Ahead of the Mexican Energy Forum, Energy Dialogues has had the opportunity to speak with Julio A. Santaella, Executive Coordinator of the Mexican Petroleum Fund…

Ahead of the Mexican Energy Forum, Energy Dialogues is talking to some of our distinguished speakers to bring first-hand content from our speakers to our energy community. Monika Simões, Managing Director of Energy Dialogues LLC recently spoke to Julio A. Santaella, Executive Coordinator of the Mexican Petroleum Fund. You can read the full Q&A here:

 

Monika Simões, Managing Director, Energy Dialogues LLC: What do you see as some of the key opportunities originating from the Mexican Energy Reform and how will the economy, the market and the participants benefit?

Julio A. Santaella, Executive Coordinator, Mexican Petroleum Fund (FMP): I will focus on the hydrocarbons sector within the energy reform.

The hydrocarbons sector in Mexico was in difficult state, particularly in E&P of oil. Both the reserve replacement ratio and production have been declining for several years under the old regime. Therefore, it was necessary to implement dramatic changes in this sector not only in its performance but also in the legal framework.

The Mexican Energy Reform will allow to restructure the energy sector in order to increase its productivity and competitiveness. On the one hand, increased and sustained production of hydrocarbons will allow the State to maximize oil revenues and to capture more efficiently and to a larger extent economic rents from the sector. On the other hand, the private sector and households will receive the potential benefit of lower prices of energy with a larger supply of hydrocarbons.

Through the opening of the sector, the private sector will benefit from the investment opportunities that were not accessible to them previously in the E&P of oil and gas. In turn, the new investment projects will promote job creation. In this way, the Mexican Energy Reform will contribute to generate economic growth.

Monika Simões, Managing Director, Energy Dialogues LLC: In your opinion, what are the critical points that require particular attention for the Energy Reform to succeed?

Julio A. Santaella, Executive Coordinator, Mexican Petroleum Fund (FMP): First and foremost, the reform must be implemented. The implementation challenge has to be undertaken under a strong commitment to transparency, accountability and a solid rule of law.

In the process of implementation, it is also important to balance and align the incentives of the private sector and the Federal Government. For the private sector, it is important to make its participation in E&P attractive enough to take part. For the Federal Government, it is necessary to be able to tap oil revenues and obtain appropriate economic rents from the hydrocarbon sector.

Finally, the trade-off of short-term and long-term objectives can also be a critical issue. An accelerated exploitation of oil or gas can have a positive impact in the short term, but over-exploitation of the deposit threatens the availability of resources in the long term. There should be a balance between economic growth and sustainability.

Monika Simões, Managing Director, Energy Dialogues LLC: What do you see as some the key aspects of the Mexican Petroleum Fund, its focus and priorities and what is it that the international energy community should know?

Julio A. Santaella, Executive Coordinator, Mexican Petroleum Fund (FMP): The Mexican Petroleum Fund (FMP in Spanish) is a public trust where the Mexican Central Bank (Banco de México) acts as a trustee on behalf of the Ministry of Finance. FMP has a governing body called Technical Committee, which is composed by a majority of members that are independent from Government. These features, among others, make the FMP a tool to promote transparency and build credibility in this sector.

The purpose of the FMP is threefold: (i) the cash management of the E&P contracts, since FMP will receive the revenues from these contracts, distribute them to contractors and the State according to the terms specified in the contracts, and pay the contractors; (ii) it is also a sovereign wealth fund that will benefit present and future generations through the accumulation of a long-run reserve; and (iii) it will also function as stabilization fund for public revenues.

Monika Simões, Managing Director, Energy Dialogues LLC: What role do you see state and local governments play in this new energy world?

Julio A. Santaella, Executive Coordinator, Mexican Petroleum Fund (FMP): The reform will be operated mostly by the Federal Government and its agencies. In the case of onshore fields, state and municipal governments play an important role in terms of logistics, facilitating the installation of infrastructure and guaranteeing use-of-land rights. In exchange, local governments will receive a share of the oil revenues from the Federal Government. Needless to say, all levels of government must coordinate in order to guarantee a successful reform.

Monika Simões, Managing Director, Energy Dialogues LLC: How do you see the current oil price environment impact the Mexican energy sector, timelines for the bid rounds and overall investment prospects?

Julio A. Santaella, Executive Coordinator, Mexican Petroleum Fund (FMP): Since long time ago, both major IOC’s and independents have had a particular interest in the Mexican hydrocarbon sector. For this reason, regardless the recent drop in oil prices, many companies have shown their interest in bidding for E&P contracts in shallow waters and other low cost fields. However, the oilfields in deep waters, as well as shale and other higher cost plays seem less attractive to investors under current prices: they would have to invest heavily in infrastructure and at low prices this is less profitable other things equal. In this case, the investors will prefer projects that have a low geological risk or those that not require large volumes of investment.

For this reason, the timetable of the bidding process has been adjusted, postponing the bidding for deep water until mid-year and non-conventional toward the last quarter of the year.
Nonetheless, one must keep in mind that the oil and gas business is a very long-term endeavor, where profitability is assessed in decades and not just in a short-term horizon. Accordingly, the most important determinant of investment in the sector are the expectations of hydrocarbons in the next 20 years or so.

Monika Simões, Managing Director, Energy Dialogues LLC: What other aspects of the Energy Reform present openings for foreign and local investment?

Julio A. Santaella, Executive Coordinator, Mexican Petroleum Fund (FMP): Besides the opening in the upstream sector, the energy reform has reached many other areas. The reform foresaw a transformation of industry in mid and downstream sectors, such as refining and petrochemicals. Additionally more companies will provide storage and transportation for hydrocarbons. One must not forget that the private sector has incentives to invest in the electric sector as well.

Monika Simões, Managing Director, Energy Dialogues LLC: Where do you feel events like the Mexican Energy Forum play an important role in uniting the market and what do you look forward to when participating in the Mexican Energy Forum?

Julio A. Santaella, Executive Coordinator, Mexican Petroleum Fund (FMP): This kind of events let international community and market participants know about the FMP and vice versa. This will be useful since we will be having a business relation down the road. These events also help the network creation among participants of the industry and other government delegates.