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Faced with declining reserves, Mexico’s national oil company gets serious about exploration.
Throughout almost a decade of production decline, Pemex has started shaking off the complacency that developed in the years of Mexico’s easy oil and is gradually overcoming internal and external challenges that hinder its ability to evolve into the company that it always aspired to be: competitive, innovative, productive, sustainable, and focused on value creation.
Mexico’s 1P oil reserves only promise 10 years of production at current rates, and 3P reserves extend this to 30 years. With production dropping from 3.38 MMb/d of oil in 2004 to 2.55 MMb/d in 2011, Pemex management is aware of the hurdles ahead. The company must ramp up exploration activities to add hydrocarbons to its existing reserve base while simultaneously tapping those reserves to reach its stated 3 MMb/d target over the next five years.
The current CEO of Pemex, Juan José Suárez Coppel, came to the job in September 2009 with a profile that was well suited to the challenges that lay ahead of him. With a doctorate in economics from the University of Chicago, and having worked in both academia and some of Mexico’s most influential private sector companies, Suárez Coppel also served as coordinator of advisors to the Secretary of the Mexican Treasury and was CFO of Pemex before becoming its CEO.
Having been in the job for nearly three years, Suárez Coppel has a refreshing take on Pemex and the challenges it is currently facing. He is candid about what he sees as the biggest problems at the NOC.
“Currently, there are too many cooks in the kitchen of Pemex for it to be run effectively as a company,” he said. “Each of these cooks is following their own recipe, and there is no accountability.”
Suárez Coppel is alluding to the fact that under current legislation, the government is still responsible for approving Pemex’s annual budget, while Mexico’s 2008 Energy Reform created the Comisión Nacional de Hidrocarburos (National Hydrocarbons Commission -- CNH), Mexico’s upstream regulator that Suárez Coppel said has a poorly defined mandate and as a result is interfering too much in the running of Pemex.
“What every company needs to do is choose one cook, agree on the menu, agree on the budget for that menu, and then see how successful it is,” he said. “If no one is coming to your restaurant after two weeks, then you need to hire a new cook. At Pemex, we need to move from a procedure-based system of control and make it simple: present a business plan and a budget, and then bring in results.”
One of Pemex’s 2011 achievements was bringing its 1P reserve replacement rate above 100% one year ahead of schedule, reaching 101.1% replacement. Suárez Coppel takes this as an example of what Pemex is capable of under the right conditions.
“It was never a priority for Pemex to replace its production,” he said. “Finally, we achieved a reserve replacement this year of more than 100%. People must think that we finally cracked the secret of exploration in Mexico, but the simple truth is that we finally started to invest in exploration.”
With a clear mandate driven toward value creation, he argued that Pemex will find it easy to be innovative and competitive in the future.
More like Petrobras?
In recent months, Mexico’s presidential candidates for the 2012 election have mentioned the Brazilian NOC Petrobras as a model for Pemex. Suárez Coppel believes that any comparison between the two companies is unfair given the separate histories.
“The thing that is forgotten about Petrobras is that since it was established in 1953, it never faced the type of budgetary or taxation restrictions that Pemex did. People that worked in Petrobras were not public servants. These factors restricted the way we could run the company and procure equipment and services. If we were to move Pemex to the Petrobras model, there would be a huge payout.
“However, now that the Brazilian government has realized the tax revenues that could come from the oil and gas industry, things are actually starting to look more like the Mexican model year by year.”
Getting the lay of the land
Mexico’s 2008 Energy Reform opened the door for Pemex to award contracts based on incentives for the first time in its history. Suárez Coppel explained that while IOCs find operating environments that match their technological capabilities, Pemex has to develop the skills required to fully exploit the resources on Mexico’s geological map. The company has a number of different contracts available to act on its mandate.
“The first is contracting for certain activities, such as drilling or well completion. We can also contract field laboratories where we bring in a partner to systematically try new technologies in a given block over a two- to four-year period,” Suárez Coppel said.
“The third type of contract is the integrated service contract, through which we pay our partners a percentage of cost recovery plus a fee per barrel. These contracts were designed for field development but with the right changes can equally be used for higher risk projects.”
He went on to explain that although the new integrated service contracts have so far only been used for bringing companies in to boost production at mature fields, he hopes that through finding a way to share some exploration risk, the contracts will also be used to make deepwater collaboration projects interesting for those companies that have the expertise Pemex needs.
“One idea we have for this is compensating for exploration costs at the moment a project is declared commercial. We are also looking into scaling bids up or down according to the size of the discovery made,” Suarez Coppel said. “Pemex may look like its intentions are misguided, but what we are really trying to do is make the best of the hand that has been dealt to us by the government.”
Since President Calderón visited Cuba in April this year, speculation has been rife that a deal would soon be completed for Pemex to work on Cuban offshore oil projects.
“One of the biggest questions today is whether things would move faster if international companies were able to come to Mexico. Why not reverse this logic? There is no reason why Pemex should not be able to work in other countries to speed up the learning process instead of butting our heads against the political system,” Suárez Coppel said. “We are currently looking at opportunities in the US Gulf of Mexico, and as soon as we are ready, we are certain we will go there. We are also interested in looking at shale gas and tight oil opportunities in the US.”
The final sentiment that Suárez Coppel shared is the fact that he is not keen on the eventual privatization of Mexico’s oil and gas industry. “Our vision is that liberalization should not be a critical decision for Mexico to make,” he said. “Having a national oil company has its advantages. To depend on the whims of international operators is a dangerous game, and an NOC can mitigate this risk.
“I do not mean to imply that national oil companies are the only way to run an industry, but at Pemex we would like to run things so efficiently that liberalizing the industry fades as a critical decision,” he added.
More information about Mexico Oil & Gas Review is available at www.mexicooilandgasreview.com.