Oxford Business Group

Luis Vielma, director-general, CBM, on the challenges facing the oil sector

MexicoEconomy 

24 Jan 2017 
 
 
 
 
 

MX17_Economic View_Luis Vielma b&w.png

What is the new reality for today’s global oil sector?

LUIS VIELMA: This new era started with the sharp drop in global oil prices in the second half of 2014, and the prices have remained low in 2015, not climbing back up significantly. This presents us with a $40-per-barrel world, with prices oscillating between $40 and $50. It is difficult to envision the price exceeding the $50 mark in the next two years. Within this new price reality, there are additional concerns to consider.

First, there is a surplus in the oil market which is still unknown to markets themselves; oil that has been produced and is stored around the world. The US’s strategic reserves are at a record high, and countries in the Middle East, such as Saudi Arabia, Iran and Iraq, have stored vast quantities of oil, which are difficult to track.

Second, drilling times have decreased sharply with the use of new technology. On some sites drilling can be done 50-60% faster.

Third, the economic recovery in China, the US and other key countries in the world, which drive global demand, remains weak.

As for renewable energies, there has been considerable progress in the development of cost-competitive technologies, solar energy in particular, but the question still remains as to how much of a viable option these technologies will be, cost-wise, in the coming decade.

How much flexibility does Petroleos Mexicanos (Pemex) have and what will it need to successfully complete its re-structuring and be competitive in an open sector?

VIELMA: One of the main challenges for the former state company remains its labour force. Current executives understand the obstacles posed by a lack of flexibility in managing its human capital according to the needs of the business.

As the dominant player in the sector, Pemex will need to adapt to a new competitive market in which labour force management will be key for success.

Pemex will be required to assess which segments are viable and which should be outsourced. The sector will benefit from new partnerships between Pemex and private companies. Pemex should see itself as an engineering company rather than an operations company.

How important will it be for the industry to have new farm-outs for high-value fields?

VIELMA: Farm-outs are led by Mexico’s national institutions, and Pemex is unable to play an active role in defining which companies are best suited to a project. Pemex should have the space to negotiate partnerships on the basis of what Pemex sees as its technological and financial necessities.

Farm-outs would allow Pemex to find the best partner in the market to increase the efficiency and reduce the costs of a project. Current contract tenders do not allow the best alliances to be formed since the government looks for the best deal in terms of potential state revenues.

Looking to the future, the sector needs to gain independence from federal authorities. More than the financial obstacles, the lack of a dominant role in choosing partners is the major hindrance for the competitiveness of the sector.

What level of interest are we seeing from international players in the sector in coming to invest to the country?

VIELMA: Experts are well aware of the abundance of resources in the Gulf of Mexico. Companies are exploring and producing in the US waters in the Gulf of Mexico, with vast amounts of data and information available on the potential of deepwater fields on the Mexican side of the border.

At a global level, sector stakeholders are aware that large multinationals have the knowledge and technology necessary to increase the competitiveness of projects. Mexico’s proximity to the US makes it an attractive destination for large companies taking into account the closeness to the market.

Future bidding rounds will exhibit a more agile bureaucratic process. The first rounds have been positive and have provided valuable lessons for the parties involved in the optimisation of future biddings. 

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