The Sheraton Maria Isabel’s Bugambilias Room was the setting for the first Mexico Oil & Gas Procurement Forum on Monday June 2nd, just days ahead of the Congreso Mexicano del Petróleo. The event held 120 key executives involved with the procurement of products and services in the Mexican oil and gas industry, eager to share their perspectives on how the procurement function will work after the Energy Reform and PEMEX’s recent creation of a Procurement Division. Mexico Oil & Gas Procurement Forum created a space for debate and networking across two panels, three presentations, and a keynote exposé led by PEMEX’s new Chief Procurement Office on the changes that the NOC is planning to implement for the future.
Outlining the Changes in the Mexican Energy Sector
Once the opening remarks had concluded, the formal program of the Mexico Oil & Gas Procurement Forum began with a special presentation by David Enríquez, Partner of top-tier law firm Goodrich, Riquelme y Asociados and foremost expert on the legal systems governing the Mexican energy sector. Enríquez put forth an overview of the changes that are about to take place in the Mexican oil and gas industry as a result of recent developments such as the passing of the Energy Reform and PEMEX’s submittal of its Round Zero requests. His overall assessment of the future of this sector alternated a generally positive attitude with a calculated skepticism that he, on numerous occasions, explicitly referred to as “politically incorrect”.
A good example of this balance was Enriquez’s expectations regarding the immediate execution of the next expected steps in the Energy Reform timeline, which include the passing of the Secondary Laws and the publication of SENER’s decision regarding PEMEX’s Round Zero requests. Enríquez was sure that these coming developments would take place according to schedule, since the timely nature of past events suggested that politicians and government officials were serious about sticking to their timetables. However, he was also quick to use international comparisons to underline that, regardless of how punctual these events turn out to be, the real effects of the reform would still take their own time to manifest themselves; in Enríquez’s estimation, analogous reforms in the 90s in both Venezuela and Brazil took three years to start having a tangible impact on their corresponding economies.
Enríquez’s skepticism was also expressed in his belief that the Energy Reform, to a certain degree, kept the ‘status quo’ due to the fact that it still limits PEMEX’s ability to access the capital markets. This, in Enriquez’s estimation, limited PEMEX’s capacity to compete in a free market environment and “created speculation” regarding the future of the NOC. He also contrasted the complicated process involved in the implementation of the Energy Reform with the short-term production, economic, and GDP growth targets put forth by industry leaders and politicians; Enríquez suggested that said targets should perhaps be reconsidered, since the fluctuations and variables of the aforementioned implementation process could affect the exact magnitude of growth and immediate benefits that the Energy Reform could bring.
An extensive segment of Enriquez’s presentation was dedicated to a subject that he felt was not being addressed as frequently as it should: social engagement, particularly legal issues with ejido authorities. Enríquez wished to stress the importance of focusing on this aspect of a project for new and upcoming participants in the Mexican oil and gas industry, especially those interested in unconventional onshore projects; he also made it clear that people should not be naïve about their ability to handle this engagement though purely judicial means. As Enríquez himself put it, “this is not a drafting issue, it is a sociological issue.” Most of the questions and concerns voiced during the Q&A session responded to this focus on ejido interactions, along with a couple of questions surrounding labor and security issues also tied to social engagement.
If you want to access the slides used in David Enríquez’s presentation, click here.
A Spectrum of Opportunities for Suppliers and Service Providers
The first panel at Mexico Oil & Gas Procurement Forum was characterized by topics related to the new market opportunities for suppliers and service providers that are expected to be brought about by the Energy Reform’s recent enactment. The participants of this Q&A session were: Claudio de la Cerda, Technology Director for Schlumberger; César Vera, Senior Area Manager for Mexico and Guatemala of Nabors; and Sergio Charles, Commercial Director of Grupo Protexa. These three key-decision makers exposed their experiences with PEMEX in the Mexican oil and gas industry through case examples while voicing their opinion regarding the coming changes to procurement operations with the national oil company.
De la Cerda was keen to point out Schlumberger’s long-lived working history alongside PEMEX, where it has been a service provider for over 70 years. Moreover, he pointed out the fact that Schlumberger has been adapting its internal operational structure to PEMEX’s, that is, by focusing their activities in an asset-by-asset basis throughout the entire country’s hydrocarbon-producing regions, thus positioning the global service provider at a competitive advantage in its relationship with Mexico’s productive fields. After de la Cerda strongly stated that such approach must be undertaken by every company that wishes to become a key supplier and service provider to PEMEX, Vera complemented by highlighting the importance of the new potential operators that will come into the Mexican oil and gas industry as buyers and, therefore, potential clients. He stressed that, given the forecasted boom in the upstream and midstream segments of the industry, especially in drilling and pipeline construction activities, a wide range of opportunities will bloom for Mexican suppliers and service providers. At the same time, he outlined the fact that with the new regulating roles of CNH and SENER in the contracting arena for domestic and foreign operators in the upcoming rounds, suppliers and providers will definitely see significant improvements when providing their products and services in terms of punctuality, transparency, and reliability as they work with various companies in the oil and gas industry. Incentives will be brought about by competition according to Vera, and this is a route that he believes will lead to plenty of room for his and other companies’ growth. Similarly, Charles concurred with Vera’s ideas, leading Grupo Protexa to expect great demand for his company’s shallow water drilling platforms. Even though this segment will perhaps be overtaken by PEMEX, he is certain that the consistency of the national company’s shallow water operations will ensure business opportunities in this area.
After today’s panel, it is evident that a set of uncertainties are still to be defined in the coming months. The final approval of the secondary laws will establish new fiscal terms among other conditions which will affect suppliers and service providers in the near future. Nonetheless, the fact that PEMEX will now head for a more centralized procurement division will radically change the way the backbones of the Mexican oil and gas industry are treated. The three speakers definitely foresee this as a beneficial move on PEMEX’s agenda and are waiting for private operators to arrive in order to tackle to the ever growing number of opportunities out there.
Addressing the Technological Challenges Ahead
The second presentation of the morning had Luis Vielma Lobo, CEO of CBM, addressing the technological and operational challenges facing the Mexican oil and gas industry. Vielma Lobo gave an introduction of the different stages of the E&P process where technology is needed for success. He described that the process starts at the reservoir, where the hydrocarbons are stored in the subsurface. The next stage is the drainage area, which is basically the contact point between the well and the reservoir established by the drilling equipment. The well itself and its extraction mechanism constitute the third stage, bringing the hydrocarbons to the surface, where they are later transported to production and storage facilities – the fourth stage of the process. These four stages make up the basic value chain of the E&P process and frame the different areas where technology is paramount and can be improved to face the upcoming challenges in the Mexican oil and gas industry.
The presentation continued with a brief overview of the Mexican petroleum history, from the discovery of Cantarell to the present. Here, Vielma Lobo made emphasis on how reservoirs, the same as humans, have an expiration date and start to decline after a certain age. He recalled how Mexico had lived off from conventional and highly productive reservoirs through financial efforts and accentuated that the hydrocarbon future of the country will depend on reservoirs found in mature fields, deepwater, and less-productive unconventional fields, where technology is crucial for an efficient extraction process. Therefore, Vielma Lobo stressed that Mexico has to search for the correct technological fit to streamline its E&P activities, giving the country the opportunity to subsist both in terms of financial health and energetic stability.
In order to do this, Vielma Lobo commented that each reservoir has to be analyzed separately, given the different technological challenges each presents. By thoroughly analyzing the behavior of each type of reservoir, Mexico can better face the challenges it fronts. For instance, highly-productive conventional reservoirs usually present challenges related to the secondary recovery methods used on them, artificial lifting systems, and water management issues. Timely secondary recovery can extend the productive life of Mexican reservoirs, claimed Vielma Lobo. At the same time, less-productive unconventional reservoirs carry out issues regarding the understanding of their behavior for the correct architectural well design and fracking technology selection. “Shale has always been there; fracking, on the other hand, is a breakthrough technology that is barely scratching the surface in terms of usage for the extraction of unconventional reserves,” Vielma Lobo said just before explaining that, just as Chicontepec, the Faja del Orinoco project in Venezuela started with a 40b/d output per well. “Through technology, it is now producing 3,000b/d per well, a feat that is viable in Chicontepec through the correct selection of technology,” he argued. For deepwater, main challenges ahead include the identification and delineation of reservoirs and the design of wells and production facilities, along with their construction and termination. Finally, heavy and extra-heavy crude oil reservoirs include challenges in the connectivity point between the well and the hydrocarbon deposits, the type of artificial lift systems used for the extraction process, and transportation and storage of extracted hydrocarbons. According to Vielma Lobo, it is important to note that not all the artificial lifting systems work for this type of reservoirs, so it is required to tailor them for the type of crude and reservoir that is being approached. He claims that, while Mexico has engendered strength in technologies related to naturally fractured onshore and shallow water reservoirs, the challenge remains in defining a technological strategy to select the most adequate stance in circumscribing strategic alliances for the future challenges. Mexico also needs to adopt an ‘intelligent buyer’ strategy, suggested Vielma Lobo. “This strategy, combined with behavior simulations at each type of reservoir, will help the country in selecting the technology that best fits the challenges of Mexican E&P.”
After giving some examples of technologies that could help in successfully facing the current challenges that Mexico has in the four different stages of the E&P process, Vielma Lobo concluded with his 2025 vision for the country: a vision that includes PEMEX facing its strategic challenges by incorporating new practices, technologies, and business models, as well as international newcomers of all sizes and magnitudes acting through the different contracting models to contribute in the significant expected growth in hydrocarbon production for Mexico.
If you want to access the slides used in Luis Vielma Lobo’s presentation, click here (link to be uploaded).
The Regulator’s Take on the Upcoming Technological Challenges
In the third presentation of the event, Ulises Neri Flores, Associate Director for Reserves of CNH, gave the regulator’s point of view on the technological challenges that Mexico faces in the deepwater and unconventional segments. He started off by giving an overview of the hydrocarbon potential in Mexico, stating that just in the deepwater and unconventional segments, the country has more than 86 billion boe in prospective resources. Neri Flores mentioned the EIA’s estimates on shale prospective resources, which rank the country as the 6th largest reserve of shale hydrocarbons worldwide, as the base for Mexico’s exploration projects in the Chihuahua, Sabinas-Burro-Picachos, Burgos, Tampico-Misantla, and Veracruz basins. He recalled that these projects have proved the extensions of the US’ Eagle Ford and Woodford plays into Mexico. He also gave a synopsis on the hydrocarbon potential of the recent discoveries in deepwater and the significance of Chicontepec for Mexico’s energetic future, since it contains around 40% of the country’s 3P reserves.
Once having established the background under which the Mexican hydrocarbon industry stands, Neri Flores talked about the different ways of addressing each of the three segments he previously introduced. “Depending on the type of deposit we face, the well spacing, and the well activities, we need to define the different technical approach and strategies to use for each segment,” he explains, after exposing the challenges that have to be overcome at the three different segments. For shale gas and oil, Neri Flores earmarks the execution capabilities of the country and the social and environmental aspects as the main concerns for CNH. He also points out that the technical options to be used depend heavily on the fracking technologies available and the spacing between the different deposits found. In the case of Chicontepec, CNH views several more obstacles in the path to maximizing its production. The geological understanding of the field and the variation its presents across the entire area top the list, with execution capabilities, well design, development of production facilities, fracking technologies, and their corresponding environmental and social consequences completing the inventory of challenges in the paleochannel’s project. Deepwater, on the other hand, faces problems that hinge the geologic uncertainty of the segment with its high financial hedges and market value assurances. He established the need for companies to have several contingency plans to shield their future investments in the segment.
After addressing the specific challenges of the unconventional and deepwater segments, Neri Flores commented on several other challenges that E&P companies need to take into account when operating in these segments. He enumerated several social and environmental challenges, dealing mainly with possible damages to the community and to the equipment used in the E&P process; infrastructure challenges, dealing with facilities for transportation and storage; and human challenges, such as the generational gap that both PEMEX and the industry face and the training and development challenges that universities and the private sector are yet to address. With the overview on all the challenges upfront, Neri Flores summed the country’s main problematic up in the fact that most projects in Mexico are declining or in the exploration phase. He then established the importance of the Energy Reform in extending the projects’ productive life and commented on the strategies that CNH, as a new government office, is approaching to achieve this. He revealed that the government structure for petroleum comprised within the Energy Reform Decree is aimed at ensuring the optimal government take from E&P operations, advance on the development of the country’s petroleum resources, and create a durable and successful petroleum regime. “We are currently analyzing what the correct balance between our fiscal ‘toolbox’ and the different contracting models available is in order to maximize the government take and attract the necessary foreign direct investment to fulfill those three targets,” Neri Flores concluded.
If you want to access the slides used in Ulises Neri Flores’ presentation, click here (link to be uploaded).
Contriving Strategic Alliances to Develop the Industry
Immediately after the presentation made by Neri Flores, the second panel of the day assembled to talk about the success factors of alliances and partnerships in a post-Energy Reform industry and in a centralized procurement scenario. The panel was moderated by Nicolás Borda, Partner of international law firm Greenberg Traurig, and it was composed by prominent industry stakeholders and experts such as Patricio Gutiérrez Fernández, Chief Financial Officer of Braskem-Idesa, Oscar Vázquez, Finance Corporate Manager of Grupo Diavaz, Juan Trebino, Vice President and Partner of the Energy Practice in Hispanic-Americas of Strategy&, and Mario Alberto Vega Ibarra, Consultant of CBM.
Borda began by expressing his view that companies looking to build alliances and partnerships, especially those looking to enter the industry as full-fledged operators or bid for the operation of large blocks, should be given the space to determine the terms of these collaborations by the secondary laws. In other words, limits and regulations on important factors in all oil and gas alliances, such as risk allocation, should not be codified into the law but managed by the relevant authorities on a case-by-case basis. In Borda’s estimation, doing otherwise could potentially hinder investment and make interested parties think twice about getting involved in a partnership with a Mexican company or in a Mexican project. Vega Ibarra followed these opening remarks by asserting that partnerships and alliances need to understand that increasing national production should be one of their top priorities, for all subsequent industry development must come as a result of this production increase instead of the other way around.
As part of Grupo Diavaz, a company poised to become one of the first major Mexican oil and gas operators in the world through its alliances with international players, Vázquez was quick to highlight the importance of seeking out partnerships and to do what is necessary to maintain those partnerships throughout all the phases of a project. The importance of infrastructural integration in these projects was also stressed; to underline this point, Trebino remarked that it is important to think about the Energy Reform not just in terms of the benefits it brings to Mexico but also in terms of the degree to which it completely integrates Mexico into what he called the ‘North American energy matrix’. He also gave the example of a Chinese company that invested heavily in a project in Colombia, only to later realize that there was not enough infrastructure to bring the oil extracted to market without severely affecting their bottom line to the tune of US$50 per barrel. The story was meant to illustrate the need for alliances and partnerships to take an integrated approach to the projects they choose to tackle.
A good example of this tendency towards integration would undoubtedly be Etileno XXI, the brainchild of the joint venture known as Braskem-Idesa. Etileno XXI is considered to be one of the most outstanding projects of its kind and one of the best recent examples of a successful international partnership in the oil and gas sector, in this case between Brazilian petrochemical giant Braskem (the largest petrochemical company in Latin America and a member of the Odebrecht family) and Mexican petrochemical market leader Grupo Idesa. As CFO of this alliance, Gutiérrez Fernández spoke at length of the difficulties involved in achieving the complicated financial scheme that made the Etileno XXI project possible, which included aligning the interests of many local and international banks from all over the globe. He also talked about the importance of having a strategy based around the needs that one detects in the local markets; for example, the polyethylene that Etileno XXI will produce has always been planned as a replacement of American imports.
PEMEX’s New Procurement Strategy
The keynote presentation hyped throughout the entire morning came at the end of the event, with Arturo Henríquez Autrey, Chief Procurement Officer of PEMEX, addressing the new challenges and outlook in procurement for the NOC. “To understand procurement in PEMEX, we need to understand the company’s magnitude,” he said before giving a brief outlook on the context under which PEMEX operates. After summarizing the impact of the company in facts and figures, Henríquez Autrey stated that PEMEX buys around US$30 billion in equipment, services, leases, and public works procurement procedures, awarding around 30,000 contracts per year. However, he rued when mentioning that the company does all this through more than 100 contracting offices with over 3,000 employees dedicated to procurement. This has led to heterogeneous methods in buying and diverse approaches to procuring the same items without having a unique corporate strategy, creating inefficiencies and transparency issues within the company. In order to solve these problems, Henríquez Autrey revealed that the PEMEX C-suite set its sights on different models of oil companies around the world and looked at what the trend was in respect to their procurement functions. He was adamant in saying that they discovered that 14 relevant oil and gas companies – including BP, Conoco, Total, Petrobras, Petrochina, ExxonMobil, Repsol, Chevron, Shell, ENI, Statoil, Suncor, and Kuwait Petroleum – had organized their procurement functions around two models: a centralized model and a hybrid centralized model. “We visited these oil companies to understand the reasons behind them centralizing their procurement function,” he acknowledged.
After this investigation period, PEMEX executives found out that the centralized model allowed one office to control all the processes, standardizing the procurement functions around the entire company, under the scrutiny of specialized people that understood to a hair the different products and services to be acquired. This allowed the aforementioned companies to guide all the procurement operations towards their corporate strategy, acquiring benefits in the form of economies of scale, improving transparency within the company, and saving both time and money in the process. “Centralizing the procurement function gives the importance required to it,” Henríquez Autrey pointed out. “Procurement operations within a company are as important as those in the finance and human resources functions, so they should be centralized as well and given the hierarchy they deserve.”
Henríquez Autrey continued by saying that, when they looked at best practices from all these companies, the company’s executives noted they all revolved around six different topics: central procurement operation, having to report everything to a Chief Procurement Officer who in turn would report everything to the CEO; category management, which, according to Henríquez Autrey, has the most impact on procurement strategies; integrated shared services with other functions in need of products and services, such as IT, HR, upstream, etc.; strategic sourcing, which involved the need for international procurement offices and experts on the different categories of products and services required; technology maximization to improve efficiency, effectiveness, visibility, and compliance policies within the company; and talent management to raise the skills of people involved in procurement operations or in using the procured products and services. “Before, PEMEX’s five subsidiaries used to all procure separately, without a clear cut central strategy,” Henríquez Autrey recalled. “However, efforts towards centralization have begun in order to seize all the benefits implied of following one corporate strategy.”
Henríquez Autrey elaborated that PEMEX will implement these international best practices on three main subjects: strategy, suppliers, and procurement. The first topic concerns aligning the procurement function to the corporate strategy of the company, standardizing processes, and having efficient governance processes. “PEMEX has not historically been a strategic buyer. This will change under the new model,” assured Henríquez Autrey while noting that category management, strategic sourcing, and market intelligence ought to play an important role in securing these objectives. The second topic revolves around forming strategic alliances and joint ventures to develop both suppliers and service providers, while fulfilling national content requirements. A correct demand forecast and supplier assessment mechanisms would be crucial for these targets to be met. Finally, the third topic revolves at organizing different multidisciplinary business units to implement the procurement strategy and develop a better relationship with final users. “We need to focus on a process-based PEMEX that goes from the creation of the need to its fulfillment at the satisfaction of the end-user,” stressed Henríquez Autrey.
Given the importance he hangs on category management for the company’s procurement strategy to move forward, Henríquez Autrey’s presentation went on to address what this concept involves. He defined category management as an international practice that helps to transform the process of procurement and supply to generate value by segmenting the procurement of goods, leases, services, and public works to achieve the most favorable conditions in terms of quality, timeliness, and price. It divides all the required products and services into different categories, which have a category management and several multidisciplinary groups of people who ought to become experts in the category. “It is vastly different to buy drilling equipment from buying medicines – of which PEMEX is an avid buyer,” Henríquez Autrey points out. “This is where category management helps us: creating different categories to differentiate the way the products and service of each category are procured, and forcing the company to create professional specialized buyers in each of the categories.”
Henríquez Autrey highlights that the main benefits of the procurement centralization in PEMEX will be the unification of processes, policies, and procedures, the aggregation of demand to achieve economies of scale, generation of transparency and efficiencies, longer and better relationships with suppliers and service providers, and savings both in money and in reducing the procurement cycle. After establishing the roadmap through which PEMEX plans to implement this new process – including the four stages of integration that the company aims to complete in one year time – Henríquez Autrey mentioned that the bulk of the results will be displayed after the five years which PEMEX is setting as deadline to complete the centralization plan. “Until today, doing business with PEMEX and getting to the end users is a very difficult thing to do,” he admits. “However, this five year plan is aimed at changing this. PEMEX’s new Procurement Division aims at being a facilitator to do business with PEMEX and ease things up for suppliers, service providers, and our own end users.” He concluded by highlighting that “category management will radically change the way PEMEX does business. We aim at becoming experts in what we buy.”
Note: For more information on category management, do not miss our blog post for Wednesday June 4th on the concept and Henríquez Autrey’s article published on Mexico Oil & Gas Review 2014.