| | |  Business News | August 2009 
Regulating Mexico's Upstream
 Javier Estrada - BNAmericas
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August 03, 2009
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Last year's energy reform in Mexico created the five-member national hydrocarbons commission (CNH) with the aim of increasing oversight of the country's upstream hydrocarbons sector, which previously had not known extensive regulation.
Aside from specific concerns raised about one CNH member's past and the sector experience of another, many are skeptical that such an agency will be capable of regulating the behemoth state oil company Pemex.
BNamericas spoke to CNH commissioner Javier Estrada to hear his perspective regarding how the body will tackle Mexican E&P.
BNamericas: Do you believe the CNH will be an effective regulator?
Estrada: Yes, definitely. Let's not forget that at the beginning all regulators above all have a mission to manage resources that belong to the nation, and are looking to generate the maximum economic wealth and follow the best industry practices as much for E&P technology as health and environment issues.
What happens in other regulators in almost the entire rest of the world is that they also review bidding rounds. That makes sense when there's competition. Given that that's not the case in Mexico, there will be what I would call "assignment processes" which are similar to bidding rounds, but here there is only one participant [Pemex].
What changes? That this participant requests its assigned space as companies in other countries would request a concession, a series of studies are done, Pemex is given a series of requirements, and Pemex has to demonstrate it can fulfill them. In that process of fulfilling the obligations is when it will need to sign contracts with companies to supplement its capacity.
So I don't exactly see a problem yet regarding the institutional design. What will be a challenge is that over the course of many decades Pemex had all the information and knowledge about Mexico's oil sector. So both Pemex and the CNH are going to find themselves in a stage of transition and adaptation.
BNamericas: How will this collaboration work?
Estrada: To begin with, it must be clear that the CNH's functions are different from those of the operator. The regulator should have a geological knowledge of the entire national territory, should know its potential for where resources could exist, eventually begin identifying oil reserve zones, identifying which should be assigned for oil works, carry out studies to demonstrate they can be economically viable, and afterward establish the requirements for the assignment. Pemex would come to the CNH for each assignment and at that time the CNH's function would be to evaluate Pemex's ability to carry out the works. Once the assignment is given with the CNH-established requirements, then comes the supervision process.
BNamericas: So the CNH would not just approve or reject Pemex's projects, but rather also make its own proposals?
Estrada: Of course. But obviously more often the operator brings its plans and it will have its proposals. When I say we will have an opinion, it will be about the minimum obligatory works; nothing more.
BNamericas: Would the projects be assigned as a block, an area, a field?
Estrada: It could be done many ways. Blocks are almost always a pragmatic, practical way to resolve the problems of assignment. Surely we will resolve some cases with blocks, and in others it will be with polygons, but in the end they're the same thing.
BNamericas: But would blocks be politically acceptable? I understood it is difficult to have blocks in Mexico because people worry they will usher in private participation.
Estrada: Independent of the worries the population could have, the legislation already exists. In fact, all this about regulation of assignments already existed. Simply put, now it is a much more developed regulation. Those same assignments can only be granted to Pemex - that has not changed since more than four decades ago. The difference, then, is the form in which this is carried out. Whether it is a polygon or a square are really superficial issues. What is important is that through those assignments it will facilitate the way to administer the development of the oil works.
If Pemex can demonstrate that with its providers it has the ability to develop a project, the money to do it, the engineering to do it, and the resources, it will simply go ahead. There is no reason why the CNH should detain Pemex; on the contrary. But even in those cases, CNH will seek to challenge Pemex with respect to if it can expand its objectives, whether in oil recovery from the field, costs or efficiency.
There will be cases where with Pemex's traditional providers and existing knowledge it is fully capable of meeting the challenges of an assignment without great problem. But there will be others where that is not the case. Those, perhaps, are the most interesting cases for which the new legislation and this new Mexican model were designed. It is precisely there where it is not so much cooperation, but rather a relationship between authority and operator in which Pemex will need to submit to a process that is more typical of international companies in other countries.
BNamericas: Do you see any possibility for conflict of interest, given that two of the five CNH members previously worked for Pemex and receive retirement checks from the company?
Estrada: I don't think so. Conflict of interest is when someone has an investment somewhere, or when it is a company in which someone has a real economic interest.
Let's not forget that the point of having five members is a voting system. This is very important because the voting system of the CNH greatly diminishes any potential for collusion between a member and an interest. Even if it were to exist, it would be diluted by the vote of the other four members. So it is an efficient way to avoid this type of collusion between companies and decision makers.
BNamericas: Will the CNH, like the Norwegian Petroleum Directorate, carry out daily monitoring of exploratory drilling and supervision of concessions? Or will it give the green light to Pemex, and then they return with their results?
Estrada: Every model has its pros and cons. Daily monitoring has its advantages and disadvantages. We all need to ensure the measurements are correct.
But there are other things that could wind up being bureaucracy, and which are resolved in a different way in every country. Essentially we will have to supervise Pemex works in a systematic and ordinary way – which is to say forecasted – and in an extraordinary way, when necessary. We will also review audits to see not only that oil works are being carried out well, but rather to see its accounting and development; its economic side.
BNamericas: So would supervision be daily, monthly, annually?
Estrada: We have not yet written the rules. Normally what is done in these cases is there is a work program when the assignment is given. That is the operation, development and installation plan. Within that program there will be a series of obligatory works, which is to say that the CNH has to supervise that they are being carried out.
Once the projects begin to enter into a more operative stage, the regulation and supervision tends to be annual. It tends to be a function of those objectives, so there can be supervision during the year to see the advances and the works as they are carried out.
But what we don't want is for the CNH to become a new straightjacket for Pemex, and for us to become a bureaucracy that, for example, doesn't allow for one well to be drilled because we're missing paperwork. So yes, there will be a level of supervision, but also so that work can be done.
BNamericas: When the CNH is evaluating or proposing projects, will it be speaking to the board of Pemex's E&P subsidiary PEP, PEP CEO Carlos Morales Gil or PEP's regional divisions?
Estrada: With the regional divisions and the PEP directors, and if necessary also the Pemex directors. We will also be speaking, when necessary, with all oil companies that are in Mexico or aren't in Mexico.
BNamericas: But is it possible, for example that the southeast division comes with its own project and the CNH does not need to speak to PEP or Pemex directors to give the go-ahead?
Estrada: As with any oil company, of course it would tend to need the endorsement of its company.
We will always be interested in the real decision makers. If it is fundamental we speak with their bosses, we will also speak with them. But we are interested in the project and understanding it, so we will mostly be speaking with the regions.
About Javier Estrada
Javier Estrada was commissioner of Mexico's national energy regulator CRE from 1986 through 2002, during which time he coordinated the works for the establishment of a framework for natural gas distribution. He also promoted the regulation for LNG terminals in Mexico and coordinated first works for the Altamira and Baja California terminals.
He holds a degree in business administration from the Universidad Iberoamericana in Mexico City, as well as a graduate degree in public economics and a master's degree in international economics from the Université de Paris.
His term with the CNH runs three years, and can be renewed for an additional five.
Estrada founded and headed Analítica Energética, which specializes in the study, analysis and consulting for the energy sector, and acted as study director for various Norwegian institutes and companies. Estrada also served as president of the Mexican energy economy association (Amee) and the Mexican association of oil service companies (Amespac). |
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