Interview with Aldo Flores, Undersecretary of Hydrocarbons at the Ministry of Energy
Q: What did the Energy Reform accomplish before you started as Deputy Secretary of Hydrocarbons in August 2016 and how did this shape your priorities?
A: The Energy Reform’s main, early achievement was the approval of a new legal and institutional framework that helped launch the country’s exploration and production strategy, as embodied in the first three bidding cycles of Round One. That in itself was a major achievement that changed the energy sector as we knew it for almost 80 years. I began participating during the deepwater bidding cycle of Round One. The experience of the initial three cycles, plus the new framework, informed our thinking about the next stage of our E&P strategy. The lessons learned helped us improve the contractual structure included in our new Five-Year Plan and streamline our processes. Indeed, we are moving from innovation to standardization, which is a main priority.
Q: What are the most important changes in the new Five- Year Plan?
A: The new Five-Year Plan deploys a strategy to bolster E&P companies’ confidence for continued investments in Mexico. A key change is the opening of the full portfolio of 509 blocks and 82 production fields to nomination by industry participants. Another important change is the streamlining of the bidding process itself, including the simplification of requirements for participation and nominations. Furthermore, we standardized the bidding schedule, and will hold two bidding cycles per year. This allows us to speed up the process to get to greater volumes of production and exploration.
Q: What are the main parameters that you would use to describe the success of Round One?
A: The main purpose of Round One was to establish the seriousness and credibility of Mexico’s new E&P institutions. For me, Round 1.1 was a success because the authorities showed they were competent, transparent and scrupulous. We applied the lessons learned to the next bidding rounds and cemented the country’s reputation as a principal destination in the global oil and gas market. The extent to which we keep attracting competitive, global companies that are willing to risk their talent and resources to participate in Mexico will be an ongoing measure of success.
Q: What are the main concerns for potential operators about future rounds and how are you addressing those?
A: From the beginning, we have been responsive to the private sector’s concerns. This has helped us identify opportunities for improving the structure of the rounds and contracts. We will continue doing so. Naturally, the emphasis has shifted from reaffirming our commitment to implementing the Energy Reform to discussing specific aspects of the implementation process. We will continue to engage with the private sector and industry experts to make sure that we have the most competitive framework possible.
Q: What can be done in the short term to make more progress towards production, reserve replacement, investment and local content targets for upstream?
A: The licensing rounds are among the necessary steps to achieve more exploration, more production and more demand for domestic services and supplies. Two and a half years ago, there was only one operator, while now we have almost 50 with signed contracts. This first step was essential to increase levels of investment in exploration and production. The new Five-Year Plan is our strategy to leverage market dynamics, through the nomination process, to speed up investments, production, reserve replacement and achievement of local content targets.
Q: What can be done from a policy perspective to accelerate PEMEX’s progress in transforming its 83 percent share of 2P reserves into tangible production increases?
A: The policy framework is designed to help PEMEX use migrations to attract technical expertise, cutting-edge technology and fresh financial resources. PEMEX has over 400 asignaciones, the resources awarded to it in Round Zero. The company is already bringing its acreage into the competitive field through migrations to the contracts regime.
Q: How can the success of the Trion farm-out and its implementation be a stepping stone to accelerating the farm-out process?
A: The Trion farm-out confirms that partnerships are an effective vehicle for bringing in resources, technology, expertise and talent that complement those of PEMEX. Trion is already a pillar of success considering the amount of investment it will bring. There will be more farm-outs in the year ahead and I am very optimistic that they will draw significant attention considering the resource base involved and PEMEX’s own expertise.
Q: Some have argued that it would have been more beneficial for Mexico if the work program had had a larger weighting in the bidding process for Round 1.4. What is your view?
A: Naturally, there are different viewpoints on what the best way to balance these two key variables and we are evaluating the trade-offs. A case can be made for emphasizing the work program but it must also make a convincing argument to allay the concerns of securing the state’s income through royalties. We will continue to revisit this subject as we improve the contractual framework and the awarding formula.
Q: The Energy Reform will likely be a key topic in the upcoming presidential elections. How might this influence the next rounds?
A: The implementation of the reform will be completed in 2017, with the opening of all the energy markets. We have already set up a schedule for the upstream bidding cycles, all of which will be launched before the election takes place.
Q: Following the cancellation of Round 1.5, what role should unconventional resources play in Mexico’s natural gas strategy?
A: Our natural gas strategy involves the full value chain, which means putting more blocks with natural gas production potential up for auction, creating incentives for the construction of storage and transportation infrastructure and improving the quality of downstream services by creating a market that is driven by the right incentives and prices for projects to be developed. We hope to launch an unconventional resources round by the end of 2017, provided the regulation and other elements needed to move forward are in place. We broke new ground in this process so we have had to spend a considerable amount of time making sure the regulations and contractual structure for these types of blocks are ready. In any case, we are accepting nominations for unconventional onshore and offshore blocks and we expect to make the announcement in June.
Q: Is there willingness to offer more generous terms to accelerate the development of the natural gas sector?
A: We have adjusted the contractual terms according to the risk-reward opportunity of projects. The royalties for deepwater projects are different from those for shallow water or onshore blocks. Risk matters, the size of the block matters, so all of this will be factored in.
Q: What role will local content play in the development of the supply chain and are the requirements moving targets?
A: Mexico already has a diversified supply chain that developed alongside PEMEX. As demand for local services and supplies increases, I am confident we will see new investments made to meet the sector’s sophistication and standards competitively. We are seeking to have foreign sourcing complement local content providers and have set up a progressively ambitious schedule to meet local content requirements. We also introduced flexibility in this schedule to differentiate onshore and shallow-water projects from more complex deepwater and unconventional ones, as well as the projects’ life cycle needs.
Q: When should we expect reserves replacement to reach 100 percent again?
A: Like the rest of the industry, PEMEX’s investment in reserve replacement dipped during the downturn in international oil prices but it has since stabilized and PEMEX’s replacement rates are improving. Also, with the private sector’s help, we should see improvements even sooner. It is important not to confuse a short-term trend with a long-term plan.
Industry insiders, including the heads of PEMEX’s divisions, will discuss these results and more at the Mexico Oil & Gas Summit on July 18-19. Click for tickets. For more articles on Mexico’s oil and gas industry, check out our blog here