Interview with Ernesto Marcos, Founding Partner at Marcos y Asociados
Q: If you could go back to your role as CFO of PEMEX, what is the first thing you would do?
A: The first action would be to implement an appropriate financial strategy to reflect the NOC’s new identity and concentrate on upstream as the company’s main business focus. In the decade before 2015, the royalties paid by PEMEX represented 33.9 percent of the federal government’s total income. In 2012 they represented 40 percent. This aggressive fiscal regime prevented PEMEX from investing. This is especially obvious today in Mexico’s midstream sector, which is said to suffer from an underinvestment of about US$14 billion.
Q: What does PEMEX need to do to reverse its production decline?
A: The only solution for PEMEX to reverse its 13-year production decline is to seize all the opportunities the Energy Reform offers. This involves seeking out private investment and productive partnerships. While the Trion farm-out was a great success, PEMEX has failed to multiply and accelerate the farm-out of other fields. The key lies in the quantity of farm-outs but PEMEX has not managed to establish the necessary parameters and mechanics to facilitate this. PEMEX needs greater pressure to speed up its farm-out ambitions.
Q: What is your view of concerns that royalty rates are prioritized over work plan increases in selecting winners of the licensing rounds?
A: First, CNH and the Ministry of Energy’s openness to listening to the concerns of the industry in the drafting of the contracts for each bidding round is to be praised. A comparison of the contracts from Round 1.1 with those from Round 1.4 reveals fundamental changes that reflect proposals made by the industry. The industry was not only able to propose modifications for contracts but also had an opportunity to nominate which fields will be auctioned and the deadlines of each bidding round and their prequalification periods.
The only topic to be debated is the imbalance between the two variables of the bidding rounds, namely the government’s take and the investment amount promised by each bidder through the work program. For AMESPAC’s group of service providers, and especially in this “lower for longer” price environment, it would be beneficial to promote larger investments in the work programs rather than focus on royalty rates because that would encourage companies to commence exploration and drilling activities sooner. By maximizing the government’s take, the government is sacrificing the initial investment companies will offer in the round. When oil prices are depressed, the profitability of certain fields is inevitably affected. What is needed is more commitment and more investment.
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.