Flow for All

Your appointment has been described as a move that will help honest discussion within Mexican society, with the potential for effective public policies that will help build the country. What is your incoming strategy?

In the energy sector in particular, we are faced with the challenge of making public policy in an environment where it is necessary to disseminate information about the status of the energy industry, and in which the degree of knowledge and the opinions of the public cover a wide spectrum of ideological positions. Before putting forward any concrete proposals, we believe that the public must be informed about the current status of our energy sector, the steps that need to be taken in order to revert the observed trends, and the price we would pay as a country if we fall behind technically, technologically, and in terms of infrastructure for failing to act. Promoting cultural change among the public is very important, a change that will be revealed in a better use of energy resources and in a new individual relationship by each of us with the world of energy and the stewardship of the environment. We also need to be less introspective and retrospective when it comes to energy and consider the sector in connection with the country’s immediate and future needs, concerning both production and consumption. In this regard, the Pacto por México (Pact for Mexico) contemplates that energy reform will begin to be designed in 2013 for the purpose of exchanging points of view and developing both the goals and the technical arguments to back it up. Once this effort is consolidated, the changes needed in the current legislation will be put forward. The reform proposal will be discussed, and we hope it can be passed in order to begin implementing the important transformations Mexico is expecting.

What part will energy reform take in realizing the Pact for Mexico, and to what extent will the focus be placed on reducing the tax burden of PEMEX ahead of privatization measures?

The Pact for Mexico is very clear regarding the timetable agreed upon for the reforms. It therein establishes that during 1H2013, design of the energy reform will begin, followed by an exchange of points of view, and the development of the technical objectives and arguments to back the proposal. Once this effort comes to fruition, necessary amendments to the legislation in force can be proposed. The reform proposal will be discussed, and we expect it to be approved so as to begin implementing the significant changes entailed. There is a significant difference between privatization and modernization. Privatization entails the transfer of property and operation of resources from a public agent to a private one. Modernization, on the other hand, reaffirms the state’s stewardship of oil while at the same time seeking manners in which to improve the design and operation of the industry. This approach based on modernization lies at the heart of the reform. Thereby, reform is not a privatization mechanism; the objective is to modernize the sector and achieve the expansion of the benefit of our energy wealth. In this, President Peña Nieto has been very clear: PEMEX is not to be privatized, nor is it for sale.

What continued levels of investment into deep-water reserves do you anticipate over the coming years, and how important will this remain to Mexico’s long-term energy strategy?

The worldwide energy environment has changed dramatically over the last decade. Readily accessible oil is fast disappearing and the world is now turning toward unconventional resources, including deep-water and ultra-deep-water oilfields. Mexico is not exempt from this change and has classified the potential of deep-water and ultra-deep-water oil drilling in the Gulf of Mexico as a priority. The recent discovery of the Trion and Supremus beds bode well for our potential in the Gulf of Mexico. The prospective resources of the exploration project Área Perdido, estimated at up to 13 billion barrels of oil equivalent (BoE), could double the current proven reserves of Mexico. In fact, approximately one-fourth of all prospective resources in the country are found in beds of this type; such is the scale and importance of deep-water oil drilling in Mexico. PEMEX faces huge challenges in deep water. Some experts have analyzed the constraints that such operations pose, such as a significant fiscal burden, a low level of budgetary and administrative autonomy, and the impossibility of scientific and technological development. All this has hindered us from gaining more experience in deep water. The challenge now is to grapple with these issues and increase our production in these zones so as to recover the frontline position of our industry. It is imperative that we increase our production in deep water and ultra-deep water at the same time as we draft a solid regulatory framework that will guarantee the security, sustainability, and transparency of operations in the sector. We must focus our efforts on preventing accidents, pursuing international standards, and strengthening our industrial safety and environmental protection processes at PEMEX. If we are to optimize our results in deep water, we must assign clear roles to the various stakeholders in the sector. That is, the regulatory agencies must act based on a clear and independent mandate from the operators and institutions in charge of promoting oil activities in deep water. Given the magnitude of the investment required, we need public agencies to oversee transparency and accountability, as is the case in other oil-producing nations. The Pact for Mexico also contemplates strengthening the industry’s regulatory agencies, as well as sustainability ingrained in the processes and operations of PEMEX.

The efficient exploitation of Mexico’s shale gas reserves has the potential to transform Mexico’s energy landscape. What measures should be taken to realize this potential?

In 2010, PEMEX Exploración y Producción (PEP) began work to evaluate the potential linked to this resource. The geological zones of Sabinas, Burro-Picachos, Burgos, Tampico-Misantla, and Veracruz have been identified as oil and shale gas precursors. At present, an investment project is underway to determine the investment needed to carry out geological and geochemical studies as well as the acquisition, progression, and interpretation of 3D seismic information in areas deemed to have unconventional plays. The foregoing will give way to greater certainty regarding the estimates of oil, gas, and recoverable condensate volumes. Also scheduled is the drilling of exploration wells to prove the concept and productivity of the oil beds in the geological zones considered. These elements will make it possible to determine investment programs focusing on the regions offering the highest production potential. Before this happens, the rules for exploration and drilling must be expanded and applied to shale projects in order to reduce the impact on communities and the environment.

What do you see as being the key opportunities for Mexico?

Mexico has great wind, geothermal, solar, biomass, and hydraulic potential for power generation. Currently, 13% of all electrical power in the country is generated through alternative power sources, 10% of which takes place through the use of large hydroelectric plants. Nevertheless, this percentage can be increased through the participation of private investment, by making use of the power-generating schemes contemplated by the Electrical Power Public Service Act. In connection with energy efficiency, we must profit from technological advances in order to attain the full potential for savings in the domestic sector. We should also promote greater efficiency in transportation systems and in the construction of buildings. On the other hand, there is enormous potential within the energy sector itself, through achieving a reduction of transmission network losses, using intelligent networks to promote distributed generation, and substituting expensive fuels for lower-cost alternatives, such as natural gas and hydro-electricity for the generation of energy.

What current key opportunities exist for the private sector in Mexico’s energy industry?

A modernizing reform, doubtless, will seek to increase autonomy in the administration of PEMEX. With increased autonomy, the company will be able to make decisions that will optimize its profitability. At the same time, this approach envisions the participation of the private and social sectors in the non-essential activities of PEMEX, as well as in projects that are not to be included in the investment portfolio. An initial step has already taken place as a result of the 2008 Reform, namely, the establishment of Comprehensive Contracts for Exploration and Production, permitting PEMEX to increase its execution capacity and remain the sole oil proprietor. In regard to the rest of the value chain, the Pact for Mexico mentions that the energy reform will seek to create an environment of competition in the economic processes of refining, petrochemicals, and transportation of oil and do so without privatizing PEMEX’s assets. In this manner, the complementarity of public and private investment is sought.

© The Business Year – October 2013