One of the biggest conundrums that the Mexican oil industry poses for the expert analysts that follow it closely is the obligation that Pemex has to operate by itself. This has always presented an added challenge to all of the already existing technical and red tape obstacles that the company has to overcome on a daily basis. Today, the incentives are aligned for that to change.

Image from elsiglodetorreon.com.mx

President Enrique Peña Nieto and President Dilma Rousseff (Image from elsiglodetorreon.com.mx)

After discussing the possibility of changing the company’s internal structure, Pemex is facing yet another step towards optimizing its operation in a more business-like model. During President Peña Nieto’s meeting with Brazilian President Dilma Rousseff in Chile, the Mexican chief of state announced his intentions to explore a partnership agreement between both countries’ national oil companies. “We have a shared vision, and if we project it onto various multilateral forums, we could gain greater strength and synergy for the region. We’ve agreed to discuss possible joint ventures between Pemex and Petrobras for technology exchange and the development of joint projects,” Peña Nieto said.

What does this mean?

Last week, in an interview with ex-Pemex CEO and current CEO of energy consulting company EnerGea, Jesús Reyes-Heroles shared his belief that the main change needed for the energy reform to prosper would be to allow Pemex the ability to form joint ventures. “Today, Pemex is not allowed to partner with other companies to operate. The 27th Article of the Constitution remains paradoxical, at best. On one hand, it says that all the hydrocarbon resources are Pemex’s and that the NOC has the advantage of being the sole exploiter of those resources. But on the other hand, it says that Pemex has the responsibility to do it all by itself, with no help at all. That is a terrible limitation; there is no other oil company in the world that has the same restriction,” Reyes-Heroles stated. “To change this was one of the failed objectives of the 2008 energy reform, and therefore, it is still the most critical change that has to be pursued for this legislation change. If you allow that to happen, just by itself, it would provide a meaningful change to the operation of the industry.”

Having Pemex working closely with Petrobras in technology sharing and project development would really give the Mexican NOC a new framework to work with. It would allow Pemex to learn from technical matters in which it is not yet the expert, but, even more, it would give the company insight on how the Brazilians overcame challenges similar to those that the Mexican oil and gas industry is now experiencing. The corporate governance modernization that Pemex is right now lobbying for, would also endure an extra boost of productivity and transparency. It would mean the start of the openness to allow Pemex to partner with other companies, even if they are foreign, which could serve as an underlying test to how the Mexican environment reacts to openness.

The Real Challenge

Image from panoramadiario.com

Petrobras (Image from panoramadiario.com)

The idea of partnering with Petrobras, though, is nothing new. Several conversations have taken place on the topic, even since President Vicente Fox was in charge of the Federal Administration. These discussions have extended for many years now, even with changes at the presidential chair of both countries. Vicente Fox, Felipe Calderón, Ignacio Lula da Silva, and now Dilma Rousseff and Enrique Peña Nieto have all been part of this dialogue, with nothing really materializing.

During Felipe Calderón’s term, agreements were signed with Petrobras to share technologies applied in exploration and production. The former Mexican chief of state even went as far as proposing a 50/50 society between Pemex and Petrobras to operate outside of Mexico. According to Lula da Silva, though, “the mistrust that existed between Mexico and Brazil” trumped the prospects of doing such a partnership. Pemex still has no presence in Brazil, while Petrobras has just one contract until 2019 in Mexico to exploit the gas block Cuervito, at the Burgos basin.

Possible Outcome

Today, new eyes are looking at the opportunities for the two national oil companies to work together. President Peña Nieto are today taking steps in terms of uniting the political parties on the subject of energy reform that would have been unthinkable under previous administrations. Even if this joint venture is made with the sole intention of collaborating more deeply in sharing technology, it represents another step forward towards the modernization of Pemex. Nevertheless, Pemex first needs to straighten things out and decide what the new corporate structure will look like to move on with partnership agreements. The future keeps looking bright for Pemex, where commitments are being made to make the NOC an even more competitive and modern company for it to be able to face the challenges of the transition from easy to difficult oil extraction.

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