000 barrels and Poza Rica-Altamira which accounts for approximately 80,000 barrels. Then, when we were reviewing what else to request, we also took a strategic approach grounded upon the assertion that we intend to grow as an E&P company. The only way this can happen is by retaining both our existing reserves and a variety of new areas to explore.
What do you say to critics who say that Pemex is requesting too much? There is of course a precedent with Petrobras which made a very large request in their equivalent of Round Zero and the ended up giving up approximately 80 percent of their assets within two years.
There is a logical rational behind everything that we have requested. Firstly, we intend to keep those core assets where we know for sure that there are hydrocarbon reserves and which have been in production phase for a while such as Cantarell, Ku-Maloob-Zaap and Chicontepec which is understood to constitute 38 percent of the national reserve base.
Secondly, we are requesting some of the deepwater fields in the north and south belts where there have been important discoveries over the last three years. We appreciate that we need to leave enough room for new players to come and explore deep water basins and are attentive to that requirement.
Thirdly, we want to maintain a proper foothold in the unconventional areas which will be important for securing Pemex’s long term future. Many industry experts believe that gas from Mexico’s unconventional reserves can eventually be harnessed to solve the country’s gas supply problems. Nevertheless we have to remember that these are only prospective resources and need to be properly explored before they can be converted into reserves.
In the unconventional segment, there are prospective resources across five basins: Tampico-Misantla, Burgos, Sabinas, Burros-Picachos and Chihuahua. Of those,Tampico-Misantla is by a long way the most attractive because of the presence of shale oil as opposed to shale gas and our original stance was to claim the entirety of that asset. The feedback that we were getting from CNH and SENER, however, was that they are very keen to allow enough leeway for other players to compete for shale oil too and so, in our official request that we presented to SENER, we reduced somewhat our demands inTampico-Misantla, but simultaneously requested partial space in each of the other four basins. I fully expect now that what we have asked for in unconventional segment will be granted without significant amendment.
Fourthly, we expect to retain those areas where we have already established partnerships with private sector entities such as Petrofac and Schlumberger for ongoing projects. After the 2008 reforms we were permitted to tender some mature blocks and brownfields – three in the south region, six in the north and six in Chicontepec – and also to set up service contracts with third parties for gas production across the Burgos basin. The secondary legislation includes a specific transitory article for these assignations to be smoothly migrated into the new contractual framework outside of the tender process that will be conducted by CNH.
Finally, there are other areas that we hope to be able to farm out because we possess the knowledge, the expertise and have already shouldered the risk associated with the discovery of the reserves , but simply do not have the financial and execution capacity to develop the fields. I am referring to our work on Trion and Supremus in the Perdido fold belt. Our idea would be to farm-out the implementation and development phases.
As director, how are you going about balancing competing priorities to exploit shallow water fields – where Pemex is renowned as a leader – and to develop new capabilities in areas where you could be said to be lagging behind? How do you strike the right balance?
We need to spread our energies over different areas, but at the same time have a very clear idea of prioritizing and sequencing. In shallow water and onshore, providing we have the infrastructure installed it is quite easy for Pemex to progress from first oil discovery to production. For onshore fields, we can successfully complete this process within a year. For shallow offshore fields, we can do it within three years. In short term we are concentrating in the areas of our most productive assets. In the mid-term we will be attentive to the more complicated basins and new frontier exploration such as deep-water.Given the high logistic effort required for developing unconventional plays, the focus there will be on converting prospective resources into reserves rather than on the production side. In the long term, we can expect to be fully engaged in all types of field.
We are confident that the request we have put forward to SENER contains enough in terms of volume and type of assets to keep us busy exploring, discovering and converting into production well into the next decade. After that we will be able to use the experience accrued from farm-outs and partnerships to forge further ahead.
We have a very clear idea of the areas we would like to farm-out and have even identified the types of partners that we would require for their technical and financial input – namely those experienced actors that have already established a positive track-record in the deep-water Gulf of Mexico basin.
What message would you like to send out on behalf of PEP to our international readers?
Mexico is an attractive place to invest. We possess almost 40 free trade agreements with almost every part of the world. What’s more there are a lot of prospective resources just waiting to be discovered. We are part of a regional energy provider economy that comprises Canada’s tar sands, America’s gas and shale gas and Mexico’s cheap and easy to invest marketplace with bountiful resources to explore. The firm belief of Mexico’s President is that our country possesses huge growth potential if only we allow in additional capacity. That is the essence and spirit of this historic reform.
Finally, I would also like to mention that PEP does not stop and continues forward, because PEP considers the current situation as a unique opportunity to strengthen and prepare the organization with a clear view towards the future, able to overcome the main industry challenges and, certainly be prepared and ready to compete and win.