Carlos Morales Gil, Director General of Petrobal, the oil and gas exploration and production arm of the Grupo Bal conglomerate and Mexico’s first private oil company, provides an insight into the significant changes under way in the country’s petroleum industry and the new era of private enterprise in the sector.
What do you make of the transformational times that Mexico is going through with the enactment of various reforms, such as the energy reform?
The petroleum industry has several components. First, to increase investment of financial resources in Mexico. In addition, those financial resources undoubtedly create employment and, very importantly, they contribute to the generation of income that can be used to develop infrastructure. When I say infrastructure I’m referring not just to roads, ports, but also hospitals, universities, and schools; the infrastructure that the country offers to all of us that are living here.
It seems to me that the steps the country is taking are really important. It is clear that the primary objective in Mexico is to have better living conditions for everyone. That is the fundamental objective of everything that is being done in the country. Now, within that, there are particular objectives for certain groups or regions, but that is the country’s general objective. We need people to have their own place, their own decent home, with access to decent health and educational services, and obviously to have their basic needs satisfied.
To create sources of employment, you need to have an attractive country. That means there needs to be adequate infrastructure where businesses can move their products, where they can reach markets, and can have access to well-trained workers and sources of energy that are attractive to businesses.
Being a country that has hydrocarbon and renewable energy resources, it’s important for Mexico to have an appropriate and modern legal framework, so that those resources can be used quickly and easily, because in the ground those resources don’t benefit anyone. It is fundamental to create the legal structure that permits their use.
In that respect, the legal framework and its transparency are fundamental for encouraging the confidence necessary to support investment in Mexico. The energy reform represented a legislative effort unprecedented in the country’s recent history. There were 22 secondary laws and 25 regulations enacted, and three constitutional articles were changed. What do you make of this reform, and particularly, what role has private initiative played, and what role will it play, in the process of change?
For sure, one of the elements that businesses look for is corporate and legal certainty, and to be able to count on secondary legislation that is consistent with what the Constitution establishes as fundamental. That is the most important goal in terms of legislation that has been achieved in recent years, and that certainly will be the reason why people are going to say, “Yes, I want to go there; I want to go to Mexico to invest.”
The second element is that Mexico’s hydrocarbon resources also have an attraction and an important level of quality. The third and final element is to know how you implement these reforms. That requires solid institutions, which is something that has always distinguished Mexico: having institutions that command respect, that exhibit respect, and that are respected by all of us who operate within the different environments in the country – and having those institutions implement the reform processes in a transparent way.
I think the Secretary of Energy has played a very important role in the planning of the bidding process, in the planning of the rounds, in the quantifying of the resources that the country has and how to offer them to the different players in the field. How to set out contracts for them that are competitive on a global level, fiscal regimes that are competitive, that make it so people can come here, it has been essential.
As an additional element, you have to do things transparently. And the National Hydrocarbon Commission (CNH) has done it very transparently. The transparency of the processes has been worthy of praise for the CNH.
Grupo Bal is, without a doubt, one of the major business groups in Mexico. Just a few years ago, you decided to create the first private petroleum company in the country, despite the less than favorable environment. With that in mind, what was the purpose behind the creation of Petrobal?
Grupo Bal, headed by our President Alberto Baillères, has for many years demonstrated confidence in Mexico. The group has more than 100 years of investment in different sectors of the Mexican economy and betting on it in the form of doing business, thanks to the solidity of the institutions in Mexico.
Hence we have more than 100 years in mining, more than 100 years in the retail business, in department stores, and now more than 40 years in the insurance business, in the finance sector, and even in the agriculture and livestock industry. And something we’re very proud of in the group is the professional education niche, through one of the most prestigious institutions in Mexico, which is the ITAM (Instituto Tecnológico Autónomo de México).
With that perspective, and seeing the form in which the structural reforms have been carried out, particularly energy reform, the group is making the decision to continue betting on Mexico, to continue trusting Mexico. Now it’s time for energy, both petroleum and electricity. It makes us really proud to be able to be in such a solid group, with such permanence, such confidence in Mexico. Mr Baillères was the 2015 recipient of the “Belisario Domínguez” medal, which is the most important recognition that the Senate of the Republic can bestow. He said that it had a unique merit, but undoubtedly what is most important to him is his love for Mexico.
In that regard, and getting more in depth into Petrobal: you won the fourth area that you applied for in conjunction with Fieldwood Energy. In fact, Petrobal was the only company that ended up bidding in that contest, and you agreed to pay double the utility the government was expecting to receive. Being the only group that bid, I gather that you have great hopes in this bidding process that you won...
First, let me say that in competitive bidding processes, where there is competition or where you expect competition, the focus you have to have isn’t on what can be left on the table, as they say, but rather what is going to satisfy the investor: what are the returns that the investor is looking for? We make the bids in these processes in the spirit of generating a return that satisfies our expectations. We bid hard because we think that with that bid we will generate the returns, and we create a business that’s attractive for the investors. That is the first point.
Also, undoubtedly that block 4 from Ichalkil and Pokoch has very important reserves and resources, very high quality crude, and rock with the right characteristics that permit wells of very attractive productivity. What defines the attractiveness is: how quickly can I extract, and at what cost can I extract? And we at Petrobal truly have people that have experience with that.
When will the extractions begin? When do you estimate there will be fully producing wells?
We are coordinating with our associate who is the operator – Fieldwood Energy – to set the dates when we will begin to drill. You have to do the corresponding studies before you begin to drill. We are beginning these activities now. We hope to begin drilling during the second half of this year. After we evaluate and certify the reserves that we have, and after having set out the development plan for these fields, we think we probably can begin to yield the first production in 2019.
As a new petroleum company, you couldn’t bid during this first round, unless you had an associate, an ally, a joint venture. Obviously you’ve got a very interesting one. At the moment, is there any intention of participating in a new bidding process with the same associate? Are you open to creating new alliances with other associates?
Fieldwood Energy is a great company. It’s the highest producing private company in the US Gulf of Mexico sector. It operates more than 500 platforms, and it is a very solid business with financial backing that’s also very solid. We are very satisfied to be associated with them. They qualify as operators and we don’t. The construction and the operation of this consortium is something that both parties have been very proactive about to be able to reach its objectives.
Depending on the opportunities, it’s important to keep creating synergies between the two companies. If opportunities for this kind of project in which Fieldwood has a lot of experience come up, and if they’re also attractive to them, we will very likely continue working with them. If opportunities come up elsewhere where they don’t have the same appetite or the same objectives, for example in what might be mature terrestrial fields, where we would like to join, we would have to see if there is interest there; if that’s not the case, we would consider seeking out other synergies.
You know Pemex very well; you know their capacity and experience and knowledge of the country’s resources. Is Petrobal considering the possibility of working with Pemex, including as a trio with your current associate Fieldwood Energy?
Pemex is the leading company in Mexico, without a doubt, and I think even in Latin America. To me it’s earned a place in my heart. I do think that Pemex is the most important company in Latin America. And partnering a business with the capacities of Pemex is very attractive to any business, and for Petrobal definitely so. Pemex has great technical capacity, and it is fully experienced in the developments of fields here in Mexico and their operation. If in any way the creation of technical and financial synergies with Pemex makes sense, we’ll seek them out
In the end an alliance helps you to be stronger to compete, and at the same time it reduces the risks because they’re shared. What does a congress like the Offshore Technology Conference (OTC) mean for Petrobal and, particularly, for the development of this reform that Mexico is undergoing?
It’s a very important event, where all the petroleum companies come in search of new technologies, to meet providers, to get to know other operator companies, network with the different players in the industry, seek out ways to improve our activities, how to better develop our projects, how to better operate our fields, and how to identify potential in people – these are themes that are being addressed in other countries. Also, which are the industry tendencies around the world, and what are the markets like. These are the types of subjects that come up at the OTC and these types of exhibition. You don’t stop absorbing everything you see there for 3-4 days, and all the things you can take in. I think it’s very important for all the companies to have access to those sorts of exhibitions and conferences that allow us to get better all the time.
According to the information from the Mexican Institute of Petroleum and Petrobal, it seems you’re going to sign an agreement to establish a relationship in terms of seismic and geological interpretation.
We haven’t signed anything, but we have had contact. The Mexican Institute of Petroleum is a very old institution that has continued to offer research and technological implementation work in the petroleum industry, mostly in Mexico and in Latin America. We had a meeting to see how they’ve developed the capacities they have today, the equipment they have, and the employees on which they rely. It is an institution that the operating companies must turn to. We have to better utilize the high quality services they provide.
What are the objectives that Petrobal has ahead of it?
First of all, to be a company that generates profitability for the investors. That is without a doubt the primary objective. To be a socially responsible company as well. To be a secure company with regard to not having accidents; one that doesn’t subject its people, its communities, or the environment to any sort of accident. To be a sustainable business; to be a company that lasts a long time. And one that allows us to like our jobs. Regarding our size, how much can we grow? We have it in our sights to grow as much as our abilities allow; we should be a relevant petroleum company to our country. That is what we aspire to be.