Image from correo-gto.com.mx

Pemex as a Business? (Image from correo-gto.com.mx)

When Felipe Calderón Hinojosa became President of Mexico in 2006, he appointed Jesús Reyes-Heroles as Pemex CEO. One of the main objectives with the changes made was for the NOC to become more competitive. The strategic decisions made with this idea in mind included fighting for an energy reform that would allow more participation from private investment in the NOC’s business, and an organizational optimization to achieve more productivity and efficiency. The reform was achieved in 2008, with the Pemex Law looking to enhance operation functionality established in 2009. Some changes made by the reform haven’t been fully exploited, since the learning curve is still active, but it has definitely improved the way Pemex operates.

One of the changes made to optimize Pemex’s operation was to diversify exploration in Mexico to try and find resources at different types of fields. Diversification, in finance, means dividing an investment between several different assets. This is a basic principle in investment theory: forming investment portfolios with diversification purposes. The reasons behind the use of this technique are quite simple: diversifying helps to decrease the risk of the whole portfolio – if you have an investment that doesn’t go as well as you expected and generates losses, the profits obtained by other investments will counter those losses. On the other hand, if you depend solely on one investment, if (or when) this investment goes wrong, you are left with a big loss. The idea in diversification works since the combination of the expected value of all your assets will cancel out the fluctuations of each of them.

Pemex decided to use this risk-lowering technique in 2006 to try to stabilize production. The main objective was to turn around the decline that was starting to happen in the country’s oil production. The strategy was a conservative one: Pemex wasn’t expecting to hit the jackpot by diversifying sources, but they were expecting to achieve oil production stabilization in the mid-term and an increase of reserves and future production for the long-term. In the worst of cases, Pemex would balance out its losses, obtaining enough production in the mid-term to stabilize production. In the best case scenario, Pemex would succeed in finding oil at every single one of its new exploration projects, allowing the country to start turning around oil production in 6-12 years.

The strategy had its ups and downs, taking longer than expected to get under way – the energy reform in 2008 was a big step towards propelling this, but, as we mentioned before, the learning curve function hasn’t peaked yet – but it has eventually paid off. Today, Pemex can boast three different discoveries made in the last three months: two of them in deepwater – a sector that was still to be truly exploited by Pemex – and one of them onshore. The oil discovery at Navegante last week is evidence that Pemex is going the right way towards exploiting the benefits of different assets and not losing out with a miss-or-hit strategy.

Navegante Finding

Oil Discovery at Navegante-1 (Image from Vanguardia.com.mx)

Oil Discovery at Navegante-1 (Image from Vanguardia.com.mx)

In the last week of November – and the last week of ex-President Felipe Calderón’s administration – Pemex announced the discovery of light crude 6,800 meter deep at the onshore well Navegante-1, in south Tabasco, 20 km away from Villahermosa in the geological province named Cuencas del Sureste. The oil column’s structure is 315 meters deep on an extension of 87 km2, and holds, according to Pemex, 3P reserves that amount up to 500 million of b/d of 45 API crude oil.

The main difference between the discoveries made in deepwater and this one – apart from one being onshore and the other being deep offshore – is that Pemex already has the infrastructure to start producing oil from this well in this month. Pemex E&P is corroborating the reservoir’s extension, as well as acquiring seismic information to determine if the block goes as far as the Antonio J. Bermudez complex in the south, which holds up to 1,000 million b/d of crude oil in 3P reserves.

The expeditious production of this well would further indicate that Pemex’s strategy continues to be a successful one, since oil is being found in different sources and at different timelines. The immediate oil extraction of Navegante would compensate for the oil needed while Pemex continues to develop deepwater wells.

Implications of this Strategy

The main point made in the opening paragraph of this post was that Pemex’s future might be predicted by its recent past. The underlying message is clear: Pemex is trying to become more of a business, and less of a state-owned government branch and diversification is Evidence A. Diversification is usually the way all companies fund themselves, either through different investments that are not correlated – to balance the risk out – or through a separation of equity and debt in their funding projects. This is a business strategy that allows companies to distribute their investments freely through diverse assets and, therefore, exploit the most benefits of all production routes.

The implications of this strategy, though, are not all positive. If a company wants to distribute its investment throughout different assets, it means that it needs to invest in the start-up of each project. Pemex already has the facilities and infrastructure to exploit onshore and shallow water resources, but deepwater and unconventional sources, such as shale gas, require an extra investment to put the infrastructure in place and get the technologies needed. This is where the budget forecast for Pemex makes sense. People criticize the fact that Pemex is asking for too much money in its forecast for next years, but this kind of investment is needed if the NOC is to diversify its portfolio and develop the different alternatives that the country will eventually need for its energy insurance.

“Pacto por México”

Pacto por Mexico (Image from Presidencia.gob.mx)

Pacto por Mexico (Image from Presidencia.gob.mx)

New President Enrique Peña Nieto is already taking the steps needed to help Pemex become a business in the productive sense. Last week, the new President met with representatives of all parties, all sectors, and his new cabinet to discuss a proposal to deliver the needed changes for the country. This proposal, accordingly called “Pacto por México” (or Pact for Mexico), includes in its section 2.5. the ideas for an energy reform to serve as motor for investment and development.

One of the points made in the document is to turn Pemex into a public business with a productive focus. The document states that the structural changes needed to accomplish that objective will be made in regulatory issues, both in the energy and fiscal sector; all of this, among other things, with the ultimate goal of multiplying the exploration and production of hydrocarbons in a more efficient way.

The new government’s apparent goal for Pemex seems to be the enhancement of productivity and efficiency, and they believe that the best way to achieve it is through an energy reform that gives the NOC the ability to work as a business.

What do you think should be done in the following years to further enhance Pemex’s capabilities in the oil business?

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