Interview with Jorge Leis, Partner and Lead of Oil and Gas Practice in the Americas for Bain & Company
Q: How must PEMEX’s strategy change to ensure its success as a competitive market player?
A: PEMEX used to take on many projects for political reasons. Now the government can help PEMEX become a successful enterprise by not forcing it to continue with these unprofitable projects. This will allow PEMEX to focus on learning and improving the capabilities that really do matter for the company. At the moment PEMEX cannot produce more farm-outs that will allow it to get rid of its most unproductive, unprofitable areas because there is not an industrial backup for it to do so. In the US, when major companies hit a tipping point in which it is no longer economically viable to keep producing, they farm out or sell the producing assets to smaller companies. That is not possible in Mexico because there are no smaller companies. With the Energy Reform this will certainly be the environment one day.
Q: What challenges will the NOC face as it absorbs knowledge from its new partners?
A: We are not sure if PEMEX actually has the capacity to learn the lessons it needs from all the different partnerships it wants to strike. Learning from a smaller number of partners would be beneficial because it requires less human capital. Learning requires people and time to run audits, exercise control and see how they have influenced the cultural paradigm and the operational outcome, so having fewer people involved would make the process easier both for PEMEX and the IOCs. On the other hand, having multiple partners means that PEMEX can learn from a wider range of companies while at the same time having access to more human and financial capital.
Q: What impact will first-time partnerships with IOCs have on PEMEX?
A: PEMEX will have to look for guidance from its partners and learn how to become an effective operated by others (OBO) partner. Being an OBO partner does not mean it will have limited influence; almost all of the IOCs and major independents use this model. Companies frequently make a discovery but do not have the capital to develop it, forcing them to bring in partners or to convert the asset into an OBO. The ability to develop an effective OBO model will allow PEMEX to not only take part in projects that require capital investments beyond its means but to build important capabilities over time. But doing so will require optimizing contractual terms and operating models to maximize learning and influence while not interfering too much with the operating partner. To achieve this PEMEX must do more than just change the name of its institutions. It ultimately must change its decision-making processes and reduce red tape. Doing so involves a cultural change in an institution that has well over one hundred thousand employees.
Q: How are companies dealing with the current low-oil price environment and how is this affecting the industry?
A: To deal with the prospect of a low-price environment and heightened uncertainty, big oil companies have cut costs, postponed and canceled CAPEX and focused on intrinsically lower cost assets with shorter cycles, looking at their portfolios and projects to find the truly intrinsic value and where can their assets sit on the supply curve. They are making decisions based on what is required to achieve a positive mix of geographical locations and types of hydrocarbons. In the case of the Gulf of Mexico, offshore projects involve plenty of risk but each company weighs the risk differently and can invest if it believes the risk can be mitigated. If prices go up to US$80/b, companies willing to take on additional risk will generate great value but they also have to take into account the possibility of it falling to US$45/b. The geology, a deep knowledge of the area and an opening market made Mexico attractive for many international companies that were looking to enter or increase their exposure in the Gulf of Mexico and believed they could develop reserves at the low end of the cost curve.
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