Mexico Pt.4: New times, new opportunities

Acting on the risk of a future without reform
“Imagine an airplane heading straight towards a mountain. We can discuss if we should go right or left, but we need to go around the mountain,” Senator Labastida Ochoa stated to illustrate the urgency of fiscal reform. As the President of the Senate Energy Commission – as well as former Minister of Energy, Minister of Agriculture and Minister of the Interior and runner–up in the 2000 Presidential election on behalf of the Institutional Revolutionary Party (PRI) – Labastida Ochoa is one of the key drivers behind the fiscal reform that he characterizes as indispensable. Senator Graco Ramírez, Secretary of Mexico’s Senate Energy Commission representing the Democratic Revolution Party (PRD), offered a wider context. “Back in the 1970s, PEMEX was a world leader in offshore exploration and production. The company was developing its own advanced technologies and other companies around the world were very interested in learning from PEMEX’s achievements. This company, which served as an international example for successful offshore exploration and production, today is in a very bad condition.“This perspective was echoed by Senator Labastida, “PEMEX is bankrupt, not because it is an inefficient company, but because the state has squeezed out its resources”.

It is important to note that the fiscal reform does not only have financial objectives, it also aspires to stimulate innovation in exploration and production and make the system more rational. “We are just adjusting a part of the fiscal system that is badly designed,” explained Senator Labastida before putting two examples forward.

First, there is an inverse relationship between the applied tax rate and the oil price in the current fiscal regime. For example, at a crude oil price of US$20 per barrel PEMEX will be taxed at 85% of production value, while at a price per barrel of US$28 the tax rate applied to PEMEX production decreases to 78%. “The taxes increase when the oil price goes down while all fiscal regimes in the world work the other way around,” explained Labastida. “It would be very good for PEMEX if the average tax rate would be lower; an average tax rate of 90% is crazy. The production cost per barrel of oil exceeds the after–tax revenue per barrel of oil.”

Secondly, the fiscal regime states that PEMEX will be taxed based on a production target set at 3.500.000 barrels per day. Currently, PEMEX produces approximately 3.100.000 bbl/day, and is charged a 76% tax over the value of the 400,000 bbl/day it is not producing. “I don’t think you can find any country in the world with a fiscal system that taxes companies for not producing,” assessed Senator Labastida. “If charging a company for not producing oil is not Kafkaesque, then I do not know what is Kafkaesque.”

“The fiscal system has not been revised before because attempts to implement reform failed, but attempts have been made in the past,” Labastida continued. “This does not only go against the interest of PEMEX, but also against the interest of the country, against Mexico’s oil production level and against basic economic principles.”

“The current situation in the Mexican energy sector, especially in hydrocarbons, creates a serious risk for the stability of the energy sector and the Mexican economy. Last year, PEMEX was responsible for 38% of federal taxes, over 30% of state taxes and more than 20% of municipal income. If the oil production falls, and it has started decreasing, not only PEMEX will be facing a crisis but Mexico will also have a financial crisis at all three levels of government”, emphasized Senator Labastida. “I see the future of the oil and gas industry not just as a problem of PEMEX, but as a national problem that requires changes in many laws. We have to initiate qualitative change that will make PEMEX more competitive and at the same time serves as a catalyst of growth for the Mexican oil and gas industry and the country.”

Reaching agreement on fiscal reform has been a roadblock for recent Mexican governments, with the different parties in Congress unable to reach agreement on a means of easing the burden on PEMEX. According to Labastida, there is great suspicion in his party that the current fiscal regime and regulatory framework were designed to intentionally weaken PEMEX’s financial position. In an effort to bridge the gap of trust and move the fiscal reform forward, the opposition parties PRI, PRD, Convergencia, PVEM and PT proposed a model of the PEMEX fiscal reform calling for a one–time cut in taxes on the value of oil and gas production from 79% to 70%. This joint reform package was aimed at increasing the efficiency, transparency and productivity of PEMEX, while reducing the rigidity of government control over pricing policies in the public energy sector and facilitating cost reductions. “We focused more on what united us rather than on what divided us,” reflected Senator Labastida.

In response, President Calderon’s National Action Party (PAN) characterized Senator Labastida’s initiative proposing a one–shot tax reduction as unfeasible. Rubén Camarillo Ortega, member of the Senate Energy Commission on behalf of the PAN, put a counter proposal on the table, calling for a gradual reduction of the 79% tax rate which will not be unconditional. Instead, the PAN’s proposed tax reduction will be take the shape of fiscal incentives tied to productivity and efficiency improvements.

After several weeks of negotiations, all parties reached an agreement on the reform proposal outlining a cut in the tax rate paid by PEMEX on extracted hydrocarbons from the current 79% to 74% in 2008. Between 2009 and 2011 the tax rate will be reduced annually by 0.5%, and a final tax cut of 1% in 2012 will bring the tax on hydrocarbon production down to 71.5%. This reform proposal was unanimously approved by Congress on September 14 and by the Senate on September 17. The reform will now be sent to President Felipe Calderon to be signed into law as part of a broader fiscal reform package, marking a legislative victory for the President in a country where economic growth has long been hindered by its tax collection rate, which is among the lowest in Latin America.

The tax reduction for PEMEX will amount to approximately US$2.75 billion in 2008 and is forecasted to reach between US$4.6 and US$5.5 billion annually by 2012. Under the terms of the reform, PEMEX will be obliged to utilize these additional financial resources for investments in E&P, infrastructure and research as opposed to operating expenses.

Importantly, the tax reform recognizes the urgency for PEMEX of boosting its technological capabilities to unlock Mexico’s deepwater reserves and optimize production in mature and marginal fields, through technology transfer and research and development investment. The approved fiscal reform contains a 0.65% tax on the total value of hydrocarbon sales, which will approximate US$5 to US$5.5 billion depending on the oil price, which is earmarked for research and development and represents a fourteen fold increase of the current investment level. As PEMEX goes beyond its historic E&P frontiers, moving from shallow into deep water while optimizing recovery rates in producing fields, this new R&D investment program will enable Mexico to decrease its reliance on imported technology. “It will enable Mexico to become leader in deepwater exploration and production in the medium term,” Senator Graco Ramírez concluded.

Dealing with the decline of Cantarell

In November 2006, Ramirez Corzo informed the Senate Energy Commission that the output at the Cantarell field was expected to decline at an average rate of 14% per year between 2007 and 2015. During that last month before Jesus Reyes Heroles replaced Ramirez Corzo as Director General of PEMEX on December 1st, Mexico’s national oil company produced 3.163 million bbl/day. According to PEMEX statements, crude oil production averaged 3.122 million bbl/day during the January–August 2007 period, which indicates that PEMEX has successfully stabilized monthly crude oil production during the first eight months of 2007.

It is important to note that reduced crude oil production of 2.84 million bbl/day in August cannot be attributed to the decline of the Cantarell field. As a consequence of Hurricane Dean’s trajectory over the Gulf of Mexico, requiring in the evacuation of 18,197 workers from platforms in the Campeche Sound, PEMEX shut down oil production for several days which resulted in reduced production totalling 10.8 million barrels of crude and 10.3 billion cubic feet of natural gas. PEMEX resumed offshore oil production after Hurricane Dean, but the decline of Cantarell will not be of such a temporary nature. The question is whether Cantarell’s decline will follow the 14% per year between 2007 and 2015, and if fields like Ku–Maloob–Zaap, Mexico’s most prominent deepwater discovery Noxal, and the under–developed Chicontepec area, will be able to offset the production decline in the world’s second largest oil field.

It is highly doubtful that PEMEX’s current exploration and production projects will be able to make up for the declining production of Cantarell in the short to medium term. In mid–September PEMEX reached record production of 606,538 bbl/day in the Ku Maloob Zaap field, which now produces approximately 19% Mexico’s total crude oil output, while Cantarell represents round 50% of total production. PEMEX plans to drill 12 new development wells in the Ku Maloob Zaap field in 2007 and has begun injecting nitrogen into the reservoir to boost production to 800,000 barrels bbl/day by 2010.

Deepwater production will play an important role in PEMEX’s future, as the company estimates potential reserves of up to 29 billion barrels of oil beyond the Gulf of Mexico’s shallow waters. Earlier this year, Carlos Morales, Director of PEMEX Exploration & Production, stated that his division will start to produce oil in deepwater wells in 2012, 2013 or 2014. While PEMEX considers deepwater production an important part of its strategy to compensate for the declining Cantarell field, it may not be able to rely on production volumes from confirmed deepwater oil deposits such as Noxal, Lakach and Tabscob for another seven years.

The Chicontepec basin, which stretches across the states of Veracruz, Puebla and Hidalgo, was discovered 90 years ago. However, this large complex of scattered onshore oil and gas reserves only recently became an area of focus for PEMEX after decades during which E&P activities were focussed on the lower cost development of reserves in the shallow waters of the Gulf of Mexico. In the long term, PEMEX has the objective of raising production in Chicontepec from the current several thousand barrels per day to 1.0 million bbl/day.

The launch of a significant E&P investment program in anticipation of the decline of Cantarell has been the foundation of the development of Ku–Maloob–Zaap, Chicontepec and Mexico’s deepwater reserves. “Since 2001 we have seen increasing investment in PEMEX, setting historical investment records, but we are now realizing that it has not been enough,” analyzed Adán E. Oviedo Pérez. Earlier this year, he gave up his position as Exploration Vice President of PEMEX Exploration & Production to become Director General of COMESA. Created in 1968 by PEMEX, COMESA’s mission is to focus on PEMEX’s needs. While the company has been dedicated to the acquisition of seismic data onshore and in transition zones over the past decades, COMESA is evolving into an organization that is able to perform almost similar activities to PEMEX Exploration & Production.

“Moving forward, the oil and gas industry in Mexico is not just a matter of money,” assessed Mr Oviedo. “We need to complement our capabilities and be able to attract new technology and know–how to deal with the big challenges that we are facing right now. These challenges are improving the recovery factor in producing fields, deepwater exploration and production, and the development of Mexico’s marginal and mature assets that PEMEX left behind 30 years ago after the discovery of large fields such as Cantarell.”

The potential of mature and marginal fields

Enhanced recovery and production from marginal and mature fields continues to grow in importance for the Mexican oil and gas industry. “Mexico and PEMEX must be able to develop a specific business model in each sector in order to maximize the country’s value generation,” recognized Adán Oviedo.

The fiscal reform proposed by the PRI, PRD, Convergencia, PVEM and PT also included an incentive to stimulate the development of abandoned fields: the introduction of a 20% tax rate for production in mature fields that have been closed for at least three years. This fiscal reform would apply to the 6,000 to 7,000 wells that have been shut and abandoned since the 1920s. Concerned about distortions in the application of this model due to varying well conditions, the PAN rejected this initiative and called for a more flexible approach to stimulate production in mature fields, taking into account that the cost of redeveloping a closed well is directly related to the point in time it was abandoned. In addition, a lower tax rate for mature fields will not necessarily incline PEMEX to invest in mature wells since the company will inevitably dedicate its limited financial and human resources to the fields that yield the largest return. As one of the largest oil companies in the world, the giant and supergiant fields on which will remain a key priority for PEMEX. However, the development of mature and marginal fields offers great opportunities for small companies, and COMESA will be focussing on developing a model for the efficient operation of these fields in Mexico.

Historically, COMESA’s greatest strength has been its ability to acquire, process and interpret 3D onshore seismic data. Over the past decades, COMESA has conducted around 100 seismic studies for PEMEX. At the moment, its five crews consisting of 1,000 people each are acquiring 90% of the 3D seismic requirements for PEMEX. In order to provide integrated solutions to PEMEX, consisting of seismic data acquisition, processing, interpretation and reservoir analysis, COMESA also operates a large processing centre in Villahermosa. Recently, COMESA started participating in marine acquisition through alliances with WesternGeco, the Wood Group, CBM and CGGVeritas. “COMESA could serve as the technological arm of PEMEX; we could be a small and dynamic version of PEMEX Exploration & Production,” noted Adán Oviedo, “while PEMEX will concentrate on its giant activities and will place emphasis on the question how to face the deepwater and ultra deepwater challenge.”

Six years ago, COMESA’s board formulated the strategic intention to build on the company’s mission of complementing PEMEX’s capabilities by assuming a critical role in developing a model for bringing Mexico’s marginal and mature fields into production. “COMESA will go beyond the acquisition of seismic data and will get ready to operate small fields for PEMEX,” confirmed Adán Oviedo. In its ambition to diversify its activities and get ready to operate fields for PEMEX, COMESA is entering into technological alliances with different service companies in order to acquire the know–how and specific technology required to operate mature and marginal fields.

According to Oviedo, COMESA could possibly start operating a natural gas field in the Burgos Basin in the first quarter 2008. “This field is producing around 50 Bcf per day, but there is opportunity to increase this level of production based on current reserves and additional resources,” anticipated COMESA’s Director General. “Also we are visualizing an onshore oil tertiary field to go in by 2009.”

Adán Oviedo emphasized that COMESA’s main purpose is to provide integrated solutions adding value to exploration and production activities in Mexico. However, Mexico’s border will no longer be COMESA’s borders in the near future. “We have the ambition to be international maybe by 2009. The first in our internationalization process would be getting access to several onshore seismic acquisition projects in the south west Texas, as well as in Colombia and Peru. That is a completely new challenge,” he concluded.

An urgent focus on reserves replacement

At the end of last year, PEMEX’s proven reserves were 5.8% lower than a year before. During 2006, the company replaced 41% of production with new reserves, which marked an increase from 26.4% in 2005, but remains well below the 100% reserves replacement rate that will sustain the company’s production in the long term. Mexico’s reserves – production ratio equalled 9.6 at the end of 2006, which illustrates the urgency of increasing exploration investment. Earlier this year, the Director General of PEMEX announced that Mexico will reach a reserve replacement rate of 100% in 2012.

“We view this as an opportunity to help out PEMEX in its search for ways to improve the production, and not only offshore, because an estimated 40% of Mexico’s remaining reserves are onshore,” analyzed Ing. Ignacio Orozco Ortiz, Director General of PGS Mexicana. On December 31st 2006, 30% of PEMEX’s proven reserves were located offshore, while 46%of the probable and 51% of the possible reserves had been identified onshore. With 82% of current production coming from offshore fields, this indicates that Mexico’s onshore potential should not be underestimated.

The evolution of seismic studies in Mexico

PGS Mexicana is part of PGS Onshore, which is one of the three divisions of Petroleum Geo–Services.

“In September 2000, we started acquiring data in the Transition Zone in the Salina del Istmo Basin, close to Coatzacoalcos,” noted Ignacio Orozco, who joined PGS when the company decided to open a branch in Mexico in March 2000. Subsequently, PGS won several projects, both in the northern and southern regions of Mexico, and besides COMESA, it is the only company that is currently working on onshore acquisition for PEMEX.

In 2003, PGS Mexicana was awarded a vibroseis contract in the Burgos Basin for approximately 5,000 km². Since then, PEMEX has been restructuring and its focus has been more on marine exploration in deepwater, rather than onshore basins. “There will have to be another exploration boom,” assessed Mr Orozco. “Exploration is very cyclical, and the cycle is going up for offshore. Mexico’s position in this cycle is traditionally 180 degrees off the rest of the world; hence we expect improvement in 2008 and 2009.”

PGS Mexicana anticipates a lot of work in the transition zone all along the Gulf of Mexico coast, where onshore and offshore operations need to be connected in an enormous area. We have ample experience doing transition zone jobs here in Mexico for PEMEX and are expecting big transition zone projects in 2008 and 2009,” stated Mr Orozco. “PEMEX is already looking into how to integrate the marine regions with the southern and northern onshore regions.”

While PGS Mexicana identifies other opportunities in fields such as Chicontepec, the company is currently aiming to capitalize on the increasing investment in offshore acquisition. This entails a joint approach between PGS Onshore and PGS Marine, a leader in the marine data acquisition industry. In 2002 and 2003, PGS already completed two offshore projects covering a total of 7,800 km² in the Bay of Campeche.

At the moment, PGS is conducting one of the biggest marine acquisition projects in the Gulf of Mexico. In this project we are applying a new methodology, the wide–azimuth technique, which is highly adaptable to deepwater projects. “It is likely that PEMEX will be looking to apply this technique here in Mexico,” added Ignacio Orozco.

Optimizing production through swabbing services

Generally, quantities of various fluids, usually water, are building up in oil and gas wells over time and decrease production. When swabbing a well, water that is disrupting hydrocarbon production is removed. This results in immediate productivity improvement. Although swabbing services are value drivers in both the well completion and production stages, nitrogen injection has become a valuable technique for the stimulation of the extraction of oil. PEMEX has reported a high success ratio when nitrogen is used to revive oil wells that do not respond to mechanical swabbing. However, another alternative has become available in Mexico over the past four years: hydraulic induction.

Introduced to the Mexican oil and gas industry by Petroswab, in association with GOTCO, this patented technology offers a safer alternative to the mechanical version of this solution and has produced excellent results in other countries. In 2003, Juan Manuel Barajas joined forces with Carlos Lugo Ramirez to create Petroswab, which operates from its base in Poza Rica, an oil town in the north of Veracruz. “We decided to bring the technology to Mexico, therefore offering a unique, low cost service to the industry,” reflected Mr Barajas, Director General of Petroswab. “We are pleased to have discovered a new area full of opportunities in Mexico. Initially, we focussed on optimizing drilling activities in the exploration process, but currently we are also offering our services to raise productivity in producing fields with low pressure levels.”

Over the past four years, Petroswab has worked on 195 wells around Mexico, 95 being in Burgos Basin. “In 2004, we began working with multiple service providers such as Petrobras and Repsol in the Burgos Basin,” stated Juan Manuel Barajas. However, Petroswab considered its operations in the Burgos Basin merely as the first step towards convincing PEMEX of the advantages of its service.

This year, Petroswab has begun working with PEMEX in Poza Rica, based on a contract that runs from May 2007 to March 2009. “PEMEX has been very accepting of Petroswab’s technology,” declared Carlos Lugo Ramirez. “The installation of our equipment is completed in forty minutes and the entire job takes about five or six hours.” This implies that after six hours, PEMEX can benefit from increased production during, on average, 60–90 days after intervention.

At the moment, Petroswab is looking for additional equipment to take advantage of opportunities in the Chicontepec field, where Petroswab aspires to work on 700 wells. “The great thing is that PEMEX is trying to make this service permanent,” noted Mr Barajas. “This would mean that Petroswab is operating in a growing market for the next twenty years.”

In addition to the Chicontepec fields, Petroswab will be concentrating on expansion in the southern part of Mexico as well as offshore. “We are investing a lot because we know that what we are offering to the Mexican oil and gas industry has great potential,” boasted Juan Manuel Barajas. In this context, access to capital has become the largest hurdle for Petroswab’s growth.

Running a tight financial ship

As in any other country in the world, Mexico’s Navigation Law protects Mexican majority owned companies with Mexican flagged vessels and Mexican crews. Even thought Mexican companies have priority, Mexican law is more relaxed than the Jones Act in the United States which serves as a full protection mechanism. In this context, Grupo TMM – Mexico’s largest logistics and transportation company – pursues a strategy to take advantage of opportunities within the area of cabotage activity.

Javier Segovia, Director General of Grupo TMM, has learned a lot about the industry cycles since he was appointed in February 1999. “It has been a rollercoaster for Grupo TMM. Over the years, we went through a lot of investing and restructuring. During this restructuring we had to sell off our railroad activities and part of our port operations. It was a difficult and troublesome period,” he remembered. “It is a tough decision to sell off assets to pay off debt. Fortunately, that decision has proved to be a good decision because the financial markets are now supporting Grupo TMM and we have now raised capital in a way which has not been matched by any other Mexican company.”

Based on the successful restructuring, the operating environment under Mexican Navigation Law and Grupo TMM’s rising performance, securities issued by Grupo TMM achieved a “AA” rating, which has been critically important in the recent raising of 3 billion pesos (US$280 million). Silverio Di Costanzo, the company’s Senior Managing Director for Maritime Transportation, confirmed that over the last 26–28 months, Grupo TMM has invested close to US$300 million dollars in ships, not only for the offshore industry, but also in parcel tankers and product carriers in preparation for the strong demand. “We are now starting to enjoy this strong market and are getting prepared to further invest in new equipment,” noted Mr Di Constanzo. Building on its institutional relationship with PEMEX, Grupo TMM plans to issue additional securities up to 9 billion Pesos (US$840 million) to take advantage of the opportunities associated with increasing activity in exploration and production. Given the fact that PEMEX is one of the most important users of shipping services, both in exploration and production and in distribution of refined products, and Grupo TMM has established a strong partnership, and is a major provider of shipping services for both E&P and refining’” added Silverio Di Costanzo,

“Following the decline in production in the Cantarell field and declining reserve levels, Mexico is making important investments in exploration and production,” analyzed Javier Segovia. Due to the overall industry shortage the required equipment, such as drilling rigs and operating platforms, come at premium prices, which make lost production time very costly. “Right now, it makes a lot of sense to increase the number of supply vessels to reduce the potential costs associated with lost production time. TMM is focussing on these efforts, which are going to reduce costs for PEMEX,” declared Mr Segovia.

In response to PEMEX’s requirements for the renewal of the fleet, Grupo TMM has developed an investment program aimed at modernizing its fleet and creating the critical mass required to raise its competitiveness. Of course, the competition is equally aware of the emerging opportunities, since PEMEX is obliged to make all tenders public. Javier Segovia considers his company’s financial strengths as the first and foremost competitive edge, which he expects to play a critical role in Grupo TMM’s future strategy. “Of course, we do expect some competition and the success of Mexican companies will depend on their financial capability. There will be a huge increase in competition as seventy new vessels could potentially enter the market in the next three quarters. Our strategy is to focus on the areas where we can add the most value for our client.”

On the offshore side Grupo TMM is focussed on the supply to PEMEX exploration and production. “While our current vessels will remain committed to serving PEMEX in the Cantarell field, we will be shifting to new generation vessels to support deepwater exploration and production activities,” explained Mr Segovia. “Maybe we will go a step further by entering the activities of supply vessels for maintenance required by PEMEX.”

On the refining side, Grupo TMM is providing PEMEX services with five product tankers; two of which are on long term contracts, while three are on short–term contracts. “PEMEX has decided already that it will require twenty product tankers to meet its future needs; ten of which will be owned by PEMEX and ten will be leased,” stated Javier Segovia. This opens an opportunity for Grupo TMM to participate in both ship management of the fleet and in the ownership of vessels. Again, we are focussed on what we know best and where we can add value for PEMEX Refining.”

“We strive to implement our growth strategy without endangering our current performance. We probably represent less than 20% of the cabotage services in Mexico, and the pie is growing at the moment,” concluded Javier Segovia. “TMM will grow by retaining market share by continuously focussing on what we can do best. We will be taking advantage of the market opportunities, one step at a time.”

The place of Veracruz in the Mexican oil and gas industry

“Veracruz is Mexico’s leading state in petrochemicals as well as electricity, the country’s second largest producer of natural gas and ranks third in crude oil production. All of the activities of PEMEX are closely linked with Veracruz. Veracruz is home to PEMEX refineries and petrochemical complexes, as well as numerous companies working with PEMEX including Tenaris Tamsa, Swecomex, Bay–Inelectra and Grupo TMM. Also, over 14,000 kilometres of oil and gas pipelines cross the State of Veracruz and of course PEMEX is increasing its exploration and production investment in our state. So this is Veracruz,” started Governor Fidel Herrera Beltrán.

“Mexico’s largest oil reserves are in the basin of the Gulf of Mexico. Since the commencement of oil production in our state in 1908, Veracruz has been contributing to the development of the country, more than anyone else.” The State of Veracruz is facing a very contradictory situation: Veracruz holds the largest hydrocarbon reserves but is also home to the poorest population. “We need to ensure that Veracruz is given the proper place that it deserves for what Veracruz has given, gives and will continue to give to the rest of the nation,” emphasized Governor Herrera.

According to Gerardo Mancilla, Project Investment Manager for the State of Veracruz, three main projects in State of Veracruz will be critical to its economic and social progress. The most important project is the reconfiguration of the Lazaro Cardenas refinery, which is a US$3 billion project. “This is a strategic project for us because we have an agreement with PEMEX to create a regional economic development strategy, which also includes social and environmental objectives, around this project,” he noted.

The second project is the exploitation of the Lankahuasa gas field, which is very important in terms of job creation and generates opportunities for the local suppliers, following investments made by PEMEX in investment in exploration and production. This project is expected to create a multiplier effect in the region.

The third important project is the development of the Chicontepec’s paleolithic canal zone, the high quality oil reserve located in the north of the State of Veracruz. “We are about to sign a new agreement with PEMEX that will ensure that the exploitation of 1000 new oil wells in Chicontepec’s paleolithic canal will be accompanied by a very radical social development program,” stressed Governor Herrera. “This illustrates that we are addressing the unjust situation that beneath all that oil richness is the poverty of the Indian towns of the Huasteca region.”

The development of Chicontepec has initiated a growing investment program in the region and could increase the feasibility of other economic projects, such as the construction of the new deepwater port in Tuxpan, which will become the second largest port of the State of Veracruz, following the current US$600 million investment. This new port will enhance the functionality of the existing port and is destined to serve as the entrance for imports of refined products and natural gas as well as the exit for crude oil produced in Chicontepec.

Another medium term project is the construction of a new refinery in the Tuxpan area, for which the final location is currently being defined. The Chicontepec field is the biggest field after Cantarell is scheduled to replace the declining production in the Cantarell field.

Around the development of Chicontepec, the new deepwater port and the potential refinery, there is great emphasis on enhancing the infrastructure in the north of Veracruz. According to Governor Herrera, the future of Veracruz will be built upon our strong infrastructure. “A new highway connecting Mexico City and the Port of Tuxpan is currently under construction. This new infrastructure will turn Tuxpan into the closest port to Mexico City,” he stated. “The combination of the development of the Chicontepec, the refinery, the new port and the new highway marks the start of a new economic trend in the north of Veracruz.

Governor Herrera underlined his belief that Veracruz is coming to a point where it should have been fifty of sixty years ago. “We have created an enormous platform upon which our economic development can really take off, enabling us to put an end to the fact that four million people live in misery, stricken by poverty, in the rural areas and Indian towns.”

“What we see is a Veracruz of real opportunities,” he continued. “We want to convey to entrepreneurs that Veracruz is the land of opportunity. We have successfully built consensus within the government and society to attract investment. Today, I have been in office for 1000 days. I still have 1265 days and 7 hours to go, which I will devote to ensuring that we stay to realize our ambitions for the benefit of the people of Veracruz.”

Governor Herrera and Carlos Slim at the Swecomex fabrication yard – 11 out of the 12 largest offshore platform constructors have a presence in Veracruz.

A niche player thriving in the presence of the world’s leading fabrication companies

Demeresa is a small company in comparison with the industry’s largest offshore constructors, but by constantly finishing its projects ahead of time it is proving its ability to provide clients with fast results at lower costs. “This has been the key to our success,” explained Wim Jan Kindt, Managing Director of Demeresa. “We know that one little shackle in a chain can stop a whole operation and we work very hard to keep our clients’ projects on–time and on budget.”

In 1995, Mr Kindt was invited by his father, who just acquired Demeresa, to lead the shipyard into the future. Wim Jan Kindt immediately fell in love with Mexico, and while he is of Dutch origin he became a Mexican citizen seven years years ago. “Demeresa is a Mexican company and has only Mexican employees,” he emphasized.

Demeresa operates four product lines: maritime services, steel construction, ship repair and project management. “Our broad range of maritime services covers everything that a shipping company requires to operate in Mexico,” noted Mr Kindt. “This includes loading and off–loading, structural modifications, renting office space, support with import–export and transportation, supplier, crew attendance, and helping with emergency situations.” The ship repair business, particularly topside ship repair, has been constant business driver for many years. In 2000, Demeresa started targeting a niche area of the fabrication industry. The company is specialized in emergency projects and small fabrication projects up to 500–600 tonnes.

Over the years, Demeresa has improved its quality of labour, increased the amount and range of equipment, purchased additional land and built new dock sites. Wim Jan Kindt believes that the key to Demeresa’s future success, and further growth, lays in continuous investment in technology, human resources and equipment. “Our business philosophy is based on team effort,” he stated. “We have to give the young and talented people, which are plentiful in Mexico, a chance to work, learn and be creative so they can inspire the experienced people to share their knowledge and wisdom.”

As a Dutchman, and an enormous boat lover, Wim Jan Kindt would like to be involved in small–scale shipbuilding. However, his main future ambition is building high–technology modules for platforms, refineries and FPSOs. “I would also like to team up with high–technology companies, both Mexican and international, to extend our range of services,” he underlined. Having already received interest from the Government of Singapore in his yard as a base for Singapore companies with the ambition of fabricating high–technology projects in Mexico, Wim Jan Kindt seems to have the wind in his sails.

Entering Mexico with a Canadian mindset

“After a frustrating period of trying to work remotely from Canada with KOCKEN representatives in Mexico, we decided that we needed to have a direct presence in Mexico, because it was too difficult to do business from abroad,” started William Famulak, Vice President of KOCKEN Sistemas de Energia Inc. KOCKEN’s interest in Mexico was based on a market opportunity for separation technology. “At the time, only three principal suppliers of separation technology were trusted by PEMEX, and it was clear that PEMEX was looking for a more diverse offering of separation technology, which plays an important role in its exploration program,” analyzed William Famulak.

In an attempt to get a handle on the information and obtain accurate feedback, KOCKEN decided to move Engineering and Sales activities to Veracruz. It turned out that establishing a local presence was exactly what needed to be done. “We learned very quickly that as much as we didn’t like dealing with agents, our clients didn’t like dealing with them either,” noted Mr Famulak. Also, by employing Mexican staff and reinvesting in the local environment, KOCKEN has shown that the company is not just operating in Mexico to repatriate profits to Canada. According to William Famulak, KOCKEN has secured contracts because, even though it is a Canadian company, it is able to offer more than 70% national content on a contract while meeting international quality, safety and technology standards.

While separation technology brought KOCKEN into the Mexican market, it is not the company’s real area of focus. “To be honest, it is really run of the mill technology and quite a saturated market globally, with few improvements to be made in the future. But right now, we are starting to introduce new technologies in the Mexican market,” stated Willam Famulak. However, he explained that while KOCKEN’s technology is installed in the main global markets, gaining acceptance for innovative technologies remains a huge challenge in Mexico.

KOCKEN is particularly interested in introducing its gas dehydration technology to the market. This process incorporates an azeotropic distillation process in the glycol regeneration system that is 100% environmental friendly, with zero nominal emissions. It is using conventional methods to dehydrate gas, which means there is no learning curve for the operators. There is only an add–on process, which requires no human interface in order to make it work, while a self–regulating loop changes the process from high emissions to zero emissions. Currently, this technology, which is successfully implemented in other parts of the world, is not available in Mexico. “My number one goal is the implementation of this process in Mexico,” highlighted Famulak.

It is especially important in the State of Veracruz, which is primarily producing gas. An average gas dehydrator, processing 50 million cubic feet per day, has as much as 25 MMSCF per year of VOC emissions. In other part of the world, companies take advantage of the credits program administered by the United Nations, in which carbon credits are measured in units of certified emission reductions (CERs), with each CER equivalent to one tonne carbon dioxide reduction. In Mexico, PEMEX can take advantage of its internal carbon credit trading program. According to Famumak, PEMEX understands the value of reducing carbon emissions; it is just a problem of getting it implemented. “I believe this has to be the country’s number one objective for sustainable development, the Mexican oil and gas industry creates more emissions than any other industry. We need to offer equipment that is more efficient and environmentally friendly to eliminate these inefficiencies and lost resources. There are jobsites where they are flaring 1.5 billion cubic feet of gas per day. Millions and millions of BTUs are lost, while PEMEX is paying royalties to burn the gas. PEMEX is burning money. This is why we need to focus on smarter production rather than more production.”

KOCKEN’s main objective is to capture 70% of the gas dehydration market in the State of Veracruz. William Famulak considers this a conservative number for two reasons. “First, we are really good at it, and second, we can honestly make the difference by eliminating emissions in the area of production. We are talking about millions and millions and millions of cubic feet of emissions per year that we can process properly and safely, because our equipment is conventional, safe and proven.”

By default, KOCKEN has also become an expert in stabilization of crude oil. At the moment, the company’s equipment is present in three of Mexico’s five significant crude oil processing facilities. A mismatch in standards applied to the process to be implemented proved to be a hurdle in the approval process. For example, PEMEX has a specification stating that the vapour pressure of the crude oil cannot exceed 10, while KOCKEN’s standard is 7.5, which results in less volatile crude. “We are not changing the equipment specifications, but we have found ways to refine the process inside the specifications,” explained William Famulak. “This is quite impressive, especially since our equipment is operating 30% more efficiently than the stated requirements. This advantage comes directly from our experience as a Canadian company.”

Market opportunity: crane hire or lifting services?

The potential for the construction industry in Mexico is tremendous and is now being realised by the huge investment programme of PEMEX in maintenance, expansion and new construction,” started John Michael Derrick. The Director General of Sarens Ojeda recognized that while the opportunities are excellent, the Mexican market has its particularities.

Following a strategy based on building up confidence with all potential clients, maintaining sufficient equipment and resources to fulfil the market need, and never failing to supply on time, Sarens Ojeda has achieved an average utilization rate of its fleet of around 70%. Nevertheless, transportation remains a main challenge in Mexico, since the country is geographically as large as Europe covering Spain, Greece, England, Norway, and even reaching parts of Russia. “Clients have to understand that it can take a month to transport a crane from one side of Mexico to the other,” noted John Michael Derrick. “In Europe a crane supplier would never drive a 300 tons telescopic crane from Madrid to Moscow, but in Mexico we no option.

Historically, the internal maintenance department of PEMEX generally undertakes smaller projects in–house. As PEMEX has been doing the engineering, planning, purchasing and expediting the company therefore only required cranes as opposed to total lifting solutions. However, PEMEX is increasingly putting such projects to tender. “Contractually and commercially there are many good reasons why PEMEX should outsource its EPC and heavy lifting work,” assessed Mr Derrick. “PEMEX doesn’t have the global experience and technology that the EPC companies can offer. Outsourcing these activities provides PEMEX with access to the foremost experts in the world.”

Sarens Ojeda’s focus on the business has been different from the normal Mexican business technique. “We will not be late for the start of a job, our cranes are not going to breakdown and we will provide sufficient manual resources and primary and auxiliary equipment to fulfil the contracts on time,” emphasized Mr Derrick. “What any construction industry needs is service from its crane suppliers, clients are not interested in hiring a crane; they wanted us to lift a reactor into a structure or place a bridge into position on its bearings.”

In the end the limited amount of cranes in the Mexican market has created sort of balance in the division of the work between competitors. “We will need to make planned investment in more and bigger cranes to take advantage of the huge opportunities arising from increasing investment in refineries, petrochemical complexes, coal fired power stations and offshore jacket, module and platform construction.”

Investing in the future of Mexico

Most banks in Mexico are now really international banks, but not Grupo Financiero Inbursa which is an integral part of the business empire of Carlos Slim Helú, who recently became the world’s richest person. After starting operations in 1965, Grupo Financiero Inbursa has grown consistently throughout its history by expanding its customer base, which currently holds over 8 million customers. Grupo Financiero Inbursa holds 12% of Mexico’s corporate banking market, 12% of the country’s foreign exchange business, and probably 9% of the insurance market. Three years ago, Grupo Financiero Inbursa integrated the different operational areas of the group into one structure, which differentiates the group from the other Mexican banks.

Its corporate banking business covers 500 clients and is based on client service and offering customized products that meet the clients’ unique needs. “We aspire to be both a partner and banker for our clients in the Mexican investment banking market,” noted Javier Foncerrada, Director General of Grupo Financiero Inbursa. “In addition to activities such as the restructuring of leading Mexican companies, we are staring to participate in the infrastructure market, financing projects for the construction of dams, toll roads as well as platforms and petrochemical plants.”

It is very important for us to have a strong presence in the Mexican oil and gas industry, which is critical for the development of the country and creates possibilities for banks such as Grupo Financiero Inbursa. “We have been in the country for many years and we will continue to support any enterprise that is investing in Mexico. While other banks have to syndicate, we can take on complete projects of up to US$700 million per client in one operation, if we like the risk profile. There are no local or international banks in Mexico that can match our equity strength; our balance sheet is very strong.”

On the other hand, Grupo Financiero Inbursa covers the insurance for all PEMEX properties, except for the vessels, and provides financial services to SMEs that are providing products and services to PEMEX. Also, the group offers complete financial solutions, including insurance, bonds and credit, to private franchise holders of PEMEX petrol stations. Finally, Inbursa also offers companies a special card that enables their employees to electronically charges petrol purchases, and 100,000 of these cards are already active in Mexico. “The ambition of our group is very clear, we want to grow turnover and profitability every year, every month and every day,” emphasized Javier Foncerrada. “The market is complicated and our competitors are very strong, but we already achieved forty years of continuous growth.”

Opportunities for new pump technology

In 1979, Ing. J. Manuel Tanda Castillo founded Fluidos Tecnicos to take advantage of emerging opportunities in the high technology end of the pump market. Representing Sundyne Corporation, his company brought a totally new parameter to the Mexican market through the introduction of high speed pumps to substitute multistage pumps

Over the years, Fluidos Tecnicos started representing companies such as Nagle, Allweiler, Milton Roy and Tuthill. “Fluidos Tecnicos represents both centrifugal and reciprocant pumps divisions of David Brown, but the market for centrifugal pumps is very competitive, because Flowserve, Sulzer and Ruhrpumpen have local production facilities and a sales advantage. However, our reciprocating pumps division, Union Pumps, has been very successful since no competitors make these products in Mexico,” noted Fluidos Tecnicos’ Director General. Through its association with Bornemann Pumps, Fluidos Tecnicos has introduced multiphase technology to the Mexican market, which is expected to become an important business driver as the unlocking of deepwater reserves. As wells are going deeper, the pumps utilized require more volume and higher pressure, which creates great opportunities for multiphase pumping and subsea pumping solutions. “Multiphase pumps are able to handle streams of oil and gas or water; even some sand, without significant damage due to the design of the pump. The transportation of crude oil and gas from platform to onshore processing facilities through the same pipeline drastically facilitates transport,” concluded J. Manuel Tanda Castillo.

There is no magic formula for success

Several years after witnessing the Mexican oil boom in the late 1970s, Mr Vega started his career in the Mexican oil and gas industry as Turbo Machinery Equipment start–up engineer for Ingersoll Rand. The company was building gas compression modules in California for installation on offshore platforms in Mexico. “This was my entry into the offshore industry,” started Juan Vega. “After a successful tenure at Ingersoll Rand, I decided to run my own show.” In 1986, when Mexico just came out of a financial crisis, Ing Juan Vega Hernández followed his entrepreneurial spirit and created Ingenieria de Partes.

IPSA started as a representative for local and foreign companies offering valves and flow control systems in the Mexican market. Regardless of his experience as an equipment engineer, Mr Vega started by reselling products and equipment to PEMEX, since design and production activities were too capital intensive for IPSA at the time.

According to Juan Vega, the manner in which PEMEX conducted business at that time was completely different from the way PEMEX conducts business today. “In the past, it was a sin to be a Mexican company, because PEMEX personnel preferred to work with foreign companies,” he remembered. “Nowadays, PEMEX has a different approach towards Mexican companies, which does not mean that we get preferential treatment. In general, Mexican companies are more powerful and technologically advanced today.”

“You have to keep in mind that PEMEX is always looking for the latest technology,” reminded Mr Vega. “Sometimes the latest technology is not compatible with the systems already in place, and then you have to look for the most reliable equipment that can be applied to create a definitive solution to an existing problem.”

IPSA’s core business can be broken down into two divisions: Valve Automation Solutions and Process Equipment. Besides PEMEX Exploration & Production, IPSA is also working with PEMEX Gas and PEMEX Petrochemicals. “Most of the types of services that we are providing to PEMEX are awarded directly, outside of the bidding process,” stated Juan Vega. “The law allows this if you can prove that you are the only company with the expertise, capabilities, know–how and the financial strength to take care of these kinds of contracts and solutions.”

Furthermore, IPSA is the exclusive distributor and service centre for Emerson Process Management’s Valve Automation Division. “This exclusive relationship is based on the fact that we have plenty of well trained technicians and engineers and we have all the muscle required to provide true valve automation solutions,” he continued. “Our company is about people and not about products. As a result, PEMEX considers IPSA a reliable company and a single source of supply for valve automation and process equipment solutions.“

IPSA’s Director General truly believes that IPSA’s capabilities are unmatched in the Mexican market. “Many companies that call themselves solutions providers are either just manufactures or distributors without any real service capabilities. PEMEX is looking for solutions rather than equipment and we are the kind of company that provides the total solutions.”

Juan Vega sees plenty of opportunities to take IPSA to the next level, not just in this year but also in the forthcoming years. PEMEX has diversified its investment focus from exploration oriented into optimizing the performance of existing infrastructure in producing fields. This is a perfect fit with IPSA’s growth strategy. “After 21 years this is probably the best moment in our history, and IPSA is looking to add muscle, experience and knowledge to its organization. We believe that it is the right time to enter into partnerships or joint ventures with other service companies that are willing to make a medium to long term commitment to offering a better service to PEMEX,” recognized Mr Vega. “At the moment, we are conducting a thorough and careful search of companies that offer products and services that have synergies with our main expertise.”

“This year, IPSA is celebrating its 21st anniversary and we are very proud that we have reached this milestone,” announced Mr Vega. “We are also very excited that after all these years we are good enough to be considered a premier service provider for PEMEX, and we are working hard on a day to day basis in order to become a bigger and stronger company; that is the next step.”

“There is no magic formula for success, but we are adding elements to the equation of success which already includes tailor–made solutions and the quality of our people. I have full confidence that early next year we will be like a butterfly leaving the cocoon. We have been in the cocoon for a long time and now we are going to go out there and explore the new opportunities in the oil and gas industry. We owe everything to PEMEX and have to do everything we can to help and serve PEMEX. We are proud to support our national oil company,” Juan Vega concluded.