CERAWeek 2015: Global oil plenary dialogue

Miguel Matias Galuccio, CEO of YPF, and Emilio Lozoya Austin, CEO of Petróleos Mexicanos (PEMEX), sat down with Daniel Yergin, Vice Chairman of IHS, for the Global Oil Plenary on Tuesday morning to discuss the transformations both companies have been undergoing and the challenges and opportunities they face.

Mr. Lozoya said this period of implementation of Mexico's energy reforms is the most exciting time for PEMEX since its inception. PEMEX is in the process of modernizing itself to maximize its economic value, and changes being made to its corporate structure are transforming it into an "agile" company with a "more businesslike" structure. He also said reforms are on schedule because of the commitment and clear vision of the president of Mexico and the Mexican government.

Mr. Lozoya called the recent partnership with BlackRock and First Reserve in the midstream sector a first large step by PEMEX to bring in "best in class" partners to help limit implementation risk in the reforms, saying this is a symbol of what PEMEX plans for the future. He said the midstream and downstream sectors are providing significant opportunities for outside investors. The major milestones for the next year for PEMEX will be this summer's bid rounds, development of new partnerships, and the establishment of contracts that meet international standards.

Mr. Lozoya identified PEMEX's primary challenge as cash flow stemming from its declining production base, which he expects to turn around later this year. He emphasized that the selection of the right partners for farm-outs and bid rounds is necessary to help maintain existing production and address technical challenges. He said that although Round Zero contracts mostly constituted proven and probable reserves, PEMEX did retain over 20% of the prospective acreage and has separated its exploration director role from production to promote more exploration in the medium to long term.

Mr. Lozoya expects the North American oil and gas market will become more integrated with the addition of new midstream assets and the approval of a petition for the United States and Mexico to engage in swaps for heavy and light oil assets, similar to the current arrangement between the United States and Canada.

Mr. Galuccio discussed the transformation of YPF since he became CEO in 2012. He acknowledged that many were initially skeptical of YPF's plan to recover its self sufficiency and ambitious growth. He said, however, that YPF has shown "outstanding results" through additional investment, increased production, a tripling of the rig count, and improvements in the company's finances. Matias identified technical knowledge and solid project management and leadership as the key drivers of success in oil and gas companies. He specifically considers a culture of technical excellence a "cornerstone of the new DNA of the company." Mr. Galuccio said his people are proud to be a part of the transformation of YPF and the oil and gas industry in Argentina, saying their YPF positions are more than just a paycheck to them. He identified several ways YPF has chosen to drive growth, including improved production at its mature fields through waterfloods, development of unconventional gas resources, and offshore exploration.

Mr. Galuccio said the pricing of gas in Argentina at $7.45/MMBtu and oil at $77/bbl is necessary to smooth out the volatility in oil and gas pricing and provide stability for the development of the oil and gas industry in the country. The fixed price allows base production to grow, he said, calling the policy choice a "pragmatic decision" he supports "100%."

Both men discussed the role of unconventionals in their respective countries, with Argentina as the leading unconventional operator outside the United States and Canada to date. Regarding the Vaca Muerta play, Mr. Galuccio said YPF has focused on improvements in well productivity as well as on reducing the well development costs as keys to developing the play. He said the Vaca Muerta is larger in footprint and depth than both the Bakken and Eagle Ford shales. He said lessons learned from unconventional plays in the United States and the limits on restrictions due to the use of leases will provide advantages to development of the Vaca Muerta. In addition, YPF is working to improve the supply chain and has established a technology center in the area.

Mr. Lozoya said Mexico will pursue unconventional developments in the future, but must first prioritize its offshore and conventional assets because they are more cost competitive. Unconventionals will be a part of the upcoming bid round, but the focus for unconventional development will be to diversify Mexico's reserve base for the future.
Both Mr. Galuccio and and Mr. Lozoya acknowledged the commonalities and strong relationship between their two companies as well as their own friendship. Mr. Galuccio said he considers the energy reform in Mexico to be the most important event in Mexico's oil and gas industry in the last 50 years and envisions a "Latin American transformation" in the oil and gas industry in the near future.

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By Shawn Gallagher April 21, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.