Confidence and consolidation in Mexico

Mexico

Constantine A. Galanis, general director of Apollo, talks to The Energy Year about the strength and preparedness of Mexico’s state energy enterprises and local services companies as they face challenges stemming from the Covid-19 crisis. Apollo manufactures chemicals for a wide range of applications in the energy industry.

How prepared are Mexico’s state energy enterprises to overcome the challenges stemming from Covid-19 and the oil price collapse?
We are pleased to see that the government, the Secretariat of Energy and various other stakeholders are pouring in to help Pemex and the Federal Electricity Commission (CFE) during these troubled times. The government is committed to making Pemex healthy and profitable again. Pemex has had certain setbacks because of their ratings and downgraded credit profile, but we feel that with the government’s strong backing, the national oil company will be able to navigate the crisis.
Mexico is shifting its policy from exporting oil to refining it locally. That is an area where companies like Quimica Apollo can bring new technologies to enhance Pemex’s capabilities in refining locally produced oil and achieving higher energy efficiencies. For us, this shift is a good thing. We are very optimistic for the future.

How do you view the government’s support packages for building the economy’s resilience?
I believe the government is doing the best it can to support the economy without getting indebted again. Mexico has suffered a lot in the past due to accumulating external debt. The majority of the losses Pemex experienced over recent years were due to currency exchange.
However, Mexican development banks have the financial flexibility to support the government’s plans to spur economic growth by increased lending. Many of them have already demonstrated that by helping Pemex renew credit lines and refinance liabilities, which allowed the NOC to pay its suppliers and, subsequently, allowed the services sector to safely navigate the dual shock of Covid-19 and the oil price collapse.

How optimistic are you about the local services industry’s ability to navigate the crisis?
The majority of companies in Mexico are still doing okay, while some of the bigger players have already started to consolidate their positions. I am confident about the smaller and medium-sized actors being able to weather the storm. Without a doubt, we will see consolidation in the industry to create new efficiencies. We expect to see simple joint ventures and mergers. I don’t think anybody has enough cash at the moment to pursue acquisitions. If they do, they will rather hold on to it.
As far as pricing is concerned, the Mexican crude mix is at around USD 24-25 per barrel at the moment and we feel that with the cutbacks of the big producers the price may still have room to grow.

How has the level of dialogue between Pemex and its suppliers evolved since the beginning of the price crash?
We received a letter of support from Pemex asking the services sector to come together and do the best we can in terms of cost optimisation. As far as reductions are concerned, Pemex has been asking companies on an individual basis to accommodate certain reductions in rates, depending on the projects we are involved in. When the time comes, we will be willing to discuss this.

What opportunities might emerge out of the crisis for Quimica Apollo?
We see ourselves helping exploration and production companies identify new efficiencies in the production of oil and gas and providing the latest technologies at refineries and chemical plants. We are currently working at five of Pemex’s six refineries to minimise water use and increase reuse. Also we are working on the process side of these refineries, where we have helped maintain the refineries running at an all-time high and are poised to keep helping the refineries to achieve full production capacity, as this is the goal of the federal government. We see this area being a great opportunity in the foreseeable future.
Additionally, we are diversifying into energy infrastructure. We have a very robust engineering department and we are entering into different types of energy projects run by Pemex, CFE or private industry players.

How do you expect digitalisation will affect the labour market and how your workplace functions on a day-to-day basis?
We are not using digitalisation to substitute for our labour force. Instead, we will train our people to do different things. Our plan is to redirect the duties of our people to enhance efficiency and achieve better productivity. We will give our employees the tools that will ultimately allow them to do a better job.
Before, we used to rely a lot on our labour force and now we are shifting towards automation and digitalisation. So, post Covid-19, a great part of our work will be remote and there will be certain individuals that will have very specific duties to perform at the refineries and wells. It is clear that in order to navigate similar downturns in the future, we need to invest in digital infrastructure and rely more on automation and less on labour capacity.
Pemex is also moving towards digitalisation and cyber security, and they have been seeking new areas of efficiency just like all other NOCs, including in big data and artificial intelligence.

What’s in store for Mexico’s renewable energy projects in the post-pandemic environment?
Sooner or later the government will continue with the green energy push, even though there have been some setbacks that slowed down progress. The government seems to be taking a pause, as they are currently focusing on going back to the production of electricity through conventional means. It may not be what we expected, but at the end of the day, the green energy transition will have to continue.

What can international companies expect from investing in Mexico’s energy industry?
Companies that can provide new and state-of-the-art technologies to achieve new efficiencies, and specifically make the use of oil more efficient, will be welcomed in Mexico, even though the industry’s opening to foreign investors has slowed down significantly. Going forward, those foreign players who want to enter Mexico can easily associate themselves with a local company to bring their technologies to the market. I am confident that there will be tremendous opportunities. Pemex and CFE embrace new technologies and they are very open to doing things better.

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