Mexico moment: from words to facts

Mexico is living a transcendent and historical political moment which will define the future of the country. The reforms promoted by the government of President Peña Nieto, since the beginning of his six-year period, has advanced quite steady. In some cases, with greater assertively and effectiveness, in others facing some barriers related to old paradigms.

During the late political campaign some of these reforms were questioned; mainly those related to energy and education. In the case of the energy reform and regarding the hydrocarbon sector, signing more than 100 contracts with private companies, is not a small achievement. The tender process considered by all the participants as an example of clearness and transparency, with clear rules and procedures defined, considering international experiences from other countries. Each participant in the process, received fair treatment and was required to present an initial program to meet the exploration agreements, as well as the exploitation commitments. As today, the companies have committed with the Mexican government investments in a long-term scenery (25 + 10 years) for over 200 billion dollars.

The current administration has made a tremendous effort to develop this extraordinary process, conducted with transparency and integrity by the Comisiòn Nacional de Hidrocarburos (Hydrocarbons National Commission), institution in charge of the tender process and the contracts signature. In spite of this achievement the media, has speculated about the possibility of significant changes in the initiatives associated to the Energy Reform already in place. Anything may happen, this is a scenery quite difficult to achieve, because to revert the changes already included in the constitution, will require a unanimous decision from the executive branch and the national congress, as well as the total support from the 32 state legislations. This goal It is going to be a though political challenge for the new government, in case that such idea comes to their mind.

Additionally, Mexico has more than 70 companies already settled and working in the country – most of them international and private equity funds- that have initiated their investment processes in its assets obtained for the exploration and exploitation of blocks or fields. The hydrocarbon experience is quite similar in the electric sector and in the alternative or clean energies. The contracts approved by the state and signed by the companies winners in the bid processes, have specific clauses that considers risk situations for the investors, and propose options to solve them. From political to catastrophic events were considered, and unlikely situations will trigger those options to correct or take the actions necessaries to protect the parties involved.

One important issue mentioned during the political campaign was related to the amount of budget required for Pemex Exploration & Production (E&P) to increase the current levels of production from 1.95 MMBPD to more than 3.0 MMBPD. Although the round zero process assigned more than 80% of the 2P reserves existing in its allocations to Pemex E&P, the budget was not enough to meet the operational demands. For this reason the transition approach for Pemex has been considered the “Achilles heel” of the reform. We all know that maintaining the production capability and increase it, demands significant capital and recurrent expenses, which means more budget to execute, and that that was not the case for Pemex E & P.

In 2012 the company had an annual budget that exceeded 20 billion dollars, and ever since it has gradually decreased. For the current year it represents about 50% of that amount, and certainly it is very difficult for any oil company to maintain a level of production growth with budget restrictions of this type. At the end, this budgetary insufficiency has been the main cause that has impacted the company operational capability, for meeting its exploration and production goals. In fact the company yearly objectives initially agreed with the government, had to be reviewed and adjusted, to the proportional budget received.

To maintain Pemex competitive, is necessary to provide the financial resources and capabilities to maintain its operation; this is certain for the upstream and downstream businesses. The reform has given to Pemex, mechanisms that allow the company to develop associations with international companies through the farm outs processes. These partnerships with companies and / or investors in specific fields or exploration blocks, will help Pemex to bring technical and financial resources to meet its exploration and production goals. However, we may ask if this option is enough to allow Pemex the potential growth necessary to return to production levels that had a decade ago? Good question for the decision makers in the new government.

This particular issue will be the real challenge for the new government and also the new Pemex management. Somehow the government has to define is priorities, beginning with the fulfillment of the promises offered to the poorest segments of the population, and this will demand a substantial portion of the national revenues, and certainly will have priority over any other government budget requirements.

Issues such as national, and social security, among others, will be at the top of the priorities of a government that could be Mexico’s great hope for the future. Satisfying all these demands, will require a different, creative, innovative approach to manage Pemex, the national productive company; but not necessarily with the same current paradigms. As Winston Churchill used to say: “In politics, you change your mind depending on the historical moment”.

Note: this article was written a week prior to July 01, Election Day.