EPC opportunities in Mexico’s changing industry

How has the energy market been evolving as a result of liberalisation?
We have already seen an increased level of activity in the field, both in the upstream and midstream markets, as a result of the energy reform. Historically, the midstream market has always had some activity, especially in pipelines. However, we began to see a boom in storage terminals. This was not happening prior to 2018.
We also began to see the use of international standards. Currently, we are working for companies that use international standards. As a result, in some cases, we had to make strategic alliances with world-class companies that are able to meet the international requirements. Our approach has been successful so far.
In terms of the impact of the energy reform, our expectations were partially fulfilled and today we are seeing tangible results. A lot of Mexico-based engineering projects are being conducted in compliance with the international standards, and I believe this is a very important and notable progression in the sector.

How important is diversification for Arendal’s activities in the engineering and construction sectors?
Nowadays, Pemex occupies 30-35% of our projects, compared to 90% in the past. We have had a successful diversification process. We have customers of different kinds. They include a range of local and international customers, both from public and private sectors. As a result, we have different strategies and resources to manage them. Such is the case regarding how to deal with the public sector on issues related to public works law.
We were a company that only worked in Mexico. We decided to pursue opportunities internationally as part of our geographical diversification process. Arendal recently won a project in Jamaica for gas transportation and we are now in the early stages of the project.
We strongly believe our future is in continuing our diversification strategy. We are aware that our main customer is and will remain Pemex, but we also feel there is a need for diversification to make Arendal a stronger company.

Which market sectors hold significant opportunities at the moment?
The storage and transportation sectors are booming at the moment, particularly storage. Transportation has a couple of issues. Normally, you transport crude oil, gas or finished products. In regards to finished products, we all know we have a big safety problem, and this has limited the investments in this sector.
In the natural gas segment, the distribution network that comes from the north is already going down to the south. This has been growing. Multiple gas transporters have emerged, which has created many opportunities to develop projects.
Crude oil is managed by Pemex. There have been a few changes in the transportation segment, but in terms of storage, we have seen a significant investment coming in to develop a variety of projects. We are already executing similar projects successfully in Mexico. Our business strategy for the sector has been well received by our customers.

What is your assessment of the local competitive environment?
There is obviously direct competition with many local companies. Unfortunately for the sector, there is a large group of small companies that know the job, but are limited in the type of projects they can execute. On the other hand, there are major companies that do not reach the lower levels, while there is no one in the mid-range. This asymmetry makes Mexico a difficult market to compete in because when you prepare a bid proposal for mid-range projects, it is hard to predict what the key competitive factors are going to be.

Given the incoming government’s signals to invest in Pemex operations, what is your outlook for the market in the near term?
We see a strengthening of Pemex in terms of project execution. We have always thought that for many years Pemex would continue to be our most important Mexican oil and gas customer. It will acquire a very important relevance in the years to come. Having said that, the sector is already open, and this is a reality. What we are waiting to see now is the new government’s strategy with regards to energy matters as they clarify their policies in the coming months.

Is the Mexican energy industry able to further digitalise and achieve greater levels of automation?
Yes, we are firm believers of that. We are a company that dedicates great effort to technological development. We believe the way to increase efficiency to meet the new demands of projects is through the use of technology and information management. Welding will always be the same regardless of the type of welding, whether it is automatic, semi-automatic or manual.

In what areas can information technology and automation help increase efficiencies?
You can improve them in three places. One is having commercial agreements that save you time when it comes to negotiation and bidding. You can also reduce [inefficiencies] through information management.
The third thing we have to emphasise is the issue of standardisation. Since you have to develop tailored projects each time, you will take longer to execute them. Standardisation is another way to start using technology to save time, raise standards and be more efficient.
We have already started using technology effectively at Arendal to support our operations.

Given the transition period the country is facing, what is your outlook for the industry?
In recent months [as of November 2018], everyone has been talking about markets and about a number of things derived from the uncertainty associated with a change of government – and that is normal. Uncertainty will always be there. The long-term certainty that existed in the 70s and part of the 80s no longer exists.
It is very important to understand we are in a market that has a dimension, and a quantity of uncertainty – and what companies have to do is being prepared to handle that uncertainty in order to be able to navigate through it. I am optimistic; I think there will be public and private investments. The next three years will be very good for us as well as for the industry. The return of Pemex to investments in different sectors represents an addition to the investments already planned by independent and international operators.

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