Sergio Rivas, President, Camara Nordica, Mexico
The president of Camara Nordica in Mexico talks about the energy reforms set to take place, the benefits of industry competition for the economy at large, and stresses that Mexico needs to be part of the international community in order to experience any real growth or success.
To what extent do you think that Mexico’s imminent energy reforms will be able to fundamentally transform the country’s energy industry?
I am convinced that the reform will create a positive impact in the Mexican society as a whole, especially from the economical point of view.
Let us reconstruct the image of the energy sector over the past few decades. Between the nationalization of the industry in 1938 and the present day, we can remember some of the most important events in the world—such as WWII, the war in Korea, the Vietnam War, the rise and fall of the Berlin wall, and so on. Simultaneously, in 1938 there was no World Bank, no Regional Bank of Development and no Monetary Fund. The issue here is that Mexico’s outdated regulatory situation, pertaining to the country’s energy policy, remained unchanged in the Constitution, despite the transformation of the world at large. The world is absolutely different now. Furthermore, there is the issue of transparency. The oil and gas industry has to present the results before the International Community. The issue is more political than a common sense one. My understanding is that nobody has proposed to privatize Pemex, but it will allow having more players and Pemex will continue to exist and operate as a state-owned entity.
The Constitutional reform is now done. Now is the time when the Congress will be working in secondary laws, which are now more than 20. It is the time when Pemex will prepare and submit before the National Hydrocarbon Commission its proposal, having three months to do it. The NHC will evaluate this proposal, and having a semester to respond Pemex, it will be clarified which blocks will be explored and exploited by Pemex, and which would be consider for a first biding round. We could expect a result on the round Nr. Zero, at the end of 2014. Thus a first international biding would not take place before autumn 2015. That would imply that the first new type of investments for O&G industry would be arriving at the end 2015.
What can Mexico learn from the international community in terms of how it can develop organizationally and structurally?
I believe that one of the experiences that can be taken as a reference is that of Statoil in Norway. Right now, the Norwegian heavyweight must compete for a license in Norway. The benefits derived from competition, are worth mentioning. In the oil industry, there is a niche that is very important: the recovery factor index of the reservoirs. At this moment, Norway achieves a 60 percent recovery rate compared to a mere 23 percent in Mexico. This demonstrates why oil companies, including Pemex, should compete and increase their involvement with suppliers of R&D in order to discover how to enhance the recovery factor index. Another benefit of competition would be the streamlining of their opex and capex figures.
Considering that Pemex is one of the largest clients to the oil field service companies and that over 50 percent of the potential resources is in offshore and furthermore, their infrastructure is old, what sorts of companies are best positioned to take advantage of the reform opportunity?
The reform will bring many important changes. Within these changes could be the prices service providers charge today. Moreover, another segment of the suppliers is linked to technology services. Norway has a huge segment dedicated to reservoir exploration and a unique set of technologies regarding how to reduce gas flaring. To add one more point, Statoil has developed a project, together with Pemex, following the Kyoto Protocol, named the Tres Hermanos. In short, this is the result of a joint effort between Mexican state oil company and Statoil to cut CO2-emissions through curbing gas flaring. This is the first gas flaring reduction project in the Mexican oil industry registered as a Clean Development Mechanism CDM.
In sum, the traditional suppliers will be playing a similar but more active role in the local industry. However, the reduced prices at which they do so following the reforms will allow them to incorporate a greater degree of knowledge, providing technology to increase the recovery factor, safety and security considerations, etc.
After all, these are areas in which Pemex is facing a lot of challenges as it does lack the resources to develop its resources while also operating its downstream sector, which is quickly becoming outdated as a result of under investment. In addition to this, the majority of Pemex’s budget is directed at exploration and production activities as the company seeks to reverse the trend of declining production levels over the past decade. Hence, it is obvious that more investment is needed, but also know how and technology. However, following many years of close collaboration with industry players, we have come to realize that contract structures have, to some degree, limited the participation of international players. Pemex has so far indirectly excluded a number of participants from its bidding rounds due to the structure of its contracts that do not necessarily abide by international standards, locking those potential participants out due to their own internal policies. This represents a very important issue which we hope will be ratified with the implementation of the reforms.
Considering Norway’s success at distributing its oil and gas wealth to its people, how can Mexico strike the right balance between national content and resource development?
I believe that it is important to promote national content, but I am convinced that this should not be done by default, or by law, but under the international competitive conditions. We do not have any local supply to recover industrial focus. Moreover, creating local content is needed from the very beginning, not just the end of the value chain, because otherwise it creates gaps. Mexico has an enormous infrastructure and a wealth of engineers, but a lot of them work in administrative positions, not in the field. We hope that with the reform, we will be able to enhance local content creation while enhancing the industry’s collective knowledge and technical expertise.
As members of the Nordic Chamber we take the responsibility to promote, within the Mexican society, the business values regarding the transparency, democracy, business conduct and zero tolerance towards corruption. These constitute the core of the values we promote. In addition to this, we have the commitment to promote foreign investments from Nordic countries to Mexico and also the trade between Mexico and the five Nordic countries; Norway, Finland, Sweden, Denmark and Iceland.
When we speak about Norway, almost by default we speak about oil and gas. This year we had several activities involving Intsok and the Ministry of Energy and we have developed one important seminar and a bilateral workshop regarding the Norwegian experience. The purpose of these though, was not to show or teach Mexico any element of the Norwegian way: as we are convinced that Mexico has to find its own way, based on its own needs, priorities, targets, and objectives. We have great respect for the sovereignty of this country and we are full confident they have the capacity to effectively develop their energy industry in their own manner. Nevertheless, we have developed several platforms for cooperation.
In addition to this, we are aware of the fact that part of the stakeholders, including the Senate, and the Chamber of Deputies, have paid a lot of attention to the world at large and they received reference from Brazil, Azerbaijan, Colombia and the UK, among others, getting information about the new model of activity and oil and gas activities as part of the cooperation above mentioned.
As newly appointed President of the Nordic Chamber, what objectives have you set for yourself and how optimistic are you about its future in the Mexican oil and gas industry?
Our main intention is to promote foreign investment in Mexico. We are very optimistic about the short and long-term future of Mexico and we are convinced that this energy reform, along with other reforms, will have a great impact on the society at large. When I think of energy reform I think of more and better jobs, better social conditions for the employees. Looking at the international arena, Mexico needs to be part of the international community, and I believe that the Nordic Chamber is well positioned to play a contributing role in this respect.
Given your experiences, what are the critical success factors for doing business in Mexico?
In my opinion, a key element to success for the foreign companies is to have a permanent presence in Mexico and a commitment to be in this country, understanding the culture and preserving the important values, while at the same time adapting to the local situation.