mexico part 4

November 2007 Oil & Gas Financial Journal • www.ogfj.com www.focusreports.net 87

MexicoNew times, new opportunities

Within a month after Hurricane Dean paralyzed oil

activities in the Bay of Campeche, which cost

PEMEX up to US$1.5 billion in lost production, the

Mexican Congress and Senate approved a long awaited fiscal reform

package aimed at reviving the financial muscle of Mexico’s national

oil company. This massive success for President Calderon, in a coun-

try that has historically struggled to achieve fiscal reform, is destined

to mark the start of a new age for the Mexican oil and gas industry.

Pt.4

This supplement was produced by Focus Reports LLC. For more

information and exclusive interviews, log on to www.focusreports.net.

Text and research: Jeroen Posma Project coordination: Anna Jonca

88 www.focusreports.net November 2007 Oil & Gas Financial Journal • www.ogfj.com

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 elec-

tion on behalf of the Institutional Revolutionary Party (PRI) – Labas-

tida 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 learn-

ing 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 explora-

tion 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 produc-

tion 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 charg-

ing a company for

not producing oil is

not Kafkaesque, then

I do not know what

is Kafkaesque.”

PEMEX is working around the clock to minimize the production decline in the Cantarell field. Nevertheless, fiscal reform is a criti-cal measure to maintain Mexico’s production level in the future.

Senator Francisco Labastida Ochoa, President of the Senate Energy Commission


“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 inter-

est 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 respon-

sible 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 indus-

try and the country.”

Reaching agreement on fiscal reform has been a roadblock for

recent Mexican governments, with the different parties in Con-

gress 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 pro-

ductivity and efficiency improvements.

After several weeks of negotiations, all parties reached an agree-

ment 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 annu-

ally 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

BanInb_OGFJ_0711 1 10/15/07 11:03:40 AM


Felipe Calderon to be signed into law as

part of a broader fiscal reform package,

marking a legislative victory for the Presi-

dent 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 invest-

ment. 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 explora-

tion and production in the medium term,” Senator Graco Ramírez

concluded.

Dealing with the decline of CantarellIn 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 trajec-

tory 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 produc-

tion 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 pro-

duction projects will be able to make up for the declining produc-

tion 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 compen-

sate 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. How-

ever, 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 devel-

opment 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 antici-

pation of the decline of Cantarell has been the foundation of the

development of Ku-Maloob-Zaap, Chicontepec and Mexico’s deep-

water 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 Direc-

tor 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 chal-

lenges 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.”

Jesús Reyes Heroles, General Director of PEMEX

Senator Graco Ramirez Abreu, Secretary of the Senate

Energy Commission

SinergíaPasión por lo que hacemos,

constante innovación

ahora bajo un nuevo nombre.

cggveritas.com

CGGVer_OGFJ_0711 1 10/15/07 1:21:40 PM


The potential of mature and marginal fieldsEnhanced recovery and production from marginal and mature fields

continues to grow in importance for the Mexican oil and gas indus-

try. “Mexico and PEMEX must be able to develop a specific business

model in each sector in order to maximize the country’s value gen-

eration,” 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 finan-

cial 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 con-

ducted 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, process-

ing, interpretation and reservoir analysis, COMESA also operates a

large processing centre in Villahermosa. Recently, COMESA started

participating in marine acquisition through alliances with West-

ernGeco, 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 inten-

tion 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 addi-

tional 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 chal-

lenge,” he concluded.

An urgent focus on reserves replacementAt 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 replace-

ment 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 invest-

ment. 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,” ana-

lyzed 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 produc-

tion coming from offshore fields, this indicates that Mexico’s onshore

potential should not be underestimated.

Adán E. Oviedo Pérez, Director General of COMESA

OUR PURPOSE

TO PROVIDE INTEGRAL SOLUTIONS WHICH GIVE ADDED VALUE TO THE EXPLORATION

AND PRODUCTION OF HYDROCARBONS

“Integrated SolutionsDeep Down

Commitment”

INTEGRATED SOLUTIONS

TO A

DD

VA

LUE

www.comesa.org.mx

Comesa_OGFJ_0711 1 10/18/07 11:31:04 AM


The evolution of seismic studies in MexicoPGS 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 Transi-

tion 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 off-

shore. 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 north-

ern onshore regions.”

While PGS Mexicana identifies other opportunities in fields

such as Chicontepec, the company is cur-

rently aiming to capitalize on the increas-

ing 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.

PGSMex_OGFJ_0711 1 10/16/07 8:57:15 AM

Ing. Ignacio Orozco Ortiz, Director General of PGS Mexicana

Optimizing production through swabbing servicesGenerally, 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 improve-

ment. Although swabbing services are value

drivers in both the well completion and

production stages, nitrogen injection has

become a valuable technique for the stimu-

lation 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 mechani-

cal 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 Petro-

swab, in association

with GOTCO, this

patented technol-

ogy offers a safer

alternative to the

mechanical version

of this solution and

has produced excel-

lent 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 Gen-

eral 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 ser-

vices to raise productivity in producing fields

with low pressure levels.”

For the firsttime in Mexico,

Petrowab de México,S.A. de C.V.

is using a patentHidraulic Induction Unit.

Petroswab de México,S.A. de C.V.Av. Ruiz CortinesNo. 506 altosCol. Obras SocialesPoza Rica, Veracruz,Mexico, C.P. 93240Tel. y Fax+52 (782) 824 8933,824 3564

[email protected]

Petros_OGFJ_0711 1 10/16/07 3:11:23 PM

ABOVE: Juan Manuel Barajas (right) and Carlos Lugo Ramirez, co-founders of Petroswab. BELOW: Petroswab’s interventions yield result in five to six hours

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 Petro-

bras 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 work-

ing 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 com-

pleted in forty min-

utes 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 look-

ing 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 grow-

ing market for the

next twenty years.”

In addition to the Chicontepec fields,

Petroswab will be concentrating on expan-

sion 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.

Petroswab: 1/3 Vertical


Running a tight financial shipAs 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 opera-

tions. 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 operat-

ing 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 com-

pany’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 mod-

ernizing 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 produc-

tion. “While our current

vessels will remain com-

mitted to serving PEMEX

in the Cantarell field, we

will be shifting to new

generation vessels to sup-

port 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 endanger-

ing 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.”

Javier Segovia Serrano (right) and Silverio Di Costanzo, Director General and Senior Managing Direc-tor of Grupo TMM

GruTmm_OGFJ_0711 1 10/15/07 1:32:36 PM


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 work-

ing with PEMEX including Tenaris Tamsa, Swecomex, Bay-Inelectra

and Grupo TMM. Also, over 14,000 kilometres of oil and gas pipe-

lines 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 Mex-

ico. 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,” empha-

sized Governor Herrera.

According to Gerardo

Mancilla, Project Investment

Manager for the State of Vera-

cruz, 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 Chicon-

tepec’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 feasibil-

ity 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, follow-

ing the current US$600 million investment.

This new port will enhance the functional-

ity 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 refin-

ery 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 deepwa-

ter port and the potential refin-

ery, 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 develop-

ment 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 develop-

ment 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 govern-

ment 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.”

Fidel Herrera Beltrán, Gover-nor of the State 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 companiesDemeresa is a small company in comparison with the industry’s

largest offshore constructors, but by constantly finishing its proj-

ects 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 cov-

ers everything that a shipping company

requires to operate in Mexico,” noted Mr

Kindt. “This includes loading and off-load-

ing, structural modifications, renting office

space, support with import-export and

transportation, supplier, crew attendance,

and helping with emergency situations.”

The ship repair business, particularly top-

side ship repair, has been constant business

driver for many years. In 2000, Demeresa

started targeting a niche area of the fabri-

cation 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 equip-

ment. “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 build-

ing 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. Hav-

ing already received interest from the Gov-

ernment 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. Wim Jan Kindt, Managing

Director of Demeresa

Demer_OGFJ_0711 1 10/16/07 2:58:35 PM


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 inter-

est 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 accu-

rate 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 deal-

ing 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 Can-

ada. 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 meet-

ing 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, gain-

ing acceptance for innovative technologies remains a huge challenge

in Mexico.

KOCKEN is particularly interested in introducing its gas dehy-

dration 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 imple-

mented 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 primar-

ily 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 reduc-

tions (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 prob-

lem 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 job-

sites where they are flar-

ing 1.5 billion cubic feet

of gas per day. Millions

and millions of BTUs are

lost, while PEMEX is pay-

ing 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 dehydra-

tion 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 speci-

fications, 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.”

William Famulak, Vice President of KOCKEN Sistemas de Energia Inc.

Kocken_OGFJ_0711 1 10/15/07 11:34:18 AM


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 recog-

nized 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%. Never-

theless, 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 gener-

ally 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 commer-

cially 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 suf-

ficient 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 com-

petitors. “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.”

SerOje_OGFJ_0711 1 10/15/07 1:17:34 PM

John Michael Derrick


Investing in the future of MexicoMost 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 cus-

tomer 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 inte-

grated 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 Mexi-

can 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 Foncer-

rada. “The market is complicated and our competitors are very

strong, but we already achieved forty years of continuous growth.”

Lic. Javier Foncerrada Izqui-erdo, Managing Director

of Grupo Financiero Inbursa

FluTec_OGFJ_0711 1 10/15/07 1:39:07 PM

Opportunities for new pump technologyIn 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 pres-

sure, 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 transporta-

tion of crude oil and gas from platform to

onshore processing facilities through the

same pipeline drastically facilitates trans-

port,” concluded J. Manuel Tanda Castillo.

Ing. J. Manuel Tanda Cas-tillo, Director General

of Fluidos Tecnicos


There is no magic formula for successSeveral 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 con-

ducted 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 tech-

nology is not compatible with the

systems already in place, and then

you have to look for the most reli-

able 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 them-

selves 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 pro-

vides 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 invest-

ment focus from exploration

oriented into optimizing the per-

formance of existing infrastruc-

ture 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 ser-

vice 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 ele-

ments 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 indus-

try. 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.

Ing. Juan S. Vega Hernández, Director General of Ingenieria de Partes

Ingen_OGFJ_0711 1 10/19/07 3:01:56 PM

mexico part 4

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