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Ernesto Marcos Giacoman

MEXICO - Energy & Mining

All Change

President & General Director, AMESPAC

Bio

Ernesto Marcos Giacoman is the Founding Partner of Marcos y Asociados. He has devoted most of his professional career to the development of financing alternatives that better suit the differentiated needs of the Mexican industrial and infrastructure sectors. Between 1989 and 1994, he was CFO of PEMEX, and from 1986 to 1989 he was President of Nacional Financiera (NAFIN), Mexico’s development bank. Between 1982 and 1983, he held the position of Undersecretary for State-owned Industry within the Ministry of Industry. He has a PhD in Economics from Notre Dame University.

"The main element of the reform is in allowing private investment all along the value chain of the industry."

What are the key elements of energy sector reform?

There are four main elements supporting the new structure. The Mexican state retains full ownership of hydrocarbon reserves. The participation of private investment in the new scheme would be in association with the owner of the oil reserves, which is the Mexican state, and which will offer contracts and licenses to private participants. The Mexican state also maintains full ownership of the former state monopolies, PEMEX and the Federal Electricity Commission (CFE). The government will charge royalties for the exploitation of these reserves, and a sovereign Mexican oil fund will be incorporated in order to create transparency in the management of the economic rent generated by their exploitation. The other main component foresees PEMEX and CFE transforming from a monopoly to a dominant state-owned entity. For that, there will be a new legal structure and a new legal statute transforming PEMEX and CFE into productive enterprises competing on equal terms with private companies, but still as state-owned entities. Another factor is the strengthening of the government’s regulatory role; there will be at least four entities regulating the oil and gas industry. The National Hydro-Carbon Commission has to be strengthened considerably because the only regulated entity to date was PEMEX, and its authority must be extended. The Energy Regulatory Commission will concentrate on downstream activities and the distribution of oil and gas. Then, there is going to be a new entity to operate the natural gas system that PEMEX has built over the years. It will take assets from PEMEX and operate as a new autonomous entity. There is also going to be a new agency focused on safety and environmental protection for the energy sector. The main element of the reform is in allowing private investment all along the value chain of the industry, starting with exploration and production. Another important element of these developments is that the National Hydrocarbons Commission will provide access to all the seismic and geological information that PEMEX has accumulated over the years. This is the first time that private investors will be privy to this seismic information. One important issue is that although the hydrocarbon reserves will be kept under the property of the Mexican state, the contractors or owners of licenses issued by the state will be able to register the economic interests derived from the licenses or contracts.

How do you see the relationship between PEMEX and service companies in the oil and gas industry developing?

PEMEX is going through the most important transition of its corporate life. It will be 76 years old in 2014, and it has never faced anything like the current challenge. It is going to be a difficult transition, but I am convinced that PEMEX has the strength that will allow it to become a dominant player in the market. Obviously, the Mexican oil service companies, whom I represent through AMESPAC, are counting on PEMEX becoming a dominant player and trusting in its strength to face the new competition. We are preparing to help them and all operators who are interested in entering the Mexican market with critical supplies, equipment, and services. Some of the companies that belong to AMESPAC have most of the capabilities required to become independent operators of oil and gas fields. We are counting on some of these Mexican-owned corporations being able to transform themselves from oil service entities into fully independent operators in new areas such as shale gas and oil, and develop mature oil fields that in many cases PEMEX has abandoned. Mexican companies only need to complement their capabilities. We hope to develop independent Mexican oil and gas operators, and are awaiting the arrival of the next PEMEX of the oil and gas industry.

“The main element of the reform is in allowing private investment all along the value chain of the industry.”

What are your expectations regarding foreign private investment?

Since there is going to be a very wide range of investment opportunities post reform, we have tried to estimate the potential for new private investment in Mexico that could be attracted under these new terms. The current investment program that PEMEX has developed for 2014 is worth $27.7 billion, but will likely grow to the range of $30 billion per year for the rest of decade. This represents about 2% of GDP. Furthermore, we assumed that four deepwater fields would be developed beginning in 2016, and throughout the decade we estimated that each field would cost about $6.5 billion, which is a low range average. We made a similar calculation for shale gas assuming that new operators would drill 1,000 new wells. Over the rest of the decade there is also a lot of potential for midstream activity, because we have a great need for storage facilities and pipelines, which were not built because of PEMEX’s budget limitations. The end result is that PEMEX will continue to invest around $30 billion annually, with an additional $30 billion on average coming from private investment. This means that, assuming 4% GDP growth, the average CAPEX in oil and gas will grow by around 16% for the rest of the decade. By 2018, we are assuming $60 billion in investment, half from PEMEX and half from the private sector. Obviously, the private sector will grow more in the later stages.

How do you view partnerships and joint ventures as a way to enter the market?

I think that for some of the oil service international companies that have been operating in Mexico for many years, it will just be a multiplication of their market. There are also many companies that are suppliers for new operators, and when these new operators come, they will invite old partners that will have to find a strategy to establish their business here. One of them might be able to acquire a joint venture with a Mexican service company that has these facilities in place in Mexico. In some cases they might decide to go about this themselves. I would say that Mexico has a friendly investment structure. The oil and electricity sectors provide these opportunities, and the regulatory framework is available.

What would you say are the biggest challenges for the sector over the next year?

There are many challenges. We have only had one operating company in each sector, so we need to think of all the elements to assemble and create a competitive structure. But even if we do not get it right the first time around, the legal structure allows us to adopt, modify, and adapt. The government is designing a first round of bids for upstream that will reach the market by the middle of 2015. It is sending the message that Mexico will produce a diversified round of tenders that will include mature fields, which is something that Mexican companies and independent operators would be interested in. PEMEX has been the only potential player with the legal right to work in over 400 developed fields. The opportunities will be huge if the terms and conditions of the contract are competitive. These are the three elements, or what we in the industry call “prospectivity,” i.e. opportunities in the oil and gas market, legal certainty, and being fiscally competitive. If these three requirements are met, it will be a very attractive opportunity.

© The Business Year – May 2014

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