Alberto de la Fuente, Managing Director, Shell Mexico: Interview

Interview: Alberto de la Fuente

How do local content laws affect competiveness?

ALBERTO DE LA FUENTE: At first sight it seems like Mexico learned a thing or two from the Brazilian experience, as the government has set very reasonable targets in terms of local content for shallow-water exploration. In other areas, such as deepwater, the government has recognised there is a lack of experience in the country, and therefore local content laws will be adapted to avoid damaging sector competitiveness. It is clear that the government is willing to work hand in hand with the industry to develop Mexican human capital without affecting the competitiveness of the sector or the interests of international oil companies.

What are your chief concerns in terms of the implementation of the energy reform and round one?

DE LA FUENTE: In terms of the constitutional reform and secondary laws, we are very happy with the depth and structure. However, we will have to wait and see how things will actually work. The government released the round one specifications in December 2014, and although the rules seem quite clear, we believe there will be a learning curve for everyone, including the government. We have some concerns going forward – the most important of which is timing.

The government has a strong interest in developing the sector and attracting investment as quickly as possible; therefore, working times are very tight: one bid in six months, 45 days to deliver a working plan after being granted a permit, three years to begin exploration and various other investment commitments that we believe are somewhat ambitious in terms of timing. We are reviewing these to see if they are realistic.

Another area of concern is overregulation. We are in favour of strong and independent regulators in the oil and gas industry, and that is what the reform has done, giving the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH) and other regulators more independence and strength. However, it has also created an environment that could lead to overregulation – with the CNH, the Energy Regulator Commission (Comisión Reguladora de Energía, CRE), the Federal Competition Commission (Comisión Federal de Competencia, CFC), the National Commission for the Efficient Use of Energy, the Ministry of Energy, and the Ministry of Finance and Public Credit all involved in decision making and regulation.

We hope this does not lead to an environment that can limit the development of Mexico’s oil and gas industry. Furthermore, the three main regulators – the CNH, CRE, and CFC – currently lack the capacity to deal with the workload that will come their way. They must expand and become more efficient to avoid paralysing the acquisition of permits and so forth.

Our last concern, which is not unique to Mexico, is that of transparency. Without transparent processes and a level playing field, the industry will not grow and develop, as companies like Shell will not take part in such practices. However, from what we understand the government is placing a strong emphasis in this area, so we are expecting a successful round one.

How is round one expected to impact production and investment levels in the industry?

DE LA FUENTE: It is expected that round one will have an immediate and positive impact in terms of investment, as the bid specification includes investment commitments 45 days after the permit is granted. In terms of reversing production falls, we think we will begin to see an impact in three years. We are basing this expectation on the impact of multiple services contracts in recent years, where production levels at small fields with minimal output were doubled or tripled in a matter of two to three years. For this reason, we think that it is very reasonable that Mexico can both reverse its production trend and receive larger investments by 2018. At some point the government was talking about reaching the 3m barrel-per-year mark by 2020 and hitting 3.5m barrels per year by 2025, which I think are too ambitious. However, we will have to wait and see.