We know the incentive scheme and the contractual structure we have developed is competitive because of the number and quality of companies that have shown up to participate in Mexico’s opening.

Aldo FLORES-QUIROGA Deputy Secretary of Energy for Hydrocarbons SECRETARIAT OF ENERGY

Mexico’s advance towards a more open market

April 28, 2017

TOGY talks to Mexico’s Deputy Secretary of Energy for Hydrocarbons Aldo Flores-Quiroga about the benefits of opening Mexico’s hydrocarbons industry. The Secretariat of Energy (SENER) was founded in 1946.

SENER is the most powerful institution in Mexico’s energy arena. President Enrique Peña Nieto’s energy reform, passed in August 2014, strengthened the secretariat’s role, and made it responsible for identifying which of the country’s oil and gas assets would be awarded to Pemex, and which would be made available via public tender in the upstream sector. The institution also plays a role in the downstream sector. SENER has been endowed with the mandate to issue permits to companies seeking to participate in the processing, refining, import and export of hydrocarbons.

• On facilitating gas growth: “On the upstream side, the blocks we’ve been putting up for auction, particularly in Round 2, have dry and wet natural gas. We are working with Pemex to reduce gas flaring. Midstream, we are facilitating more investments in infrastructure and we are building a true natural gas market through increased access to the pipeline system controlled and managed by Cenagas.”

• On energy prices:
“Flexible and realistic prices will send the right signals for investment. Competitive prices will convey the right information for companies and consumers to make their decisions. With the phasing out of controlled prices and the clear schedule for the opening of each regional market, we are already witnessing enthusiasm from the private sector to invest in transportation, storage and distribution infrastructure.”

• On opening the downstream sector:
“In all our efforts we have two guiding principles: transparency and competition. In the case of the downstream sector, we have followed those principles to set up a process for a gradual opening starting in the north and moving towards the south as the year progresses. We gave ourselves room to improve at each stage of the opening, as we attempt to attract the greatest possible number of investors and set rules that are internationally competitive.”

• On USA-Mexico relations: “The countries have already enjoyed a very fruitful, complementary collaboration in the energy sector, and we expect it to continue. Trade and investment flows have reinforced each other, and co-ordination of policies in the region has continued. It’s been a great relationship that has strengthened energy security on both sides of the border.”

 

Besides touching on these topics, Flores-Quiroga also discussed projected increases in oil production infrastructure and facilitating access to natural gas. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Aldo Flores-Quiroga below.

What are SENER’s key objectives for 2017 and 2018?
In 2017 and 2018, we’re essentially completing the opening of the oil and gas industry. We have been opening the upstream and midstream sectors, and this year, we’ll open the downstream sector as well.
Three years ago, we had one upstream oil company and today we have contracts signed with 48. We once had a single large-scale natural gas transportation company and 24 now participate in the market. While we used to have one petrol brand, we now have about 10 and the number is growing. The new reality of Mexico’s energy model is already materialising.

How is SENER fighting declining reserves and production?

The key incentive remains the new legal, institutional, regulatory and policy framework that creates the long-term certainty for investment to flourish. We know the incentive scheme and the contractual structure we have developed is competitive because of the number and quality of companies that have shown up to participate in Mexico’s opening.
That said, we will continue to improve this framework throughout 2017 and beyond. The oil industry is very competitive and we want to make sure we are at the forefront of the field. We have presented our updated five-year plan for upstream auctions, which incorporates the learning we have accumulated over the last few years and is structured as an interactive platform for the industry to provide its feedback.

What adjustments are SENER and the National Hydrocarbons Commission making to the prequalification process ahead of the upcoming rounds?
They will become public in time, but the idea is to have a permit that companies can use for a set period of time to work in the type of blocks where they demonstrate expertise. This should simplify the process for companies to work in Mexico and speed up their investments.

Which measures is SENER using to liberalise the downstream sector?

In all our efforts we have two guiding principles: transparency and competition. In the case of the downstream sector, we have followed those principles to set up a process for a gradual opening starting in the north and moving towards the south as the year progresses. We gave ourselves room to improve at each stage of the opening, as we attempt to attract the greatest possible number of investors and set rules that are internationally competitive.

Will the policies aimed at liberalising the fuel market send the appropriate signals?

Flexible and realistic prices will send the right signals for investment. Competitive prices will convey the right information for companies and consumers to make their decisions. With the phasing out of controlled prices and the clear schedule for the opening of each regional market, we are already witnessing enthusiasm from the private sector to invest in transportation, storage and distribution infrastructure.

How prepared is Mexico to support the expected increase in E&P activity?

Mexico has a diversified manufacturing sector that already produces equipment and provides services for E&P activities. To date, it has been mainly focused on Pemex as its main client and on the export market in the case of manufacturing. This is a strong base from which to further develop the support industry. Policies are in place to facilitate the expansion of the sector, not only with respect to manufacturing, but including the training of more skilled workers and technical experts. As investments in E&P grow, demand for domestic supplies and talent will increase and we expect the supporting industry to rise to the challenge.

Are you considering any adjustments to fiscal terms to incentivise participation in the upcoming rounds?

The Secretariat of Finance sets the fiscal terms and has made adjustments where necessary. It is constantly evaluating the performance of the current fiscal framework to secure its competitiveness and efficiency. Judging from Round 1.4, or even past rounds, the fiscal terms haven’t been a constraining factor – companies committed nearly USD 50 billion in investment. There is always room for improvement, but we are seeing an unprecedented level of interest in Mexico and it’s very welcome.

What measures have been taken to accelerate access to natural gas?

On the upstream side, the blocks we’ve been putting up for auction, particularly in Round 2, have dry and wet natural gas. We are working with Pemex to reduce gas flaring. Midstream, we are facilitating more investments in infrastructure and we are building a true natural gas market through increased access to the pipeline system controlled and managed by Cenagas [National Centre for Natural Gas Control].

What is the level of co-operation between the regulatory bodies?

We’re in constant co-ordination. Our work often affects the full value chain in a number of ways, requiring different agencies to work in concert. It’s an ongoing process that is very productive and it’s the reason that we’ve been able to deliver these results. From the publication of our secondary laws, the past two-and-a-half years have seen changes on an incredible scale.

When will Mexico’s potential in unconventional resources start to be fulfilled?

When we announced our update to the five-year plan, we mentioned that the next auction of deepwater and onshore unconventional oil and gas blocks is scheduled for December 2017.

Will Mexico capitalise on its proximity to the USA by sharing common basins to sustain development?

Of course having the know-how and equipment nearby and having infrastructure connecting the countries are advantages. It is about a four-hour drive to get from the production areas in Texas to those in Mexico.
The countries have already enjoyed a very fruitful, complementary collaboration in the energy sector, and we expect it to continue. Trade and investment flows have reinforced each other, and co-ordination of policies in the region has continued. It’s been a great relationship that has strengthened energy security on both sides of the border.

What strategy should Pemex adopt to become a friendly competitor and an efficient NOC?

Pemex has a promising future. It has the resources and a labour force needed to generate value and continue playing an important role in energy security. Pemex has to become an agile, competitive company that is also dynamic and innovative. We think that the current framework and the pressure of competition will move it in that direction.
Pemex will remain a pillar of Mexico’s energy sector as we move toward the reality brought about by the new model. For the first time in its history, Pemex has partnered with the private sector, as we have seen with the Trion [farm-out], and it also won a block in the Perdido Fold Belt area with Chevron and Inpex. This is huge news, and it can become much more successful within the framework of competition.
Using fairly standard metrics, Pemex is among the world’s top 15 companies, in terms of production, E&P services, logistics and trading, which is a great platform to build upon.
With the ability to form associations and partnerships, Pemex can now access business tools used commonly throughout the world. They have to make good use of these opportunities in refining, but not exclusively. Pemex is now charged with being creative as it seeks to create value.

What role will new technologies and processes play in producing from ageing fields?

In these cases, EOR can make a difference. Pemex can seek partnerships and on the policy side, we can adjust contractual frameworks and allow companies to participate in second- or third-stage production. We’re very much aware of those opportunities and are going to pursue them.

Is there sufficient local talent available to meet the expected growth in demand?

There’s room for development. Human capital formation is key. We have a young workforce and an increasing number of engineers and technical experts graduating from our universities.
We hope the increase in demand of professionals with the skills to succeed in the oil and gas industry will be reflected in our education market. The Secretariat of Energy has set up funds and incentive schemes to encourage better training in all fields related to energy. I’m very optimistic that the frameworks established in support of the energy reform will create and strengthen the country’s skill base.

What are SENER’s priorities?
The priority right now is to finalise the opening of the full value chain. We’ve set up strategies for the upstream, midstream and downstream segments. We are implementing the challenging opening of the petrol, diesel and LPG markets and we are in the process of designing the strategy for jet fuel. Still, our aim is essentially the same: We want competitive markets and pricing that reflect the reality on the ground. All of this will happen in 2017 and 2018.
What will follow in the long term is the endless process of fine-tuning the investment framework to make sure our energy markets work the right way. The the five-year plan, the open season for the midstream sector and the opening of the downstream sector have laid out the path for the foreseeable future.

For more information on Mexico’s Secretariat of Energy, including the institution’s regulatory policies under the energy reform, see our business intelligence platform, TOGYiN.
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