Interview with David Shields

To review recent comments from David Shields on the Van Meurs report, click here.

An interview with Shields is below:

1. Mexico Energy Intelligence (MEI): David, you have been following Mexican oil and gas policy and Pemex’s institutional evolution for twenty-five years if not more.

You have had a unique career in Mexican journalism, as an editor, analyst, consultant and entrepreneur. I recall our having met in Mexico City in the spring of 1991. In those days you were a contributor to El Nacional and Novedades, and The News. Later, in 1997, you were the editor of El Financiero International.

David Shields

In addition to your bi-monthly publication, Energía a Debate, you have written at least two books on Pemex, plus an uncounted number of editorials in Reforma and other publications.

In such a demanding schedule, you have also served as a panelist at numerous academic and industry conferences in Mexico and abroad. (I’m recalling that you participated in a conference at UCLA on one occasion in the 1990s.)

You have also served as a social witness of Pemex contract awards.  In July 2012, you organized a two-day forum on energy policy in Mexico City, which was widely attended by Pemex, CFE, industry and government.

So, in this interview, I would like for us to go in three directions: one might be called topological, the second, about the past, and the third about the future.

In Hindu lore, there is the story of the three blind men touching an elephant. One says that an elephant is like a tree, another like a wall, and the third like a snake.  In your career you have touched more surfaces of the “oil elephant” in Mexico than anyone else I can think of.

So tell us, as an opening comment, what does the Mexican elephant look like?

David Shields (DS): I think sight deprives me of the lucid vision a blind man might have on this. What I see is the strangest animal, indeed. The Mexican oil industry model is quite different from any other in the world. It is based on a legal monopoly and the myth that only Mexicans working for the state-owned elephant can take part in producing oil in Mexico. But the lifeblood of the industry is a vast network of private-sector and international contractors and suppliers who do most of the work in the field. Pemex and the industry seems like an amorphous mass to me.

It is politics, government, national identity and it is not even a company; and yet, despite not being a company, Pemex is the 10th biggest oil company in the world, says PIW. And yet this undefinable behemoth seems to be about to undergo a radical metamorphosis, including “becoming a company” at last, and yet, ironically, it may be too slow and unwieldy to survive in a new, hotter, more complex environment.

2. MEI: I’m not sure how you want the name of your publication to be translated into English. The title suggests something along the lines of “Let the Energy Debate Begin!”  But, as we saw during the “Energy Forum” of the spring and summer of 2008, there was very little of what, in English, we would call a debate; the presentations were a series of monologues. So our question is this: Do you have the sense that you are achieving a forum of debate, or is it a forum for people to publish position papers?

DS: Debate is not necessarily a synonym of open discussion. Monologues and position papers directed to an informed public are part of the underground debate that has been simmering for years in Mexico and which periodically emerges to the surface, as today, in a series of new reform proposals for the industry. The new proposals of today are the result of a complex debate that has been ongoing.2DS

3. MEI: Let’s examine some institutional questions. We both recall the “restructuring” of Pemex in 1992, when the single legal entity of Petróleos Mexicanos was broken up into five legal units: four business units and one HQ unit. For the past five or six years we have heard rumors that there are voices in Pemex that want to restore the company to its prior legal structure.

How do you see this?  Did the 1992 reform accomplish its purposes? Has Pemex been a better oil company on account of this five-fold structure?  Would a unitary structure be better?

DS: No, the current idea is not to restore it exactly to its prior structure, but to have one strong upstream division and one strong downstream division as part of a single company, which will be much more autonomous from government and political structures.

The 1992 reform failed miserably, as its objective was to “rationalise assets” and “privatise”, i.e., to divide up the company and divest it in parts. This purpose was not accomplished and I think 1992 (the year of the tragic Guadalajara explosion, which was the excuse for dividing up the company) was the start of a two-decade period in which progressive thinkers began to lose confidence in Pemex and in which Pemex began to lose confidence in itself. Two decades of poor administration of the industry, plus the need to adapt to global industry standards and practices, have brought the industry to a turning point where the purpose of Reform is to make Pemex much more of a real company in a competitive environment.

4MEI4. MEI: Thinking back to the beginnings of NAFTA, one recalls that Pemex convinced the Salinas government to impose a 10% tariff on natural gas imports. This tariff had the collateral effect of discouraging Mexican heavy industry from investing in its own pipeline as anchor customers. In 20 years, there has been no gas transportation pipeline that competes with those of Pemex, nor a single gas storage facility (and excluding CRE’s artificial classification of LNG facilities).

Some industry players and observers in Houston have expressed the wish that Pemex Gas would be broken up into three or four separate business units: processing, marketing and transportation.

How do you see the institutional outlook for PGPB and the market outlook for natural gas? Do you see any likelihood that a transportation line could be financed without having CFE or Pemex as the anchor customers?

DS: Today’s uniquely strange Mexican oil model, by the way, was a product of NAFTA. NAFTA was Mexico’s real oil reform, strengthening the legal monopoly at Pemex, but opening up all major public works gradually to international contractors.

The openings in natural gas came in 1995, just after NAFTA. Everyone, including big industry, thought the natural gas reforms would cause pipelines to sprout up everywhere, but that vision did not foresee the problem of Pemex owning the “molecule”. Pipelines need an anchor, but industry has been slow to demand pipelines and to be that anchor. Industrialists have thought: “Let them first build the pipeline and then I’ll see if I buy the gas”. But things don’t work that way. If gas remains very cheap, thanks to shale imports, then that may stimulate big industry to be an anchor and demand pipelines. This is happening right now in Zacatecas, where Grupo Modelo is acting as an anchor.

PGPB? Well, someone in Pemex will have to sell Pemex’s gas, but I don’t see PGPB being split up. We are seeing a new unusual phenomena in Mexico’s amorphous industry related to gas. When it was seen that LNG purchases would be the solution to “critical alert” gas shortages, it seems that it was the Energy Ministry who told CFE to purchase the boatloads of gas needed by CFE, Pemex and industrialists (Coparmex). PGPB was left out in the cold. I wouldn’t be surprised if we see the Ministry, supported by Coparmex, continuing to coordinate CFE and Pemex and telling both of them how to run the country’s gas system “in the national interest”, which may not be PGPB’s or CFE’s interest.

5MEI5. MEI: In this connection, please tell us your view of the Los Ramones project. As we see it, the current scramble for gas pipeline deliverability speaks badly of a system in which there is no secondary market for pipeline capacity; that is, there were no market signals of how tight the deliverability of the pipeline grid had become. The only signal to Pemex and the government took the form of supply interruptions. Can you see this situation improving anytime soon?

5DSDS: Again, it seems to have been the “top authority” -the Ministry- who defined who was to do what regarding gas import pipelines. CFE got to build the Northwestern Pipeline and Pemex got Los Ramones. I’m not sure who decided to tender the Los Ramones pipeline in two parts, one part being tendered by Gasoductos de Chihuahua (50% Sempra-Ienova, half by TAG, an obscure Pemex affiliate) and the other part by PGPB. The whole Los Ramones project seems to be moving ahead slowly, compared to CFE on the Northwestern Pipeline. I don’t fully understand the logic nor do I know how this whole thing will turn out. The jury is still out.

6. MEI: As we see it, 70% (if not more) of the public narrative is about making Pemex “more efficient,” “less corrupt” and “more transparent.” We don’t hear demands that Pemex prepare itself to be the operator of a field in the U.S. Gulf of Mexico, or in the North Sea or West Africa. Said differently, the public narrative in Mexico seems content to let Pemex remain as a big (if not the only) frog in a small pond. Only a few of us, it seems, want to see the future of Pemex as a global player outside of Mexico.

How do you see this matter?

6DSDS: What I see is that Juan José Suarez Coppel [Pemex’s former director general], George Baker and maybe Emilio Lozoya, too, have had some degree of obsession about Pemex being a global player, whatever that means.

Suarez got bogged down with Repsol, Lozoya has bought a Spanish shipyard (and a bunch of problems) for exactly one euro, while Baker would have Pemex in a transboundary agreement. But nobody else seems very worried about that. There has been no political will for Pemex to be a global player and there’s been no budget for that.

6bDSAlso, the pond at home is not that small and Pemex has been having trouble dealing with it. Refineries don’t get built, Chicontepec and Cantarell are nightmares, gas and gasoline need to be imported. Now, if and only if Pemex now becomes a real company with an independent board and is able to keep and reinvest some of its profits, then the board might just decide to spend some of that money in projects abroad, without trying to act through PMI offshore units.

7. MEI: Let’s talk about Pemex governance for a few minutes. Has the organizational experiment of “professional advisor” on the Pemex corporate board of directors paid off for Pemex and for public oversight?

DS: The professional, independent board members have not done a good job. They are a new level of internal bureaucracy, a new filter (one of a dozen or so) that projects have to pass through. The decisions and actions of the Pemex board(s) are just as opaque as before, rarely revealed to the 118 million stakeholders (sic). One of the problems with the independent board members is that they are political appointments, i.e. not independent.

8. MEI: Some of us have urged a policy by which the President of Mexico restrain himself from getting into the Pemex news cycle, as it conveys the wrong message to markets (namely, that oil in Mexico is always a presidential matter).

A few observers (ourselves among them) have urged a change in policy to give hiring-and-firing authority to the Director General of senior management; as things now stand, the directors general of the four business units, for being presidential appointees, have no allegiance to the corporate director general, who, also, is a presidential appointee. 

How do you see the matter of the role of the President of Mexico in Pemex governance?

DS: Indeed, Pemex has largely been a presidential matter, as that is the way things are structured. This should largely change with the upcoming Reform, as Pemex gets company status and more autonomy vis-à-viz the federal budget.

The Directors General of Pemex Corporate have largely been ineffectual performers, at least in the first 13 years of this century, even though they have been very bright and qualified individuals. I would assume that under the new Reform, the President’s role will diminish and the role of the Director General and the board of directors should be enhanced.

9. MEI:  Let’s talk about the nitrogen project. Some of us recall the occasion, in 1998, at the first Pemex “EXITEP” congress, you asked—presciently, we might add—the director general of Pemex, Adrián Lajous, if the quoted price of US$0.40/Mcf for nitrogen (compared to $3.50/Mcf for natural gas in Houston) included the future cost of stripping the nitrogen from future oil and gas production. Tellingly, the answer was “No, it does not.”

What then happened in the next five years, when José Antonio Ceballos was the DG of PEP, is that the daily output of Cantarell was doubled, to 2 MM b/d, reaching almost 2.2 MM b/d in 2004; then Cantarell production fell sharply, losing more than 1.5 MM b/d in the next five years. Some sources have speculated that Pemex over-worked the field, causing an excessive loss of reservoir pressure.

Meanwhile, in just the past few years, Pemex has had to build an onshore processing facility to strip out the nitrogen from oil and gas production. Have you been able to sort out these related topics?

DS: Of course Pemex overworked the field. That was the plan all along, to monetize the reserves as quickly as possible. There were market and fiscal pressures to do this. There was also a vision, 10 to 15 years ago, that the era of oil (or, at least, “expensive oil”) had ended, so this provoked a rush to get reserves out of the ground. Remember Luis Tellez said in 1999 that oil prices would remain below 10 dollars a barrel for over a decade.

The onshore cryogenic facility you mentioned is way below the capacity required to “clean out” the nitrogen from the vast gas cap in Cantarell. Several other such facilities could be justified and gas from Cantarell could be a bigger part of the solution to Mexico’s gas supply needs. The reason this isn’t happening is because the price of natural gas is so low.

10MEI-DS10. MEI: About the pending energy reform announced by the current administration. It would be wrong to ask you for your opinion about what it will look like; but we do want to ask about your views of the concerns, goals or issues that the energy policy team of the current administration has on its mind. What, in short, are they worried about?

DS: Based on the perception that the President runs the show and that President Enrique Peña Nieto understands little or nothing about oil and about energy policy, then practically the only goal and concern of the President, in promoting this new Reform, is to attract vast amounts of foreign investment into the industry and into the economy.

Indeed, Peña is right in the sense that massive additional investment is needed, if Mexico is to make major headway and have success in shale and deep water, but great expectations have been created in the markets related to this Reform, so may the Virgin save Mexico if it were not to pass.

Practically the only goal and concern of the energy policy team is to pay lip-service to the President and keep his honeymoon bubble from bursting. What actually is to be done about refineries, shale or deep water are relatively secondary matters compared to the messages that the policy team needs to send to the President and to the markets. They are mainly worried about the politics of it all, though the technical matters are, I assume, being discussed by the technical experts on another level.

11. MEI: Finally, do you believe that the CNH has increased public oversight of the upstream? What is the future of the CNH: will it eventually become a true upstream regulator, one that takes charge of public auctions of oil blocks, or will it remain on the sidelines, as a mere advisory appendage to the Energy Ministry?11MEI-DS

DS: I think that the CNH has done a fine job so far, considering its limited size and scope. Going forward, it will need much greater powers and a much greater budget if it is to be a true regulator in a more competitive environment. I don’t think the idea is for it to be an appendage to the Energy Ministry in the future.

INTERVIEW by George Baker

Inquiries: News@Energia.com.

Written by

George Baker

Baker & Associates offers niche-market business and policy intelligence related to Mexico's oil and gas, power and chemical industries. Over 1,000 reports have been issued in the last 20 years. Subject matter expert and publisher George Baker, who directs the firm, has carried out consulting assignments starting in the late 1970s at the height of the Oil Boom in Mexico. He brings bilingual and bicultural skill-sets to understanding and responding to challenges of business and public policy, coupled with a deep familiarity with the history and idiosyncrasies of the Mexican operating environment.

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