Mexico Market Entry Strategies for Canadian

Oil & Gas Service Companies

A Report Prepared for

the Canadian Embassy in Mexico
and
the Government of Alberta

April 5, 2010

TABLE OF CONTENTS
EXECUTIVE SUMMARY

INTRODUCTION

I. NEW COMPETITIVE ENVIRONMENT IN THE OIL & GAS SERVICE

INDUSTRY IN MEXICO

1.1 Declining Production: Opportunities for AB companies

1.2 Mexican Energy Reform: More Flexibility & Incentives

1.2.1
1.2.2
1.2.3
1.2.4
1.2.5
1.2.6
1.2.7
1.2.8

Corporate governance and reorganization

New Procurement and Contracting Arrangements
Flexible Financial Rules
Autonomous Debt Management
Alignment of Fiscal Incentives
Enhanced Transparency and Accountability
Strengthening of Policy Formulation and Regulation
Pemexs medium and long-term goals

1.3 Albertas Oil & Gas Service Companies in Mexico: Rising Presence
1.3.1
1.3.2
1.3.3
1.3.4
1.3.5

Companies
Subsectors
Start of Operations in Mexico
Location
Exports

9
9
9
9
10
10
10
10
11
11
11
11
12
12

II. MARKET ENTRY STRATEGIES

2.1
2.2
2.3
2.4
2.5
2.6

General Framework
Agents and Representatives / Agents and Distributors
Joint Venture (General)
Joint Venture (Project Specific)
Mexican subsidiary
Subcontracting & Licensing

14
16
18
20
20
21

III. COMMENTS FROM INTERVIEWS

24

APPENDICES

54

Appendix
Appendix
Appendix
Appendix
Appendix
Appendix

55
62
69
71
73
76

A
BCDEF-

Terms and Conditions of the New E&P Contracts

Legal IssuesIncorporation and Import-Export
Questionnaire
List of interviewees
References
Americompass SC

EXECUTIVE SUMMARY
In 2002, Americompass prepared a Study on Market Entry Strategies in Mexicos
Energy Sector for the Government of Alberta. This study prepared for the Embassy
of Canada, Mexico City, and the Government of Alberta updates the original Study,
based on a research of current secondary sources and interviews with key players.
It contains three sections.
In Section I, we analyze the new competitive environment facing companies that
are already present in the Mexican energy sector or that are considering entering.
This environment is defined by three main elements:
o

An ailing oil industry characterized by an observed and expected decline in

production which could fall to 1.8 million barrels per day (MMBD) in 2021,
and by increasing imports of gasoline and other oil-based products.

A new Pemex operating regime derived from changes to the Pemex Law and
to Regulatory Law of Article 27 of the Mexican Constitution in the oil sector,
also known as the Petroleum Law.

A doubling of Pemexs capital expenditure budget resulting in the largest

ever number of Canadian companies over 40, either as equipment
suppliers or as service companies operating directly with Pemex or as
subcontractors. This Report provides information on names, activities,
locations and entry strategies of this group of companies.

Section II is devoted to the analysis of alternative entry strategies and presents

illustrative examples of each mode of entry with information obtained from public
sources.
Section III offers a compilation of valuable insight resulting from interviews on 14
topics, from which we can draw the following conclusions and recommendations:
o

o
o
o
o
o
o
o
o
o
o

Five entry strategies: agents and representatives / agents and distributors,

joint venture (general), joint venture (project specific), Mexican subsidiary,
subcontracting and licensing
Nature of companies: contrast/complementarity between local and Canadian
service companies
Market access best choice: JV with local partner that lacks technology and
subcontracting with large integrated companies
Business expectations: moderate satisfaction with results
Keys to success: high-end technology, ingrained in local culture, knowledge
of Pemex needs, hiring of local personnel
Time horizon for investments: medium-long term
Barriers to entry: regulatory, bureaucratic, cultural, labor, corruption
Impact of energy reform: service companies will be main beneficiaries
Changes with energy reform implementation: more flexible contracting,
lower overheard cost, more direct interaction with Pemexs management
Main challenge ahead: reverse decline in production through technologies
applied in enhanced oil recovery in Chicontepec and deepwater exploration
Profitabity: below expectations in short term, good in medium term

o
o

Lessons from past experience: Expect a shift toward projects directly

controlled by Pemex rather than contracting for integrated project
management
Business conditions: Difficult economic environment expected in 2010
Recommendations: 4 Ps patience, perseverance, presence, pace.

INTRODUCTION
In 2002, Alberta Economic Development retained AmeriCompass S.C., consulting
company dedicated to assisting foreign companies enter the Mexican marketplace,
to evaluate and formulate entry strategies for companies targeting the Mexican
energy sector. The study outlined and analyzed a variety of market entry vehicles
available to Canadian exporters and investors in Mexico. To help the reader in
reaching conclusions as to the most effective vehicles for the varying business types
and models, AmeriCompass interviewed over 20 individuals, companies and foreign
investors active in Mexicos energy sector. These interlocutors were involved in a
cross-section of activitiesincluding executives of small, medium-sized, and large
companies, small equipment and service providers, public officials, and academics.
Those interviewed shared their views, as well as their successes and challenges,
enabling the writers to enriching the study with practical tips and useful insight on
the dos and donts of doing business in Mexicos energy sector.
The Study concluded that a common thread through any of the viable market entry
strategies was the need to budget for costly legal expenses and bureaucratic
delays. Tax issues also needed to be carefully addressed, and understanding
Mexican business culture was a must. According to the Study, these issues tend to
be particularly relevant during the initial phases of market penetration, which may
last up from 1-3 years, during which trial and error will often be the rule rather
than the exception. The Study also highlighted the fact that, if the business proved
successful during these initial phases, to ensure know-how stays in-house and to
guarantee acceptable profit margins, companies should seriously consider
establishing a full-time office, which may be lead by a local or by an expatriate
manager. The biggest challenge for companies was the need for patience and a
commitment. Companies must possess both, as there are many failed examples of
ones who did not.
Since the Study was performed, the Mexican oil sector came to face three main
challenges:
a) Declining production: oil production decreased from 3.4 MMbd in 2004 to 2.8
MMbd in 2008; 37% of total production came from one single offshore field
in 2008; 92% of production came from mature and declining fields.
b) Increasing production costs: production cost rose by nearly 40% from 2000
to 2008. Pemex had a limited access to new technologies through joint
ventures to explore mature fields.
c) Low replacement rate: proved plus probable plus possible reserves (3P)
declined from 58.2 to 43.6 billion barrels of crude oil equivalent in the period
2000 to 2009. In 2008, replacement ratio was 72%, the highest in the last

15 years, but still below long term sustainability. Proven reserves/production

ratio declined from 11.9 years in 2004 to 9.9 years in 20081.
To face these challenges and mitigate their impacts on public finances, in October
2008 Mexico passed a historic energy reform bill. Under the new law, for the first
time, Pemex third-party contracts may include bonuses for early completion and for
the transfer of technology to the State company. To date, contractors have been
waiting for a new model of incentive-based contracts that were made legal by the
reform. The new contracts are expected at some point in 2010.
These and other new circumstances in the Mexican energy sector and public
finances represent modifications in the scene where the Canadian energy
companies have traditionally moved, and offer new opportunities for those wishing
to enter the Mexican marketplace and/or to consolidate the position that they may
already have.
Therefore, it made a lot of business sense to conduct an update of the Study on
Mexico Market Entry Strategies for Canadian Energy companies that reflects such
changes, and assist them with advice on how to approach the new scenario and
how to better face the challenges it poses to foreign investment and trade in the oil
sector in Mexico.
The present update contains three sections. First, we analyze the new competitive
environment as determined by the declining oil reserves and production, the energy
reform of 2008 and the doubling of Pemex capital expenditure budget. This chapter
summarizes the new conditions in which Canadian companies are evolving in
Mexico and the challenges and opportunities that those wishing to enter Mexico will
have to face and/or explore. Secondly, we revised the five entry strategies that are
open to Canadian companies that are exploring Mexico as a place to do business,
including concrete examples of each one of them. Third, we summarize the views
expressed by key players, mostly Mexican and Canadian oil & gas service
companies, who were interviewed for this new Study. This compilation is key to
gain a better understanding, from the perspective of knowledgeable and
experienced people, of the pros and cons as well as the challenges and rewards of
entering the Mexican energy sector for Canadian companies.
Lastly, in the appendixes we present an analysis of the new Pemex contracts and
provide an update of the legal framework that rules the incorporation of a Mexican
company as well as import/export operations.

I. NEW COMPETITIVE ENVIRONMENT IN THE OIL & GAS

SERVICE INDUSTRY IN MEXICO
1.1 Declining Production: Opportunities for Canadian companies
In 2008, Mexico was the sixth largest producer of crude oil in the world, at
3.0 million barrels per day (MMBD), more than 80% from offshore fields, and most
1

CSIS Conference, April 6, 2009, available at

beta.csis.org/files/attachments/CSIS_Conference_6_04_09%20(2).pdf

of it heavy oil. In 2009, production fell for the 7th consecutive year to 2.601 MMBD,
a decline of 15.3% over the previous year. Output peaked in December 2003 at
about 3.5 MMBD. Mexico's production is expected to continue to fall to as much as
2.3 MMBD in 2010. Cantarell - the giant offshore field which accounted for about
two-thirds of the oil Mexico produced at the peak of production in December 2003 fell by 35 percent in November 2009 from the year earlier. New resources are not
being developed apace. The decline in oil production had an estimated cost for
Pemex of US$23.4 billion in revenue and forced the government, which depends on
oil revenue to fund about a third of its budget, to raise taxes to narrow a budget
deficit.

Figure 1

Source: Pemex, Memoria de Labores

The country's proven oil reserves are 14.3 billion barrels. Most analysts believe that
Mexico has much more oil but this oil remains undeveloped because of underinvestment by PEMEX. For instance, PEMEX has only drilled 6 exploratory wells to
date in the deep water on the Mexican side of the Gulf of Mexico, while a robust
industry exists on the American side. Half of Mexico's crude oil is exported,
primarily to the United States. In turn, due to underinvestment in the refining
sector Mexico imports half of its refined oil products, notably gasoline, principally
from the United States; ie Mexican oil exports returned as imported US gasoline.
In order to reverse declining oil production, the 2009 PEMEX investment budget
was US$19.3 billion and is proposed to reach US$20.2 billion for 2010. Almost 85
percent of the budget for 2010 is allocated to the E&P division since it is the most
profitable business line.

Figure 2

Source: Pemex, Memoria de Labores

Mexico has an estimated 14.6 trillion cubic feet (Tcf) of proven natural gas
reserves. Average annual production in 2009 was 6.7 billion cubic feet (Bcf) per
day. Production has been increasing for several years. The country has significant
untapped gas potential, but the investment emphasis of PEMEX has been on oil.
The country is a net importer of natural gas. Imports consist of piped natural gas
from the United States, and liquified natural gas (LNG). Mexico currently has two
LNG import terminals and a third under construction. All feed, or will feed, power
plants.
Given their technological competitive advantage, the major opportunities for
Canadian companies in the oil and gas sector will be in providing drilling and
exploration services to PEMEX. Technologies most in need are shown below:
Table 1
Mexico: Main Technologies in E&P Investment Program
Area
Exploration

Development

Goal

Technologies

Higher probability of
success;

Seismic processing & reprocessing to improve

imaging

Lower finding costs

Wide azimuth shooting for sub-saline structures

Data loaded 3D models including geochemical,

facies, flow units, reservoir geometry,
petrphysics and others

Combined methods to reduce prospect

uncertainty

Extended reach wells

New subsea equipment risers, flowlines,

umbilicals and subsea connections

Subsea high integrity pipeline protection

systems

Optimal development
cost;
Efficient project
execution

Production

Lower production
cost:
Sound environmental
performance

Intelligent completion control & instrumentation

Subsea controls

Subsea separation & injection system

Oil and water monitoring and level detection

Early production systems, e.g. (foalting

production storage and offloading FPSO)

Subsea artificial lift system (gas lift and ESP)

Source: Pemex, Pemex Exploracin y Produccin: An Overview of 2009-2010

Companies from Canada have a strong competitive advantage with respect to both
technology and logistics and they should be very competitive in supplying services
in the following areas:
1) Offshore: PEMEX is most active in offshore, shallow water exploration and
production. Important fields include Cantarell and Ku-Maloob-Zaap. There is
demand for products and services related to inspection and repair, pipeline laying,
and safety products and services. There is also significant demand for marine
services related to offshore oil and gas production - e.g. supply ships, dynamic
positioning vessels and shipyards for new ship construction.
2) Offshore Deepwater: PEMEX does not have any significant deepwater
exploration and production experience, or technologies. Deepwater opportunities
are limited, but are supposed to improve with the incentive-based contracts set up
by the Energy Reform of 2008.
3) Pipelines: PEMEX has an estimated 60,000 km of oil and gas pipelines, of which
3,000 km are offshore and the remainder onshore. All offshore pipelines, and half
of onshore pipelines, fall under the exploration and production portion of PEMEX.
The balance of onshore pipelines correspond roughly half and half to Refining and
Gas/Basic Petrochemicals. Offshore pipelines have an estimated average age of 20
years and onshore pipelines of 35 years. Pipeline accidents are common in Mexico
and PEMEX is under constant pressure to improve pipeline maintenance and repair
practices.
4) Enhanced Oil Recovery (EOR): In light of declining production since 2004, PEMEX
will bring mature and declining wells back into production through access to foreign
technologies for drilling unconventional wells, technologies for secondary and
enhanced oil recovery processes, and technology for monitoring, controlling and
automation of wells and facilities. In 2010, Pemex is expected to drill a total of
2040 wells, mainly at the on-shore Chicontepec field.

1.2 Mexican Energy Reform: More Flexiblity and Incentives

On October 28, 2008 the Mexican Congress passed a bill to amend the existing
regulatory framework of the energy industry in order to strengthen Pemex and
thereby increase Mexicos hydrocarbon reserves and production in a competitive
and efficient manner. The Energy Reform consists of amendments to three federal
laws and statutes (Regulatory statute of Article 27 of the Constitution Concerning
Oil Affairs, Energy Regulatory Commission Act, and Federal Public Administration
Act) as well as the enactment of four new statutes: Law of Petroleos Mexicanos,

Law for the Sustainable Use of Energy, Law for the Use of Renewable Energies and
the Financing of the Energy Transition, and National Hydrocarbon Commission Act.
The energy reform introduced changes in regulation in the following areas:

1.2.1 Corporate Governance and Reorganization

New powers were given to the Board of Directors to determine the

organizational structure of Pemex, propose to the Executive the creation of
subsidiary entities and engage in institutional programming, coordination,
evaluation of activities, debt, acquisitions, leases and services.
Four new independent, professional directors were appointed for a 6 year
term by the Federal Executive and ratified by the Senate.
Seven specialized committees are created to enhance the Boards functions:
(auditing and performance evaluation; strategy and investment;
compensations, acquisitions, leases; construction and services procurement;
environment and sustainable development; transparency and accountability;
technological R&D.)

1.2.2 New Procurement and Contracting Arrangements

A special regime is created tailored to the fundamental activities of the oil & gas
industry, whereby Pemex tendering is subject to its internal regulations and the
provisions issued by its Board of Directors. The general legally established regime
continues for all other activities, with the following clarifications:

Prohibited contracts are those that grant rights to oil production or reserves,
involve the sharing of production or proceeds of sales or grant preferential
rights for the acquisition of oil.
Permitted contracts include fixed schemes of predetermined formulas for
which a certain price is obtained, multi-year price reviews to accommodate
use of advanced technology or price variations of raw materials, additional
compensation when savings are realized as a result of decreased execution
times, Pemex benefits form technology transfers or contractors contributing
to higher profit.

1.2.3 Flexible Financial Rules

As part of its strategic business plan, Pemex will propose every year to the Finance
Ministry and Congress a five-year financial program. A seven year transition period
is established to gain budgetary autonomy whereby Pemex may use its excess
income, approve adjustments to its budget without prior authorization by the
Ministry of Finance when the financial balance goals are met, and simplify the
registration process of its investment program.

1.2.4 Autonomous Debt Management

PIDIREGAS financing is eliminated and substituted by budgetary resources.

Pemex investment expense will no longer be part of public sector financial
balance (more flexible investment ceiling, tied to Pemexs resource
availability).

10

Pemex will be able to issue debt according to the companys priorities and
consistent with the public sectors financing program. Pemex does not
require prior approvals by the Ministry of Finance; only under exceptional
circumstances can transactions be suspended.
Pemex may use the resources accumulated until 2008 in the Stabilization
Fund for Investment in Infrastructure (1 billion USD). This will enable
startup for the construction of new refining capacity, among other projects.
Pemex will be able to issue a special series of securities called Citizen Bonds
acquired by Mexican nationals that do not grant corporate or property rights.
Their yield will reflect Pemexs economic performance, will boost
transparency and accountability in Pemexs operations and finances.

1.2.5 Alignment of Fiscal Incentives

Acknowledging the higher complexity and cost of new fields, fiscal incentives are
aligned as follows:

Chicontepec: 71.5% rate and cost-deduction cap of USD $11/bl, compared

to 74.5% and USD $6.5/bl in general regime;
Deepwaters: 71.5% rate (depending on oil price level) and cost-deduction
cap of USD $16/bl;
Abandoned fields: Minimum additional production requirement is eliminated
to grant more favorable fiscal regime.

1.2.6 Enhanced Transparency and Accountability

A new surveillance and supervision strategy will be based on: Internal Control Body,
Audit and Performance Evaluation Committee, External Auditor and Federal Audit
Agency (Auditora Superior de la Federacin). Pemex shall submit an annual report
to Congress including an explanation and declaration of the main accounting
policies and criteria which shall be disclosed on the Pemex webpage, quarterly
reports to Congress disclosing, by business line and operational area, Pemex
results, based on indicators and parameters acceptable at an international level, as
well as an annual report to the Ministry of Finance with respect to the use of debt.
The corporate commissioner will deliver an annual report to bondholders on the
state of the economic performance of Pemex.

1.2.7 Strengthening of Policy Formulation and Regulation

SENER (Energy Ministry): Pemex will be subject to the energy policy defined
by the Energy Ministry, in terms of reserve replacement and production
rates.
CNH (National Hydrocarbon Commission New upstream regulator): Pemex
will obtain from this Commission a formal opinion for the technical aspects of
its exploration and production projects, and will subject itself to the technical
rules established by it.
CRE (Energy Regulatory Commission Existing downstream regulator): New
authority in regulating prices for first-hand sales, pipeline transportation and
storage for fuel-oil and basic petrochemicals.
National Energy Council: Will establish the National Energy Strategy, with a
15 year horizon, subject to approval by Congress.

11

1.2.8 Pemexs medium and long-term goals may be summarized as:

Maintain crude production platform within 2.7-2.8 mmbd, and seek new
opportunities to increase production to 3.0 mmbd, by 2015.
Maintain natural gas production above 6.0 bcf per day.
Increase reserve-replacement ratios to at least 100% towards 2012.
Re-establish reserve/production ratio to 10 years (after 2012).
Reduce gasoline imports, by investing in conversion of residuals at existing
refineries, as well as in additional refining capacity.
Close maintenance gaps to improve security and facilities integrity.
Reduce environmental liabilities.
Reduce project-execution gaps.

1.3 Canadian Oil & Gas Service Companies in Mexico

At the beginning of 2010, there were around 40 Canadian companies, all from
Alberta, in the oil and gas sector established in Mexico, as shown in Table 2.
1.3.1 Companies. Some of the major players working in Mexico today include:
TransCanada Pipelines, Tarco International, AGAT Labs, Tesco, QMax, Enerflex,
Kudu Pumps, TTS Sense, Ensign and Trinidad Drilling. The largest oil & gas service
company in Alberta, Precision Drilling, used to be one of the most important
contractors of Pemex but its Energy Services and International Drilling division was
sold to Weatherford in 2005.
1.3.2 Subsectors. Companies are operating in the following areas:
1)
2)
3)
4)
5)

Geophysical service & mapping

Drilling and support services
Pipelines
Information Communication Technologies
Oil & Gas Field Machinery & Equiment

Clearly, most companies are in the drilling and support services area. Mexico has
become an important market for Canadian companies expertise in unconventional
drilling, artificial lift and enhanced recovery. It has also gained importance as a
market for oil and gas processing, equipment and fracturing technologies and
services.
1.3.3 Start of Operations in Mexico. Most oil & gas service companies from
Canada have entered the Mexican marketplace in the last 10 years. A first wave of
companies came to Mexico in the middle of the 2000s. During this period, Albertan
companies were able to secure good, long-term contacts with Pemex. Pemex liked
the Canadian oilfield service companies because they tended to be smaller, and the
service they offered was a little more hands-on and personal compared with large
multinational firms. In this period, the rigs heading south were the cream, top of
the line, brand new with the latest technology. Although the Canadian Association
of Oilwell Drilling Contractors (CAODC) has no numbers for the southward
migration, it recognizes that its member firms tend to scour the market in order to
keep their best crews and rigs working: They tend to bring new stuff and best
crews when they head south."

12

A second wave of companies came to Mexico in 2008-2009 as a result of two

push factors: the low price of oil and gas and the high number of idle rigs in
Canada, which made new drilling rig construction uneconomic. In this period,
virtually no rigs were being built in Canada and the U.S. and there was very stiff
competition, so all rig manufacturers in Canada started to look outside for business.
For many firms, going international and in particular to Mexico, became a business
panacea.
On the Mexican side, the pull factors were the reforms to Mexico's hydrocarbon
laws and Pemex's intention to invest US$240 billion on exploration and production
by 2023. As Pemex started to move into deep water to try and shore up
plummeting output, specialized firms lined up for contract work with the state oil
company, particularly seismic research firms.
The latest wave of Canadian companies came as a result of Pemex relaunching the
Chicontepec Project in 2009. Companies with experience in the handling of heavy
oils and enhanced oil recovery technologies offered themselves to help with the
development of the project, now called Tertiary Gulf Oil (Aceite Terciario del Golfo,
ATG) and set up services centers in the area.
1.3.4 Location. Canadian oil & gas service companies have settled mostly in the
states of Veracruz (Poza Rica, Burgos, Tuxpan), Tabasco (Villahermosa, Cd. Del
Carmen) and to a less extent in Tampico (Tamaulipas) and Mexico City.
1.3.5 Exports. Albertan companies exports of boring & sinking machinery were
worth USD$212.8 million in 2009, 188.9% growth over previous year. Mexican
imports of parts for this type of machinery were worth USD$99,2 in 2009, 32%
growth over previous year. These two items were among the top 10 exports of
Canada to Mexico in 2009. Mexico has become one of the three top markets
(together with Russia and India) for machinery, conventional exploration,
production and pipelines from Canada.
Table 2
Canadian Oil & Gas Service Companies in Mexico, 2010
Area/Company
1. Geophysical service &
mapping
1. AGAT Labs
2. Concentra Tek
3. Core Labs
4. ION Geophysical
5. Terra Energy
6. Petroleum Geo Services
2. Drilling and support
services
7.
8.
9.
10.

Blackwatch Energy Services

Calfrac Well Services
CanElson Drilling
Canadian Energy Services

Primary Activity

Start in
Mexico

Location Mexico

Services
Soil, air, water & environmental
2002
analysis and monitoring
2009
Underground scientific studies
Reservoir management services n.a.
3D seismic studies on land
2009
2006
Geosciences services
1996
3D seismic work

Villahermosa, Cd.
del Carmen, Tamp.
Mxico D.F.
Reynosa
n.a.
Mxico D.F.
Tampico

Sales drilling equipment and

services
Hydraulic fracturing services
Drilling and service rigs
Drilling fluids

Poza Rica
Poza Rica, Reynosa
Cd. del Carmen
n.a.

2009
2007
2009
n.a.

13

Alliance
11. C-FER
12. Drillers Technology
13. Enbridge
14. Ensign Energy Services
15. Entech Energy Group
16. Hyduke Energy Services
17. Invensys systems

18. Katch Kan Ltd.

19. Leader Energy Services
20. MI Drilling Fluids
21. Mullen Group
22. Nabors

23. Nexen
24. Oyo Geo Space Canada
25. Pantera Drilling Income
Trust
26. Qmax Solutions South
Mexico
27. Sanjel
28. Saxon Energy Services
29. Savanna Energy Services
Corp.
30. Strata Energy Services
31. Tesco Drilling Innovation
32. Xtreme Coil Drilling
33. Wavefront Technology
Solutions
3. Pipelines
34. TransCanada
35. ShawCor Ltd
4. ITC, Consultancy
36. AspenTech
37. Enerflex Systems Income
Fund
38. VMC
5. Oil & Gas Field
Machinery & Equiment
39. Baroid Surface Solutions
40. Kudu Pumps

n.a.
2004

Engineering services
Drilling services
Energy transportation,
distribution and services

1999

Continued Table 2 (above)

2009
Drilling services
Conventional oil well
2009
stimulation
n.a.
Drilling services
Monitor, control and automation
2001
processes
n.a.
Rig safety systems
Wholly-Owned Subsidiary (Key
2007
Energy Services de Mexico)
Drilling services
Drilling
rig
relocation
oilfield support services
Drilling services

n.a.
and

Upstream
Manufacturing seismic
instruments
Drilling services
Drilling
fluids,
solids
control
management
Drilling services
Drilling services
Drilling
Drilling
Drilling
Drilling

2002

Gas Pipeline construction

Pipe Coating
Software to optimize process
manufacturing
Hydrocarbon production,
engineering and equipment
optimization
Advise MSC Project; Contractor
for new fiscal law Pemex
Manufacturers
Drilling products
Progressive cavity pumps for
heavy oil appl.

Houston
Mxico D.F.

Mxico D.F.
Cd. del Carmen
Poza Rica
Villahermosa, Poza
Rica

Cd. del Carmen

2007
2004

engineering,
and
waste 2000

Well stimulation work

Naucalpan

n.a.

2009

contractor
Services
technology and services
services

Cd. del Carmen

Tampico

Houston
Poza Rica
Reynosa, Poza Rica,
Villahermosa, Cd.
del Carmen, Ver.

2009
Reynosa, Poza Rica
2009
n.a.
2005
2008
2009
1998
2004

n.a.

Poza Rica
Villahermosa
Burgos, Poza Rica
Poza Rica
Poza Rica
Mexico D.F.
San Nicols de los
Garza, Villahermosa

Mxico D.F.

n.a.
n.a.
2003

n.a.
n.a.

n.a.

Cd. del Carmen

14

41. Tarco International

42. Top-Co LP
43. TTS Sense

Enhanced oil recovery

Cementing equipment
Equipment for rigs and vessels

2006
2008
2009

Mxico D.F.
Mxico D.F.
Poza Rica

Source: Own research

II. MARKET ENTRY STRATEGIES

2.1 General Framework
As shown in Figure 3 below, the Energy Reform opens new avenues of business for
Albertan oil & gas service companies that are already positioned in Mexico or are
targeting to do so, and that belong to any of the following categories: equipment
suppliers, specialized technology service providers, subcontractors and/or business
services providers.
Figure 3
Impact of Energy Reform on Entry strategies

Pemex operating regime offers the following benefits:

1. New models of contract. Contracts will be subject to the rules established in the
Pemex Law, its regulations and the directives issued by the Pemex Board of
Directors, rather than to the general government procurement framework
applicable to other public entities. Public bids shall include stages in which
companies will be able to negotiate contract prices. Contracts may include clauses
that will allow amendments in order to include price adjustments as a result of the
application of new technologies, changes in market prices of supplies and
equipment and new information that may increase project efficiencies. Also, price

15

clauses may establish additional compensation when contractors save time in the
performance of the works and as a result of Pemex benefiting from better
technologies or other project efficiencies introduced by the firms.
2. Lower administrative overhead. Once the contracting areas of Pemex adopt
simpler and more objective and transparent procedures for contracting, small and
medium service companies will benefit from a lower administrative overhead.
3. A Governing Board will be responsible for the projects, instead of the works
resident (residente de obra). This will make decisions much less bureaucratic and
allow a better interaction between Pemex and companies to seek ways of making
decision-making about processes more efficient and transparent.
To this date, AB oil & gas service companies have recurred to many different entry
strategies into the Mexican market, as shown in Table 2.
Following is a description of the main avenues of entry into the Mexican
marketplace, together with some relevant examples of companies currently
operating under each one of the schemes.
Table 3
Entry Strategies of Canadian Oil & Gas Service Companies
Area/Company

Entry Strategy/ Name of Mexican

Subsidiary

1. Geophysical service & mapping

AGAT Laboratories
Concentra Tek
Core Labs
ION Geophysical
Terra Energy
Petroleum Geo Services
2. Drilling and support services
Blackwatch Energy Services
Calfrac Well Services
C-FER
CanElson Drilling
Canadian Energy Services Alliance
Drillers Technology
Enbridge
Ensign Energy Services
Entech Energy Group
Invensys systems
Katch Kan Ltd.
Leader Energy Services

Wholly-Owned Subsidiary (AGAT Labs

Mexicana)
Wholly-Owned Subsidiary
Wholly-Owned Subsidiary (Core Lab
Operations)
Agreement with COMESA
Wholly-Owned Subsidiary
Wholly-Owned Subsidiaries
Subcontractor
Wholly-Owned Subsidiary
Representative
JV with Grupo Diavaz (Diavaz CanElson de
Mexico)
JV (Project specific) CICSA
JV with Schlumberger
Wholly-owned subsidiary
Acquired Foxxee Services Holdings Inc., private
Houston-based company that owns and
operates six drilling rigs in Mexico, with 2
subcontracts with Weatherford
JV with Marcos y Asociados and Terra Energy
Wholly-Owned Subsidiary (Invensys Systems
de Mexico)
Agent / Materiales y Equipo Petrolero
Wholly-Owned Subsidiary (Key Energy Services
de Mexico)

16

MI Drilling Fluids
Mullen Group

Wholly-Owned Subsidiary (MI Drilling Fluids de

Mexico)
Interline agreements w/Mexican carriers
Continued Table 3 (above)

Nabors

Wholly-Owned Subsidiaries (Nabors

Perforaciones de Mexico)

Nexen
Nisku-based Hyduke Energy Services
Oyo Geo Space Canada
Pantera Drilling Trust
Qmax Solutions South Mexico
Sanjel
Saxon Energy Services
Savanna Energy Services Corp.

Collaboration agreement with Pemex

Subcontractor Mexican drilling firm
Commercial arrangement
Subcontractor
Wholly-Owned Subsidiary (Qmax Mexico)
JV with Industrial Perforadora de Campeche
Wholly-Owned Subsidiary JV con Schlumberger
Subcontractor Halliburton

Strata Energy Services

Wholly-Owned Subsidiary (Strata Energy

Services de Mxico)

Tesco Drilling Innovation

Wholly-Owned Subsidiary (Tesco Oil Field

Services de Mxico)

Top-Co LP
Xtreme Coil
Wavefront Technology Solutions
3. Pipelines
TransCanada
Shaw Pipe

Distribution Office
Wholly-Owned Subsidiary
Letter of Intent with Pemex
Wholly-Owned Subsidiary
Wholly-Owned Subsidiary (Shaw Mexican
Holdings)

4. Information Communication
Technologies
Aspentech
Enerflex

Wholly-Owned Subsidiary (Aspentech de

Mxico)
Commercial agreement with Mexican
companies

5. Oil & Gas Field Machinery & Equipment

Baroid
Sales office
Kudu Pumps
Distributor
Tarco International
Wholly-Owned Subsidiary Pemex contractor
TTS Sense
Wholly-Owned Subsidiary Sales office
Source: Own research

2.2 Agents, Representatives and Distributors

For purposes of this report, agents are defined as representatives who primarily
rely on commissions for compensation, but who receive a retainer as well and who
have as their primary responsibility developing business and servicing clients. This
category appeals primarily to equipment manufacturers who cannot afford the cost
to set up an independent marketing organization and who require near-term cash
flow.
Equipment suppliers will often rely on agents, but agents are not commonly used in
the service sector because services are not easily exported without a local base.
Agents usually receive commissions and/or success fees only but occasionally will

17

receive a monthly retainer. The most common alternative to an agent is

establishing an independent marketing company, but this can be expensive and
takes time to achieve results.
The results from using agents have been mixed. Finding a good agent dedicated
to building your business can be a challenge. Although finding one with the right
business connections can be achieved, many agents are spread too thin
representing various lines and applicationsand thus are unable to give enough
attention to marketing a particular product. Others may not have sufficient
technical knowledge to effectively sell or service the product.
The financial relationship with agents should also be carefully managed, as cases of
agents failing to pay debts or committing illegal acts have been reported. The
criticism most often heard is that the agent has too many diverse interests, and the
agent not always understands the product and therefore cannot effectively market
it. Thus, some of the most important criteria in selecting an agent are: technical
knowledge and capability, marketing and sales ability and reputation and
relationships with target customer base.
In some industries, having a national presence is essential. In Mexicos oil & gas
sector, however, this may or may not be relevant. Most PEMEX subsidiaries and
operations tend to procure from the local field offices (which may be diffuse) more
than headquarters. For instance, most of PEMEX Exploration & Production (PEP)
procurement is done out of the five regional offices. However, large, integrated
projects are more likely procured from headquarters in Mexico City, and
relationships within PEMEX tend to be built top down. Therefore, having an agent
with a presence or at least relationships in not only Mexico City but also each of
these offices may be advantageous. Another option is employing a field agent in a
particular targeted region, such as Villahermosa, Ciudad del Carmen, or Burgos,
and employing more of a marketing agent in Mexico City.
In any event, companies should avoid relying too heavily on the ability of the agent
to single-handedly develop business. Agents/representatives can act as facilitators
but cannot drive the business. The agent/representative must be managed and
international sales support must be provided from corporate or regional
headquarters. At some point, it is important for Canadian company officials to
interface with the Mexican client.
An agent, representative or distributor can assist the supplier develop the market,
prepare public and private bids, gather project intelligence, build relationships, and
increase brand recognition among PEMEX officials and contractors.
Unlike distributors, who actually buy and resell equipment and merchandise and
may keep inventory, agents and representatives only facilitate the sale. As such,
commissions for agents and representatives tend to be relatively lower than the
profit margins of distributors for a similar product. Moreover, Mexican distributors
usually seek exclusivity for a specified sales territory and generally represent the
manufacturer in many aspects of sales and servicing in that territory. The
exclusivity, therefore, is in return for the substantial capital investment that may be
required in handling and selling equipment. On the other hand, manufacturers
representatives and independent agents will often work in conjunction with the
suppliers in-house business development and sales team.

18

To achieve the best results, companies should carefully screen potential agent
candidates. Ask the candidate for client references and interview some of them. In
addition, consider retaining a reputable firm to conduct a confidential evaluation,
and watch for any potential conflict of interest. The concept of a conflict of interest
in Mexico can be sometimes loosely interpreted. Terms of the agreement are also
important, and Mexican law varies significantly from Canadian law. As such,
Canadian companies are advised to seek the assistance of local counsel before
entering into binding agreements in Mexico.
Former PEMEX employees could be considered for the role of an agent or
representative, but they should be checked out independently of the
recommendation from PEMEX or a third party. Indeed, it is common in Mexico to
recommend friends who may not have the necessary expertise for the task at hand.
Table 4
Example of Company entering the Mexican Oil Market through a Distributor
An Edmonton-based company that specializes in providing equipment used in the cementing
of wells has more than doubled revenue in three years, thanks to international expansion.
Top-Co does nothing but design, manufacture and distribution of casing cement equipment.
Were specialists. There is only a handful of companies that do this in the world and we
dont want to move outside our niche, says a well-traveled Gerald McLaughlan, president
and CEO, who spends at least half of his time outside Canada. Youve got to go where the
business is. McLaughlan says. Being international has been the key to Top-Cos success.
Now active in 62 countries worldwide and working with the Canadian Trade Commissioner
Service in several of them, Top-Co has expanded by consistently being an innovator and
enhancing its product lines into technology-intensive applications for horizontal and
directional drilling and heavy oil. The company has been designing and manufacturing float
and mechanical cementing products since 1963. It has 275 employees working from a
165,000-square-foot facility in Edmonton and a 25,000-square-foot plant in Weatherford,
Texas. It is opening a third facility, in the Persian Gulf, in 2010. Top-Co has distribution and
customer support centers in Edmonton, Calgary, Houston and Weatherford, as well as
Mexico, Russia, Azerbaijan and the United Arab Emirates. Independent sales agents and
distributors are in more than 40 countries. Virtually all design, manufacturing and testing of
its products is performed in-house using electronic design media and three-dimensional
modeling before release, so the company is not relying on sub-contractors, who can create
delays and lead to loss of quality control. This vertically integrated structure provides
maximum flexibility. Speed is critical in this time-sensitive industry. McLaughlan says 99%, if
not 100%, of the time Top-Co ships out domestic orders within 24 hours of receiving a
customer request. In addition, its $3-million computerized flow-loop test facility enables the
company to test new products and conduct failure analysis before they go to the field, or to
conduct failure analysis on problematic equipment. There is nothing like it in the industry,
and its sitting here in little old Edmonton, says McLaughlan.
Based on Lynda Harrison, Albertan companys extensive reach provides recession
protection, New Technology Magazine, December 1, 2009

2.3 Joint Venture (General)

Partnering with a local Mexican company can be a very desirable market entry
strategy. The advantages include:
o
o

Political clout
The sharing of expensive administrative costs

19

o
o
o
o
o

Earlier cash flow and market penetration

The knowledge of doing business in Mexico: permitting, labor, PEMEX
relations and community relations
Instant name recognition
A statement that the foreign company is committed to the market
Cultural sensitivity

Issues to be addressed include:

o
o
o
o
o
o
o
o
o
o
o

Due diligence
Reputation and goodwill
Financial standing
Assets (including existing contracts and clients)
Obligations and liabilities (contracts, debts, employees)
Legal structure
Access to books and full disclosure (presumably the local partner will be
responsible for day-to-day administration)
Finding a suitable local partner
Complementary value added skills
Ensuring the Mexican partner can pay his share of the costs
Scope of partnership and exclusivity (whether you or your partner will be
able to conduct other business not related to the partnership independent of
each other)
Agree on goals and objectives (important to ensure you are on the same
page as your potential partner, especially considering that cultural and
linguistic barriers to communication often cloud this understanding)
Corporate governance and dispute resolution

Potential local partners have particular strength in undertaking the local EPC
(Exploration Project Components) of large infrastructure projects, as well as
consulting and project development. However, because of an inability to meet
financial guarantees, in most cases they cannot take the EPC lead. Indeed,
PEMEXs monopoly on the rights to explore, produce and refine hydrocarbons and
primary petrochemicals, and the States virtual monopoly in electric power
generation and gas transportation has retarded the development of local private
sector know-how in these essential areas. Accordingly, the foreign partner will be
expected to provide the technology and the local partner is typically chosen more
on reputation and ability to sell and manage.
Table 5
Example of a JV between a Canadian and a Mexican
Oil&Gas Service Company
On October 5, 2009 Randy Hawkings, President of CanElson Drilling Inc. announced today
that CanElson had formed a Mexican joint venture company, Diavaz CanElson de Mexico, S.A.
de C.V., with D&S Petroleum, S.A. de C.V., a wholly owned subsidiary of Grupo Diavaz, S.A.
de C.V. ("Grupo Diavaz"). Both companies have a 50% interest in the Mexican joint venture
company. The business of the joint venture company will be the purchase and/or
construction, and operation of, one or more drilling rigs in Mexico and the ownership and
operation of service rigs.

20

In January 2010, CanElson Drilling Inc. announced that its Mexican joint venture company,
Diavaz CanElson de Mexico, S.A. de C.V. ("DCM"), had started up service rig operations for
DS Servicios Petroleros, S.A. de C.V. ("DS"). The service rig will continue working for DS in
the Ebano-Panuco-Cacalilao fields of Misantla-Tampico basin of Mexico. This service rig was
contributed by DCM's Mexican partner as a non-cash contribution. CanElson is currently
retrofitting its recently acquired service rig for deployment to Mexico under similar terms.
CanElson will provide the management and expertise for the service rig operations of DCM.
As previously announced, CanElson has a 50% ownership interest in DCM, with D&S
Petroleum Services, S.A. de C.V. (a wholly owned subsidiary of Grupo Diavaz, S.A. de C.V.)
holding the other 50% ownership interest. The business of DCM is the purchase and
operation of drilling and service rigs in Mexico. "With the commencement of service rig
operations in Mexico, CanElson will look to capitalize on further opportunities in Mexico
through its interest in DCM as well as its growth platforms in Canada and the United States",
stated Randy Hawkings, President of CanElson.
Sources: http://www.marketwire.com/mw/rel_ca_print.jsp?id=1100453&lang=E1
http://www.highbeam.com/doc/1G1-209031456.html

2.4 Project Joint Venture with a Mexican Company

The mechanics or project-specific joint ventures are similar to local partnering. This
strategy is usually attractive for large single projects involving public bids.
Examples include power plants, gas distribution or cross-country pipelines, and
other infrastructure development.
Foreign investors usually seek joint venture partners with expertise focused on the
specific project with no commitment to collaborate on future projects. As such, an
advantage of project-specific joint ventures is that the foreign investor may check
out its new partner before considering more encompassing collaboration.
From a legal perspective, it is important to include a detailed joint venture or
shareholders agreement that addresses key issues such as decision-making, voting
and veto rights, and dispute resolution. Because the joint venture company will be
Mexican and therefore Mexican company law will govern, the joint venture
agreement must also be subject to Mexican law, otherwise there is a risk it will be
unenforceable in Mexico.

2.5 Mexican Subsidiary

Companies may also opt for a subsidiary (greenfield or through acquisition) or open
a subsidiary sales office. Going it alone is attractive especially to large corporations
with a sufficient start-up budget, international name-recognition, a long-term view,
and patience. The advantages of this strategy are that it:
o
o
o
o
o

Eliminates the need for agents or representatives

Puts the company directly in contact with the Mexican client
Shows corporate commitment to the market
Preserves corporate culture and helps ensure action taken is consistent with
corporate objectives interests
Facilitates integration of services with home office

Disadvantages are that it:

21

o
o
o
o
o

Usually requires more patience before profits can be achieved (3+ years is
not unusual in Mexico)
May require expatriates, which is expensive
Takes more time to build a network of contacts and learn how to do business
under local conditions
May make access to senior decision-makers (especially in government) more
difficult until the company is considered to be a serious player
May make access to market intelligence more difficult.

Acquiring as opposed to establishing a Mexican subsidiary provides for more

immediate results. Once the transition to new management is complete, the home
office can rely more heavily on local staff while overseeing operations from Canada
with occasional travel.
Table 6
Example of a Canadian Oil & Gas Service Company
with Wholly-Owned Subsidiary in Mexico
In July 2007, Calfrac Well Services Ltd. through its wholly owned subsidiary, Calfrac de
Mexico S.A. de C.V., was awarded a three-year contract with Pemex Exploracin y Produccin
for the provision of hydraulic fracturing services in the Burgos field of northern Mexico. The
Burgos field borders the United States along the Rio Grande River, running from Laredo
through McAllen, Texas. Calfrac plans to set up a district base in Reynosa, Mexico. Equipment
required to fulfill the contractual commitments will be supplied from Calfrac's existing North
American operating fleet and fracturing operations are anticipated to commence early in the
fourth quarter of this year. Over the term of the contract, estimated gross revenue is
expected to be approximately US$75 million, including subcontracted services. Calfrac
believes that entry into the Mexican well service market provides an exciting opportunity for
the company to expand in a major international fracturing market, which has substantial
potential for future growth. Entry into this market is a continuation of Calfrac's strategy of
diversifying geographically into new markets that are not dependent on natural gas drilling in
the United States and Canadian markets. The Company's fracturing activity in the
Chicontepec region increased significantly from the second quarter of 2009 due to the
deployment of a second fracturing spread and the impact of a full quarter of operations
offsetting a decline in fracturing activity in the Burgos field. The Company also deployed six
cementing units from Canada into Mexico during the third quarter and early in the fourth
quarter and commenced cementing operations in Chicontepec in mid- September. Calfrac's
common shares are publicly traded on the Toronto Stock Exchange under the trading symbol
"CFW". Calfrac provides specialized oilfield services to exploration and production companies
designed to increase the production of hydrocarbons from wells drilled throughout western
Canada, the United States, Mexico and western Siberia in Russia.
Sources: http://www.rigzone.com/NEWS/article.asp?a_id=47917,
http://www.istockanalyst.com/article/viewiStockNews/articleid/3609019

2.6 Subcontracting & Licensing

There may also be occasions when a Canadian energy company prefers to enter the
Mexican market by subcontracting a local firm to carry out certain aspects of a
larger project or by licensing know-how, technology or other intellectual property to
the Mexican counterpart. The advantage of licensing and subcontracting
agreements is that they allow the foreign company to generate significant profits
while minimizing in-country risk.

22

Subcontracting is particularly common among lead bidders on large infrastructure

projects such as IPPs (Independent Power Producers), drilling contracts, integrated
service contracts, and productive infrastructure projects in general. Before agreeing
to subcontract Mexican content for a bid situation, however, one must closely
review the tender conditions to ensure subcontracting is allowed. In many bids,
PEMEX or CFE will expressly prohibit bidders from subcontracting, instead requiring
that all work be done by either the lead bidder or a bidding consortium.
Licensing, on the other hand, may be applicable not only to bid situations (e.g.,
when a bidder requires a specific technology such as computer software or other
intellectual property) but also for local manufacturing. Sometimes an equipment
manufacturer may wish to establish a permanent, on-the-ground presence in
Mexico but prefers not to run the risk of starting up a manufacturing facility in a
foreign jurisdiction. In this case, the Canadian manufacturer may choose to license
specific technology and know-how (patents, trademarks, patented molds, design
and manufacturing processes, etc.). This can be done through transfer of
technology and license agreements, whereby the licensee pays the licensor a
royalty equal to a certain percentage of sales of product produced by the licensors
technology, as well as technical assistance agreements and service contracts.
Table 7
Example of a Subcontract Venture between a Drilling Firm
and a U.S. Multinational
At the end of 2009, Savanna entered into a contract with a large U.S. based, multi-service
provider to deploy four existing rigs from its Canadian/U.S. fleet into the Chicontepec region
in central eastern Mexico. The rigs are contracted to work at a utilization rate of 100% for an
initial term of 18 months, with an extension option. The rigs to be supplied under this
agreement are mid-depth telescoping double drilling rigs, representing the core conventional
platform within Savanna. The rigs will require minor modifications to allow them to work
effectively in the Chicontepec region, such modifications and additional equipment expected
to total less than $6 Million. The rigs are expected to be operational in Mexico by midAugust, 2009. All costs relating to mobilization of the rigs into Mexico from the U.S./Mexico
border will be borne by the operator. Similarly, demobilization of the rigs, if any, will result in
delivery of the rigs to the U.S. as well. Given Savanna's intention to expand both its U.S. and
international operations, this flexibility will be advantageous. This represents the first
expansion of Savanna's drilling operations beyond Canada and the United States, however it
is anticipated by the Company that we will continue to expand our international presence
moving forward.
Of the four rigs that are mobilizing to Mexico, two will be relocated from the current U.S.
fleet, and two will be delivered from the previously announced four rig new-build program.
With the execution of this contract, Savanna now operates four rigs in Mexico, 14 in the U.S.,
87 in Canada, and will be accepting delivery of two additional new-builds by Q3, 2009,
resulting in a total fleet of 107 drilling rigs. Savanna is a leading North American contract
drilling and oilfield services company providing a broad range of drilling, well servicing and
related services with a focus on fit for purpose technologies for key drilling markets and
industry-leading aboriginal relationships.
Source: http://www.tradingmarkets.com/.site/news/Stock%20News/2399752/

Table 8
Example of a Canadian Subcontracting Venture to an Integrated Service
Company in Chicontepec

23

In February 2009 Xtreme Coil Drilling Corp. announced the expansion of existing operations
in Mexico, following execution of a new drilling contract with a Weatherford International
subsidiary. This new commitment in Mexico required two XTC 400 drilling rigs to operate in
the Chicontepec oil development project near Poza Rica. Since mid 2008, Xtreme Coil
initiated the company's first international project in Mexico with six newly built COTDTM
drilling rigs. The company has now established a fully staffed Mexico office as an operational
base near Poza Rica. Its drilling operations personnel have achieved significant success by
recording a very high rate of rig productive time at approximately 95 percent. In September
2009, Xtreme Coil's wholly owned subsidiary, Xtreme Coil Drilling Mxico, S.A. de C.V.,
entered into eight new long term day rate contracts for Coil Over Top Drive ("COTDTM")
drilling rigs with Weatherford. The long term contracts cover a term of 18 months of 100
percent utilization at day rates substantially similar to expiring contracts and include options
for three six month extension periods. Xtreme Coil now has all ten rigs in Mxico contracted
into the 2011 fiscal year. Under these contracts, the ten drilling rigs in Mexico will continue to
operate in Chicontepec.
Based on Xtreme Coil Inks Contract with Weatherford: Adds 2 Rigs in Mexico, March 2,
2009, available at www.rigzone.com/news/article.asp?a_id=73555

Table 9
Example of AB Sales Operation linked to a Service
Contract with an Integrated Multinational
In January 2010, BlackWatch announced that it had finalized a drilling services contract with
a major international energy services company in connection with the Company's previously
announced acquisition of six drilling rigs in Mexico. The acquired rigs are three diesel-electric
triples and three "super single" style rigs, with maximum depth capacities ranging from
3,500 metres to 4,500 metres. The super single rigs are newly commissioned, state of the
art, flexible and capable of operating in deeper applications. The triples have a mixture of
self-moving, top drive and pipe handling systems. The drilling services contract is pursuant
to the customer's integrated project management contract with Pemex.
Source: http://www.marketwire.com/mw/rel_ca_print.jsp?id=1102970&lang=E1

24

III. COMMENTS FROM INTERVIEWS

This section summarizes the information collected through the face-to-face and
telephone interviews. The presentation follows the order of the Questionnaire that
was applied to representatives of the following entities: consultancy group (1), law
firm (1), Canadian utility (1) and local and foreign oil and gas service companies
(14). Each point includes general comments and the highlights of the interviews. To
preserve confidentiality, the names of interviewees are presented with the following
acronyms: Consultant (C), Law Firm (LF), Local Service Company (LSC), Canadian
Service Company (CSC), American Service Company (ASC), European Oil Service
Company (ESC).
The main benefit of this section lies on the selection and compilation of statements
from interviewees. Its richness derives not only of the wide range and diversity of
opinions that result from the many perspectives covered by the various people
interviewed, but also from the fact that most of the opinions appear as they were
expressed. The editing work was kept to a minimum in order to reproduce (to the
extent possible considering the obligatory translation process) statements with all
their conversational nuances.
1. Is there another entry strategy to the energy market in Mexico you
would add to the list above?
With no exceptions, companies interviewed considered that there are five possible
entry strategies into Mexico: agent, local partner, go-it-alone-, JV and
subcontracting.
Some companies opt for one of the strategies: We have used local partnering
only. (LSC) Others prefer to combine strategies: We actually have two of those.
We have a direct business relationship with Mexican companies and we also
subcontract. (CSC)
The strategy to be adopted depends on the type of activity. Integrated service
companies require a presence but equipment suppliers can start by having a person
in Mexico to make contacts and take the first steps with Pemex. As companies
grow, they would have to have a sporadic presence and eventually set up shop
here. However to set up shop I do not think that by flying in a bunch of expats you
can do the work. People in Mexico are more capable to do the business in a directed
fashion. (CSC)
Mexican companies with experience in dealing with Canadian partners have worked
well with them under the scheme of an associated agent who performs as the
Canadian companys local people, either on a single project or as a JV. This is
particularly helpful to open doors in Pemex for Canadian companies to present their
technologies, have them tested and eventually arrange the contracting. (LSC) A
representative can present a project to Pemex. Pemex can argue that it might be
better to integrate several services in a single contract. Then you can operate more
efficiently and have a strategic advantage. You can get that contract and administer
the subcontractors. Otherwise, if you wait until the bid comes out, you do not get
that benefit. (LF)
The main disadvantage of an agent is the lack of control over the institutional face
that this person has with Pemex or over what he does with Pemex. Canadian

25

companies are subject to the laws on Foreign Corrupt Practices and sometimes
agents have an interest because they are paid based on a commission on a project
and they can take commitments that create problems for companies. It could be
that the foreign company is happy because it got the contract but then finds out
that the agent promised to pay 10% to people in Pemex. Agent schemes are good
whenever there is a good monitoring and communication and very clear directions
on limits that the company is willing to accept with regard to corruption and other
issues. (LF)
Foreign companies often mistakenly think that by going alone and winning a bid
with Pemex, they have succeeded. It is only then that the real work starts,
because Pemex demands a lot of presence and you need someone to deal with
problems such as when Pemex decides to cancel with anticipated payments.
Canadian companies can not have their main partners or executives in Mexico one
or two weeks per month. They should be here all the time as well as in the field.
(LSC)
The main advantage of a JV is that you can share the expenses and mitigate the
amount of capital that has to be invested, but the downside is that you run the risk
of staying tied to a partner for the entire duration of the contract. For small
companies that have equipment but do not have a large capital or the people that
can come down and run it, a JV can work well. If each side has something to
provide during the entire life of the contract it can make sense. Subcontracting
works particularly well for companies in the area of construction of pipelines
because you only need subcontractors during the construction phase; after
construction, the operation becomes very small and it is something you can easily
maintain in your own operations. Any company that can make a subcontract is in
their best interest to do that. (CU) The best way to start operations is to set up a
subsidiary in Mexico for fiscal reasons and because, according to Mexican Laws, all
the risks that are taken in Mexico are limited to the Mexican company and are not
extended to the foreign partner company. The disadvantage of this type of entry is
the cost implied of having a company in Mexico and the administrative overhead
implied in having to pay taxes and comply with local regulations. (LF)
The main advantage of subcontracting is that companies that opt for it do not have
to go through all the learning curve of how to do business with Pemex. Typically
they are contractors who have worked for the integrated service company in other
parts of the world. However, the disadvantage is that the subcontractor suffers the
same result as the main contractor. The schemes are set up in such a way that I
pay the subcontractor as long as Pemex pays me. If the subcontractor works well,
but another 14 do not and Pemex does not pay, the contractor will suffer the
consequences. There is also the possibility that, due to bad works of other
contractors, the reputation of a company is damaged. Companies that subcontract
do not have control of the project as a whole. The main risk is that payment is
subject to the work of others, something one can not control. But in general,
subcontracting has more advantages than disadvantages. (LF)
The bottom line is that, no matter what entry strategy a company chooses, its
success will be determined by how good its technology is. The company that has
the most competitive technology will be the most successful. Precision Drilling
proved it. (LSC)

26

There will be good opportunities for all types of entrants mainly in deepwater, in
Chicontepec and in mature fields since Pemex is going to become an administrator
of small, medium and mature fields. Canada has many small fields that yield
between 50 and 200 barrels and the companies that exploit them can come and
adapt their technologies to the local formations. In Canada they drill six months
and stop drilling six months. During the six months that they do not drill at home
they can come to work here, earn and save cash flow to have money for the time
when production starts again in Canada. (ASC) Canadian companies will have
more opportunities because Pemex needs to increase its production and will be able
to grant blocks to contractors and they will have the opportunity of bringing all
kinds of companies, and it is likely that they will put several companies to work
together with a few rigs each. There will be good opportunities not only of working
with Pemex but with the largest contractors. (LF)
One of the interviewees made a very important point, applicable no matter what
entry strategy a company decides to take, related to the need to know the local
culture: Any start-up of a business in Latin America needs to consider the cultural
issue. Canadians need to understand that there is a fundamental difference
between the business model of the oil industry in Canada and the one that exists in
Mexico. In Canada, oil is produced by private companies guided by a profitability
principle. In Mexico, as in other Latin American countries, national oil companies
are closely linked to political, economic and social changes in each country; they
exist not only to produce energy and provide efficient services, but to respond to
social needs. Foreign business models should be adapted to the local environment.
(CSC)
2. Could you please describe your business under one of the following
categories? Consultants; service companies and subcontractors;
integrated service companies; engineering and construction
companies; equipment suppliers; exploration and production
companies; utility service; other.
The main attributes of Mexican oil service companies are:
a) High degree of diversification. Mexican companies started in the drilling business
and diversified into other areas of the industry, mainly, into the manufacturing of
equipment. Swecomex does engineering and construction, supplies equipment and
does E&P. Today it is mainly a drilling company but its origin is the manufacturing of
equipment and drilling platforms. We are in charge of detail engineering for PEMEX
plants and platforms. We also manufacture and install the pipelines. (LSC) We are
an integrated service company, subcontractors, an E&P service company and utility
service provider (natural gas). (LSC)
b) Deep knowledge of the bidding process with Pemex. We provide services to
PEMEX as CSM (Contrato de Servicios Mltiples). (LSC) We entered into Mexico as
a shareholder of PEMEX under the new scheme of the Multiple Service Contracts.
(ESC) AB companies already established in Mexico have sought associations with
Mexican companies because they recognized the value of experience and
knowledge of the market of their Mexican counterparts. Canadians saw in us many
years of experience in the market which gave us good chance of entering the
Mexican market in the next three years, which is the duration of the contract. By
forming a JV with a well-recognized Mexican company, the Canadian company was

27

able to overcome the two main entry barriers into Mexico: distance and the type of
contracts applied in Mexico, which are very complex. (LSC)
c) Experience in the marketplace. Mexican counterparts offer themselves to do
many things, all the way from knowing what door should be tapped to present a
bid, which is very complicated to overcoming day-to-day difficulties. People do not
know how to write a bid correctly. Pemex has its own language. You have to write
the bidding papers in a certain way. We are very good at writing bids and this helps
to not being disqualified due to a certain technicality or a certain notary
requirement or a simple matter. Pemex has very complex and bureaucratic
questionnaires. Foreign companies do not understand them and look for an agent
that has done many bids like us, because we present one every week. We have 2-3
people that do only that. We have heard of clients that [] are going to be
cancelled beforehand, and the client calls us to see what can be done in order for
Pemex not to cancel the contract. What we do is go and have a chat with them,
understand why they are planning to cancel, understand their needs, open options,
and negotiate an exit strategy. (LSC)
In contrast, most AB companies already established in Mexico are usually
specialized in one area of the industry, either on the side of drilling services or on
the manufacturing of equipment. Our boss has always wanted that the company
be in sales, not services, and sell only the equipment in which we specialize.
(CSC) We are a manufacturer of oil drilling equipment and we provide service and
support to that equipment. (CSC)
With the exception of integrated companies that have been in Mexico for a decade
or so, the new arrivals are generally unfamiliar with Pemex bidding processes:
They told me that we would have a meeting with the engineers in Villahermosa. I
was ready. But they told me that I had to fill in a questionnaire, mail it, and wait. I
came with the mentality of getting the job done right away. But here things are
different. (CSC) In the past, companies from AB preferred to stay away. Now they
are taking a wait & see attitude. They are interested and many of them are playing
a gaming of positioning themselves in the Mexican marketplace. They consider that
they should be here, understand what is happening and wait until the real thing
occurs. A significant increase in the number of companies coming may occur in the
next six months because by then we will have the new models of contract. (LF)

3. How long has your company worked in Mexico?

Most Mexican oil service companies have been in the industry for a long time.
Almost 30 years. (C) We have been in the industry for 50 years. We started as
South West Engineering when it opened its plant in Guadalajara to provide services
to the Mazatlan refinery. PEMEX is our client since then. (LSC) We are in the
business since the 70s. We started as a diving company and then grew with the
development of Cantarell and the Sonda de Campeche. (LSC) We started with
project financing 15 years ago. Now we mainly do business development. (LSC)
In contrast, the first AB service companies came to Mexico in the beginning of the
90s. TC had two pipelines that we built in the 90s. One was Mayacn, 700 km in
the Yucatn peninsula, and El Bajo with 200 km. They sold those two assets to Gaz
de France when TC merged with Nova because they needed to sell some of their

28

international assets in order to consolidate the two companies. This merge was the
largest in Canadian history at the time. When things got better for the company
financially, they came back into Mexico in 2005 with the Tamazunchale pipeline.
(CU)
Latest AB service companies that arrived to Mexico have been here from a year and
a half (CSC) to almost a decade (CSC). Together with the large integrated
companies, these small ones drill two-thirds of Pemex's wells and conduct nearly all
of the seismic work needed to locate oil reservoirs.
4. Please describe your market strategy and mention if it was the
correct one.
Successful entry strategies were described as follows:
- Go directly to clients, without agents not intermediaries. (LSC)
- We deal directly with Pemex. We do not have an agent or anyone that helps us
with invoicing. We do it all ourselves. It was tough in the beginning. (CSC)
- We participated in CSM bidding with local partnership and consider the approach
very successful. (LSC)
- We have a commercial relationship with a company from Calgary. We work jointly
very well but we do not have anything signed nor have any mutual commitment.
We buy them equipments. They did not even open a representative office in Mexico.
When Pemex also wants to buy these equipments we have acted as intermediaries,
as front-end, but we do not have a representation or exclusivity contract or
anything. (LSC)
- The contract we signed the first time was not attractive from the standpoint of
profitability but it was our way of starting to work with Pemex. The value that the
company gave to it was the chance to learn how to work in Mexico. (ESC)
- We have had a go it alone (greenfields) strategy that has worked for us. Our
company does not like JV because they find it complicated, it dilutes your revenues
and increases the administration significantly. But this is something only a big
company can do. In the case of a smaller company, I would strongly recommend
that they have a local partner, a representative that works with them. (CU)
- At the beginning we did not target Mexico with a specific business development
strategy. We were targeted by our customers who are international companies who
want to expand their business with Pemex when they expanded their contracting
from us in Canada to build equipment. We considered Mexico once we realized that
we needed to service that client locally. As we became more familiar with the
market, as the market was growing, the decision was made to become a Mexican
company in order to grow with the market. We decided to set up a wholly-owned
subsidiary. (CSC)
- We do not use agents. We set up shop. We put in the time and the money to have
the facilities in order to work. I think our strategy was the correct one. We have
not changed it since we started operating here. The only thing is that we got
bigger. (CSC)
Successful entry strategies have evolved overtime:
- First we had small contracts, then larger contracts, then an alliance with a
foreign company. This route has been imposed on us because there has not been
any other way. (LSC)

29

- In a first stage, we entered the Mexican market alone. Then we left the country
and reentered in 2005 in association with a legal firm that helped us set up the
Mexican subsidiary, took care of taxes, etc. (CSC)
- Before we had small isolated contracts and now we have bigger contracts of
integral services where we act as general contractors. Now Pemex integrates five
to ten contracts in a single contract, deals with a sole supplier and we are free to
look for best practices and best prices. Once we pass the filter of the bid we are
authorized to subcontract whatever we want. There is no other way in Mexico at the
moment. (ASC)
- Canadians initially started going directly to PEMEX but they got desperate
because of the long wait times. They then recurred to the large integrated
companies who did in fact responded quickly but with bad and low payments. Now
they are saying that they want again to go direct to Pemex. The problem is that
there is a price to pay for the time to reach Pemex under the new contracts and
that is what they are seeing right now. (LSC)
Determinant factors of successful entry strategies include:
1) Good understanding of Pemex needs. We need to adapt to the needs of the
client (Pemex), rather than being committed to a specific strategy. (C) We have
grown according to the market and to the extent that our client (PEMEX) has
allowed us to. (ASC) In the beginning Pemex did everything. Then it released
some activities little by little and left more activities to be done by private
companies. We are constantly moving in a territory which belongs to Mexican
oilmen. We act according to what the client allows us to do and with the limits he
imposes. (LSC) Pemex is difficult, it is a challenge, it is one of the hardest
companies I have ever done business with anywhere in the world. There are a lot of
reasons for why it is how it is and it is not going to change. We have to adapt and
be flexible. Pemex does not adapt. You do not get paid for 9-10 months. This is how
it is. You have to give them 100% alignment, not 95%. When we do that, things
happen very good. (CSC)
2) Technology. We have an alliance with an AB company that emerged from the
need of a service that we had to give. We did not have that experience so we
looked for a strategic partner who knew this field well. We found a Canadian drilling
company. The alliance was set up by us to gain experience and develop capabilities.
They did the JV to partner with a company with a large experience in Mexico. At the
same time, we shared risks with regard to investments and in bidding for
contracts. (LSC)
3) Hiring of local personnel. Our success may be attributed to our technologies
together with the recourse to local personnel trained to use them correctly. We have
500 people working in Latin America and almost 100% Latin personnel. In each
country we set up teams with local personnel. We have come to Mexico to transfer
technologies and train Mexican people to use them efficiently. This explains our
success and our very important growth in the last three years. (CSC)
Some entry strategies are being avoided because of local regulation. Such is the
case of joint bidding: According to the Contract Law (Ley Mercantil) the risk is
borne at 100% by all of the participants in a joint association. If I have 10% of the
contract I am responsible for 100% of the contract. That is a concept that we never
use. Either we make a JV and bear 100% of the risk, or we subcontract. (LSC)

30

Medium-sized foreign service companies are also avoiding subcontracting for two
main reasons: (1) delay in payments. They do not pay until 30 days after they get
paid. If you need cash you are in trouble because you are eight months behind. Our
company has sometimes being paid 200 days later. We are negotiating with them to
get payment within 60 days; and (2) idle capacity. We are a fill-in so that might
mean that we are working 50% of the time because they might have similar
equipment to us and they might use us to fill-in. (CSC)
Some companies who took incorrect routes had to change strategy along the way:
We started worst than zero because the agent that we used to have left a very bad
image of our company. But a year a half ago, I was not neither prepared nor ready
to set up an office. What we did was the correct way. First we had to set up the
foundations, establish what we had to do. (CSC)
Success is not recognized locally. We have been working with PEMEX for 36 years
and we never finish to understand them. It is very difficult. Congress and the
Secretariats always take a very defensive posture. They continue to look at the
private sector as an enemy, as if we were invading their territory. For Pemex people
it is very difficult to recognize the achievements of a company. When something
goes well it is due to Pemex, and when things go wrong it is the contractors fault.
(LSC)
No matter what entry strategy a company takes, it must respond to Pemex current
needs. The main problem now is to terminate the well which is what interests
Pemex. In Chicontepec, 800 wells were drilled in 2009, of which 400 have not been
terminated and are not producing. Each one is producing 80 barrels. In Canada
they have artificial systems and in Chicontepec all the wells need artificial liftings.
(LSC)
Any entry strategy should be flexible and patient. The amount of effort and time to
keep the business running is 120%. That is where a lot of Canadian companies will
fail. They might win a contract but their sustainability record is not very good,
because they do not understand, they do not get paid, [] mostly they do not
address Pemexs needs. We spent a lot of time understanding how to do business
with Pemex. (CSC)

31

5. Has business met your expectations? Exceeded expectations? Not

met expectations? Why?
Companies expressing that business has exceeded expectations are the exception.
PEMEX never stops paying, even for works not included in the contract through
agreements. The only thing that one should not be is a bad supplier. Under the new
regulations Pemex is going to pay for the technology testing, which before were not
paid for. A company that brings in a new technology will be paid for testing it. If the
tests do not result, the company will be paid at minimum cost to cover the tests
and if it passes the test and gives results according to expectations, Pemex will sign
a contract. The other important change is that there are adjustments to prices
based on the market. (ASC)
Most of the comments about the extent to which business has met expectations are
equally divided between the affirmative and the negative.
The responses on the Yes side say that it is mainly because of good business
planning. Typically we do a lot of analysis before we bid on a pipeline; the
Tamazunchale pipeline has been very positive. It has met and slightly exceeded our
expectations in terms of revenue. We are very happy with that asset. (CU) We
always felt that it was a very good market, very attractive.(CSC) In the rest of the
world nobody gives a car for free, you first pay for it and then you receive the
vehicle. But here, because of the needs of the market and how things work out,
everything is different. We have adapted and achieved our goals. It has costed us a
lot of work. We have swum against the current but this is normal in every company.
And we have learnt and have good results. (CSC)
The responses on the No side have various explanations. PEMEX is not very flexible
in processing changes to existing contracts. (LSC) The policy of our company is to
never meet expectations. (LSC) The new scheme has not given our company new
businesses, partly because multiple service contracts are not an investment, they
are merely a list of prices. The expectations in terms of profitability at the start of
the business were not good. [] Although our expectations were met, they were
not that ambitious. (ESC)
Those companies that are not satisfied with results so far are making adjustments
and are now slightly more optimistic. The business has not met our expectations
because of our own problems. Initially we planned to develop our business as a
subcontractor but you can not grow the business with that. All we can do is to
maintain what we have. So we took a more direct approach and increased our
staffing levels of direct employment in Mexico by Mexicans. I am optimistic that this
will improve the results. We have just undertaken it three weeks ago. (CSC)
Business is slow right now. Ask me a year from now and I will say we are ahead of
expectations. We are going to have good activity in 2010 and 2011. What was most
helpful was to make a presentation to Pemex about the problems that exist in
reservoir formation, what the limitations there are, how things are being done now,
with a high level of confidence and technical capability. They listened very carefully
and plan to implement some of our suggestions on enhanced recovery. (CSC)
Among the secrets for success the following were cited by interviewees:
Understand how Pemex works with the professional staff and be very aware of how
the union operates. If you do not consider them, they will just shut you down and
can make life extremely difficult. You need to understand why Pemex was formed

32

and live and abide by that, not come across as being a threat or challenge as to
how Pemex operates. We want to fine tune it and make it better. We can live within
the current mandate and how it is now. We can live and operate within the current
statutes quite easily. But we have learnt them and it took us a long time. We made
mistakes but we learnt from them. (CSC)
6. To what do you attribute your companys success in Mexico?
An interviewee summarized the keys to success referring to the four Ps: presence,
patience, perseverance and pesos. (CU) Other described keys to success as
follows:
Presence: Hard work, constant presence in the market. (C) Companies may
ensure success by way of a permanent presence. (LSC) The fact that we have a
constant presence here makes a huge difference in terms of hearing about things in
a timely fashion, knowing about changes to the projects, being appraised about
what is happening in the energy sector. A local presence is extremely important for
all these aspects. (CU)
Personnel: The question of people is also very important. You have to have people
who know how the situation is, so that when there is a problem they know who and
where to go to fix it. Somebody you can trust. (LSC) The most difficult part was to
get the proper people, people who we could trust. My most important asset right
now is my people. I always give the chance to my workers of teaching me. It would
be useless to hire an A+ engineer from Mexico City and send him to Poza Rica or
viceversa. (CSC) We hire the most Mexicans we can. We have an executive team
with my three other partners and three staff. Six of us make decisions that drive
our company in Mexico. We rely on our staffs team of lawyers, accountants,
taxation, import and export people. They have a tremendous amount of knowledge
that helps us to succeed. If we tried to do it ourselves we would fail. We can not
comprehend how it is done. We rely on them and it has worked. (CSC) I do not
think a small company can come and do it on its own. That has not changed with
the energy reform. You still need a local presence. You need to find good contacts
and have certain amount of knowledge about how the culture works because there
are people who are not legitimate. AB needs to bear in mind that they need to be
selective in who they choose. They have to get someone they trust. And they have
to commit to spend a certain amount of time here to understand how the culture
works here. If they do not have to rely too much on their local partner, they can get
off track sometime. I always recommend for the small company to have a certain
amount of independence and not rely entirely on the local partner. (CU)
Perseverance and patience: You must be perseverant and tenacious because you
will probably go through very difficult times. It is very difficult to plan for growth.
Since all contracts are through public bids, the market share that one may have
may be totally different from the one that has the following year depending on the
bids and results. (LSC) The issue with Canadian companies is that they do not
understand international business whether it is Mexico, Colombia, anywhere; it is
different. You have to be patient and you have to adapt to the local culture. It takes
two to three years to get the respect and earn the right to win business here.
(CSC)
Technology: We provide what we believe is best technology, but we are not a
manufacturer. We pick the best products that we feel will work. We are not red

33

(Halliburton) or blue (Schlumberger). They have specific products that they want to
sell. It might not be the best fit, it is what they have. We take a different approach.
We look at what is best for the reservoir and what is best for the formation, and
then we pick the best technology. The technology is not ours. We are an enabler.
We know how to make complimentary technologies work together. (CSC) I
strongly recommend that people do not come under a technology contract because
it is not a good idea. You bring it in, it is tested for six months and then it is taken
out, then it is assessed and then if it is good it goes to bid and your innovation
becomes public even though it has a patent. We spent a lot of time learning that.
We went down that path and we tried it because that is what we were told by
Pemex Corporativo. We had technologies and patents that gave us an advantage. It
was very painful and we lost $300,000 dollars going with that approach. (CSC)
Interaction with client: One does not notice the division between who is from
Pemex and who is from our company. Both interact and are closely linked. If
something hurts Pemex, it also hurts us. Many companies make the mistake of
coming, making business, but they do not interact with Pemex. There are not
responsible partners. One should be a responsible partner. (ASC) We are more
worried about them than about us in some ways. If they do well, they will probably
want to continue working with us in future projects. But that is because of the way
we have treated them. (CSC) Our key to success was to join Pemex in the
baptism of fire of the Multiple Service Contracts. (ESC) It is always good to have a
good relationship with the operator, because he can turn the business upside down.
If you do not have a good relationship with the operator, and you need workers at
such and such time and in such and such place, the operator will send them before
or later, or will send them to a wrong place. Also, if the relationship with the
operator is not good and you need some fluid to be sent, he will send a different
one, etc. Canadians should be in very good terms with the operators, take, have
lunch together. In any type of work, the local people are extremely important. We
started a project to take away the water from the crude. It is a complex process. If
you do not know the characteristics of the crude that you are going to receive, they
send a different quality, the procedure that you have is useless, PEMEX will impose
a penalty and there is going to be a big problem. It is very important to be in touch
and meet the people in the field, even if one is used to deal with the boss and the
one underneath. Canadians have to have Mexican personnel who know about these
things. A company that has not worked in Mexico does not understand this type of
things. (LSC)
Strong contacts backed by professionalism and good information: We have strong
contacts with our clients. But no matter how good your contacts are in Mexico, if
you do not have the professional skills that they need for the projects that are
evolving they are not going to hire you anyway. You have to back your contacts
with a very strong product or service and give them results. Pemex needs to see
results in their projects because they have to answer for them. So to the degree
that you comply with your contractual obligations, that works in your favor for
future projects. We do not ever give them excuses. If we are going to miss a
timeline we let them know and tell them in advance. We are very open and there is
a lot of trust between us and our Mexican client. It is mutual. I do not think that it
is a trust that other energy companies enjoy. (CU) Next week we will take a class
on how to look at the new reform and what it is going to do and how it will impact
us. Four of our employees are going to attend this session and it was developed by
a lawyer that understands how to do business with Pemex. We spend a lot of time
trying to stay ahead of the curve. Now I am very happy where we are. But our

34

approach might not work now because things are changing. But I know the reform,
I know the changes, I know how long it is going to take, I spent hundreds of hours
reading and understanding, I know public works contracts, direct assignments, and
we know what works and does not work. (CSC)
Plan to deal with the issue of local content: All foreign companies will have to find
the right formulas to meet the requirement of local content, through an association
or by means of subcontracting or the search of Mexican suppliers. Even if the
technology is foreign, you can set up a company owned by Mexicans and Canadians
and keep the patents on the technology. It is still unclear how they will implement
the local content provisions. Perhaps in the beginning they are going to start by
asking 35% of local content in the bid, with an emphasis on the transfer of
technology. (LSC) We already manufacture in Mexico. Our content is above 25%.
We assemble. Our intent is to use as much products and services from Mexico as
possible even if there is a premium and we pay a little bit more money. I used that
strategy every time I went to a new country. (CSC)
Long term commitment to Mexico: Business here is not for a year. Work is for 1020-30 years. (ASC) We decided to make Mexico our last business effort. We will
not chase business in other countries. We have no shortage of demand working in
seven or eight countries but we have made a concentrated effort to be in Mexico.
We love the people here. We contribute a lot back. We have a foundation. The
strategy that I have used anywhere is the more you give the more you get. We
bring essential needs. We have a long term plan to do more on the health care side
with immunization shots. My wife is a nurse and she wants to come here and start
some programs. Our intent is to move to Mexico 50-60% of our time. We are not
here to rape and pillage. We are here to help the country, We want to grow
together with Mexico. If we are just here to make money we would fail. In the short
term, we will do OK, but on a sustained basis we will not. We want to be here for
25-30 years. We want this to be a long term sustained business. With that in mind
we operate with a high level of integrity and values. So it is difficult at times. The
work is difficult but the rewards are paying off. (CSC)
And last, but not least, understand the culture: First thing we do is engrain
ourselves and we try to understand the culture. We always make sure that we
understand the culture and we do not offend anybody. In this country, relationship
is first and business is second. Canada is not like that: it is business first and
maybe you have a relationship. People tend to be too aggressive and push too
hard. And when they get a no, they just turn off. So that is why most people try to
go with agents. (CSC)
7. What are the main difficulties (legal, regulatory, bureaucratic, etc.)
faced by your company so far?
For AB oil & gas service companies, the most important difficulty to make business
in Mexico is that they are unable to plan growth and they have to adapt to an
environment full of uncertainties. Other difficulties they see are:
Legal. Bad design of the contract because it does not align the interest of PEMEX
with the interests of the companies. For Pemex the intent is to comply with a
contract, not to produce more. (ESC) Legal requirements in Mexico are onerous
just because there are lots of documents that you have to certify, provide copies of
absolutely everything. The legal burden of doing business here is significant. Also,

35

since we are dealing with are government contracts, you have to deal with changes
of administration, changes of personnel that can change directions of projects.
Those are large burdens. (CU) Companies face a very competitive environment to
get the contracts from Pemex. They need to be aware that in Mexico bidding for a
contract is a very complicated, quasi litigious legal procedure, where very often
lawyers have to be involved. A company will face the need to get environmental
and other kinds of permits and deal with labour isses (collective contracts,
unionized workers, etc.) because in Mexico we do not have a regime of employment
at will. (LF)
Regulatory. Canadians get desperate very quickly because there are changes of
directions and personnel in Pemex. Sometimes we are making progress, they
change the rules and there is nothing we can do. (LSC) PEMEX has its hands tied.
Many times although officials want to do something they can not. Nobody signs
because there is a tremendous fear of the Secretara de la Funcin Pblica. In five
or ten years, this Secretariat can come and ask them why they signed a paper. This
accusation of patrimonial damage is a federal felony and people can go to jail. The
lack of flexibility in contracts is particularly negative during emergencies. What
happened was that in Mexico there was a time when everybody abused because
Pemex officials could do what they wanted, so chains were put everywhere. We
went from a discretionality of 100% to a total lack of mobility. (LSC) We need to
know how to reach Pemex, how can we succeed in a bid, how can they publish a bid
that allows us to win. But they tell me: Bid only for this. Their bids are extremely
complex packages and I can not participate in them. We are being forced to make
an alliance with other companies to be able to participate. (CSC) I do not
understand why you have to be analyzed for every single bid for pages and pages
and books and books of data. They ought to simplify the system and get to the
point where they have qualified suppliers. But sometimes I send in a diagram in
English and because it was not sent in Spanish I lose the bid. It is bizarre. The bids
are so complicated that you end up losing them although you are perfectly capable
of doing the business. They keep saying that the nails have to be four inches long,
galvanized and there needs to be three in each intersection of lumber. That
becomes very cumbersome. (CSC) Before the energy reform of 2008, Pemex
contracts were designed in accordance to the Public Works Law. They were
extremely rigid and not adaptable to the development of an oil field. That was one
of the reasons for the failure of Chicontepec: multiple service contracts seek to drill
wells but not to increase production. Incentive-based contracts will give a new
dynamic to Chicontepec and the results here will be much better in the coming
years. I applaud Pemex new focus of linking contracts to productivity, on payment
based on results. It is a first step to force service companies to take risks, to make
them link the service they provide to productivity. (CSC)
Bureaucratic. The paperwork here is complicated and very slow. There is no one in
charge of anything. You need a signature from everybody. If you do not, you are
basically paralyzed. (CSC) The most important difficulty we have found so far is
registering the company and getting the fiscal issues properly set up. I just
received a note that we owe a penalty for a payment we did a year ago. Registering
the employees with the IMSS has been the most important nightmare. We have
been trying that since a year ago without succeeding. Every time we go they want a
new paper. (CSC) When faced with the bureaucracy and Pemexs way of
operating, Canadians feel that they are not fair and they get mad. But that is the
way Pemex works. They want to rent a Ferrari, they want to drive it but if they
crash it is ones responsability not theirs, that is the Pemex way. But Canadians

36

think it is unfair. If you want fairness, do not come to operate with PEMEX. You are
not going to find fairness. If you look at contracts you will find them abusive
(leoninos), but that is the contract that Pemex is going to sign. If you do not sign
you will not work. That is the way it has worked for 50 years, all its life. (LSC) The
main difficulty is the bureaucratic procedure to get paid for additional works done in
contracts. The one who authorizes and signs the contracts is the residente de obra,
who is generally is a low level official, who does not want to take responsibility.
(LSC) We need to know who we should meet with in PEMEX. My boss, the owner of
the company, wants a meeting with the officials who make the decisions. I have
tried but they do not even answer the phone and the executives even less so. I
have studied the basis on the technical side, but I have been able to reach only the
directors of engineers. I know that they decide in the base but we want all the
package. The Canadian mentality is to work with the whole package. Here things
are very different. (CSC) The invoicing at Pemex is extremely cumbersome. Some
of our invoices need 100 signatures and then there would be a change and the
invoice would be rejected and then you have to go back and get 100 signatures
again. So we have three people that are pretty much dedicated to doing that.
Without the help of our administrative office we would be broke. In Canada what
could be done with someone part time it takes three people here and I have to
spend 100% of my time to make sure that things flow properly mostly to keep our
bank online. We go past our governance because of the 90 days terms and things
like that. (CSC)
Corruption. The way of doing contracts in Mexico is very peculiar; there are still a
lot of obscure things one does not know about. In order to overcome the inertia one
needs to do a lot of things, not necessarily recur to corruption but look for legal
ways to overcome that type of bad ways that PEMEX has of doing things. (LSC)
Many people have gone to Canada to tell my boss that they can get him to PEMEX.
But I have to tell them that we prefer to do it the hard way, from the bottom up. I
know my competitor and if we start to speak about prices, he undercuts me. He
probably has given money in Pemex. To reach Pemex, we have been told to go to
the Internet, fill in the form and wait. But we know that if you know someone or
know how to reach, you do not have to wait. We want to reach the people who take
the decisions but there are a lot of people in the middle who say: you have come
here but if you want for me to allow you in, you have to give me such and such. I
have to answer that we do not do that and that we act as we should. But we have
found that in Mexico nobody cares if the equipment is well or badly installed, only
when there is a problem. Here in Mexico people prefer to look for who is responsible
for what happened instead of fixing the problem. When people face a problem, I tell
them that I will go, but they do not want me to go, they prefer only that I tell them
what to do. In the contacts that I have had with the engineering departments they
say that they are interested in our products, but sometimes they have asked for
absurd certifications. I do not know if it is because of ignorance or if this is a form
of corruption. I have a competitor that wins because he accepts corruption. (CSC)
Labour issues. The big problem in Mexico are the employment contracts because
you have to set up them in such a way that nobody wants to hire people. If you hire
a person for a day and you do not like them, you have to pay them 90 days salary,
and if you dispute, then it goes on. If this happens, then you owe him another day
until there is a judgment and you can end up with a court case. But then you find
out that he is working somewhere else and he is receiving a salary. You hire a
trucker, but then one day a driver decides he is not happy or gets fired or whatever,
he sues the trucking company and we can not work with them anymore. Then you

37

find out that the guy is working for some other company but his boss is responsible
for paying lost wages. If the trucking company does not agree, the problem goes on
for five or six months. Then the trucking company disappears. If the dispute goes
to court, the lawyers have the control and things become irrational. In a lot of cases
nobody knows what the judges are doing since they act behind closed doors. When
there is a ruling you do not know how they came up with that decision. It is behind
closed doors. There is a potential for corruption or for arrangements. (CSC)
Bad planning. Canadians are even more rigid than Americans. They want
everything by the book. They are used to work with clear procedures. They are not
audacious. They do not understand why Pemex can have a very expensive
machinery idle part of the time. But they are going to have to bear this because
Pemex plans things very badly. Sometimes they say: We are going to drill here.
The contract starts and Pemex says: No. we have to stop and drill 10 km from
here. This is extremely costly and happens a lot. It is never clear how things will be
done. Especially now that they are under pressure to extract crude. They have the
studies but they do not know if that is the place where things should be done. New
information arrives and they change the place. The movement of the equipment is
very expensive. And perhaps the drilling is not being done at the appropriate
deepness. All this affects the type of equipment that is used. (LSC)
Security. It is a growing concern. We have tried to mitigate it by trying to be in a
safe building. We train all of our staff in security measures. We send them to boot
camps to instruct them on practical things such as not to take taxis. We look after
our personnel. We think that security will become more of a concern than it is now.
It does not look good right now. We are certainly monitoring it very closely. (CU)
8. What is your perception of the energy reform of 2008 and of the
main changes it will bring to the way Pemex conducts its business?
Most of the interviewees considered that the reform was implemented too little too
late. It was a shallow reform. Changes have been more cosmetic than real. It is a
complex reform but so far it has not opened up any significant opportunities to
energy industry players. So far, there has been only progress in implementing the
bureaucratic parts of the reform, not in the operational aspects. It has been an
exercise in creating new bodies, new programs and new laws but it has not
translated into any significant change in the way in which the industry operates.
(C) It is a badly conceived reform. It looked for efficiency but they multiplied the
levels of approval in Pemex. The corporate layer was increased instead of being
simplified. It is the most important reform since 1938, but not the one we needed.
It has not made Pemex competitive by international standards. The reform per se is
not going to bring about changes. Another reform will be needed. International
companies want a good form of association with Pemex in risk contracts, but it
seems that this is not going to happen. (ESC) They have divided the
responsibilities between the Hydrocarbons Commission, the CRE, etc. but have not
given them the budget to carry out the tasks that they have assigned to do and
that is not going to benefit anyone. There is a terrible lack of planning in some of
the proposals. It will not make a huge difference for Pemex. I do not anticipate that
it is going to solve the problem posed by the decline of Cantarell. I think it is going
to lead to a major financial crisis in Mexico in the very short term. (CU) If you do
not change the people in the structure, you can implement a different contracting
system but all that is mechanics, there is no fundamental change in the way Pemex
conducts its business. (CSC) It is an important change but it is not going to be

38

easy to change the way of thinking of people that all their lives have worked in a
certain way and that now are being told that PEMEX should be more efficient. In
Pemex they are working very hard to eliminate the traditional practice of fighting
with contractors since this reduces production. PEMEX exists to produce and not to
make money through contractors. We would like for Pemex to have a way of
operating which is closer to that of the private sector than to the one of the
parastate sector. (LSC) The reform does nothing to deal with the R&D issue. They
do not have a R&D group so they do not do any R&D. They depend on big
companies to provide innovation and technology. I am not sure that works that
good. (CSC)
An important point was made in reference to the labor issues: The Unions
remained untouched. There are ships that are no longer operating because they do
not have the correct specs, the ship is stuck and the unionized crew that used to
work there is still there and receives a salary. There are petrochemical plants that
have been shut down and the employees that used to work in the plant are still
there. This can not continue. (LSC) One of the top 5% of desired jobs in Mexico is
to work for Pemex because it is a very good job. You are secure, you have good
medical service, your pension, as soon as you leave your job you are paid the
same, your benefits continue until you die and then your wife takes 35%. I would
protect that at all cost. I am not going to let this go without a fight. If the
government decided to let companies come in and book the reserves, there would
be a revolt. (CSC)
On the other hand, a few of the interviewees considered that the reform is a
positive step forward. The reform is a step forward to make Pemex processes more
efficient, to have access to more resources and be able to reach the goal of
increasing reserves and production. This reform will help to a certain extent. If it
does not achieve all, more changes will be needed eventually. (LSC) The creation
of the National Hydrocarbon Commission (CNH) and of the professional advisors
was good because now we will be able to have a regulatory framework for the oil
sector which we did not have before. (ASC) The energy reform is positive in three
aspects: first, Pemex stops being a manager of regulations and becomes a manager
of oil assets based on imaginative schemes, not longer subject to the old Public
Works Law and designed to increase production and efficiency. Under the old
scheme, Pemex existed to generate benefits for the population; now Pemex has the
clear mandate of creating economic value for the company. Secondly, Pemex has
new rules of corporate governance, including the appointment of professional
advisors. Third, it sets up a regulatory agency, the CNH, which will define which
projects will be undertaken and under what conditions, what levels of production,
recovery and replacement of reserves should be achieved, and based on technical
criteria. All contracts that Pemex sign in the future will have to be registered at the
CNH. The agency will verify that contracts meet all the guidelines specified to
exploit a specific field and monitor their implementation. (LF)
Still there was almost unanimity in considering that the reform will be good for
service companies: The reform is good for the Halliburtons and the Schlumbergers
because they are fee for service companies. Their cash model, how they borrow
and how their stock is rated is determined by how they perform services. The
reform fits their business model. That is why those companies do very well in
Mexico. Large integrated service companies will probably do better since they will
have bonuses and contracts will be more flexible. (CSC) The reform may make
things easier for the small service companies that are out in the field. The concept

39

of a bonus is positive for them but I do not think it is enough. (CU) For us the
main advantage of the new bids is the fact that they are multi-year and for different
projects. The new contracts are an opportunity to bring equipments for a longer
period of time depending on the type of contract that is won. Pemex will
subcontract services that it can not provide and will receive a service at the lowest
possible price, with the best technology and in the less possible time. If the
company complies, it will obtain the proper compensation. (LSC) The most
important change is flexibility. Before, it was not possible to bid for blocks. Now this
is allowed and payments will be made in cash. Pemex is slowly becoming an
administrator of small and medium mature fields. (ASC)
By the same token, the reform is considered to be not enough for operators: The
reform is directed to service companies not to operating companies because the law
does not admit the booking of reserves.(LF) I do not see any incentive to
participate. I do not see that a company like Petrobras is going to be interested in
coming to explore in deep waters in Mexico as a service provider because the
reform does not have an incentive to take the risk. Operators will take the risk only
if they are allowed to book the reserves that they find. (LSC) Those who argue
that it was a shallow reform are those that were expecting a regime of concessions
or production sharing. They do not understand how difficult it is to change anything
in Pemex. (LF) Perhaps for companies that are in secondary production, the
reform is good. It is not enough to attract large companies that would make a
difference in the country in terms of increasing production. It is not going to drag
companies into offshore fields, whether they are deep waters or shallow waters. It
is not enough. The constitutional limits determine the way in which a company can
do a business in Mexico; you have to get around these issues in such strange ways
that companies are not interested in doing them. I think it is tragic because when
they brought the multiple service contracts in 2002, they had a meeting to explain
how this was going to work with 2000 people in that conference. Today, when you
get a meeting to explain how the new contracts are going to work, you will get 4050 people. The interest is not there anymore. Nobody believes them and until
something big happens they are not going to be interested. Companies are tired of
waiting. In a sense that is positive because if people are banging in the door waiting
to get in, they will not change anything. We will have to hit a wall before something
happens. (CU) Do not expect the BPs to come here because it does not fit their
business model. There is nothing wrong with that. No one would ever want to come
here if their assets are the reserves they have and what they borrow against. Here
they can not book that asset and it is very difficult for them to get financing for
these projects. Until these changes, I do not see how they are going to be able to
attract companies to come here. I do not see that happening for at least three
years. In Canada the government owns the reserves but allows the companies to
book them. I do not see that ever happening here. There might be some subtle
changes but not enough. The concessions whereby a producing company comes
and works, that is going to take some time. (CSC)
Most importantly, the reform is considered insufficient to reverse the decline of oil
production. The increase of drilling activity in Mexico is the result of two factors:
on the one hand, the lack of activity at home. Companies want to keep crews busy
even if work here is not as lucrative as in AB. But overall the impact is not going to
be huge. You are talking of a production per well of 30 barrels, not of hundreds of
thousands of barrels which is what Mexico needs. You are not going to get that until
you have large companies working on large projects and paying significant
revenues to the government. They will not be able to make up with this program for

40

the decline in Cantarell. That is my biggest concern. Year over year we are seeing
less and less production in oil and now in gas. They are going to have to import
more and more crude, refined products and natural gas. They have to pay for that
and if they do not have the revenues that come from selling the crude because they
are not producing it anymore, they will not have the revenues to import them
either. (CSC)
However, to measure the full impact of the reform, we will have to wait some time.
We will see the real reform when its implementation is done. The law specifies that
contracts will no longer be ruled by the old Public Work scheme and this is very
good for all those contractors that have suffered from it. The new rules on contracts
say that Pemex contracts will contain whatever clauses exist in common law, in the
normal regime of contracts. This means that contracts are no longer part of an
administrative regime, full of regulatory restrictions, and become strictly
commercial contracts. For us this is a major step forward because we have left
behind many tabus or restrictions that we had before. (LF) Another important
change is how E&P payments will be agreed upon. The previous law said that
payment could only be in cash. That is kept. But it said that under no circumstance
could it be related to the results in production. Pemex managed this very
conservatively as a restriction to agree on any type of concession that had to deal
with efficiency. The new law links the results of production to payment. As a
compensation formula, there will be sort of fee per barrel or bonus when a certain
level of production is reached. This is a very important step forward. (LF) They are
all trying to get that piece about how to deal with JV with producing companies but
it is extremely confusing. Since December they have changed it four times. In
January, Pemex was supposed to award contracts based upon production. We have
two contracts that are going that path. We are a month or six weeks from signing
them. They are non-bid, based on our technology, our innovation, how we approach
things. So we do not know. It is too early to tell. (CSC) I do not believe anyone
has understood what is included in the scope of the reform. It is still not
understood. The new Pemex Law says a series of things but they have to transcend
into concrete acts. Before, I used to sign contracts in a certain way and now things
will change I do not know how. The guidelines of last January the 6th are not
enough to design the new contracts because they are not sufficiently clear. And,
besides, the guidelines, there has to be a series of policies dictated by the Board of
Directors and by the professional advisors. Before, the Secretariat of the
Comptroller intervened but now Pemex has to do it internally and it is still unclear
how they should do it. They are just starting to understand the reform. For service
companies, the reform is very good if it is implemented as it is designed. But we
will not know it for sure until we see the contracts. (LSC) I think it allows big
companies to transfer technology but I am not really sure how it is going to be
applied in the end. The old Public Works Law was set up in order to get rid of the
perception that you could make deals that did not work in the best interest of the
state, and now it is not clear if they are not allowing them again. It depends on
how it comes down. The reform has not affected my business so far in any way.
(CSC) If the reform is applied as it has been designed, it will be good. But they are
having to deal with a constitutional controversy and there are several
interpretations of the new regulations already. I consider that the reform is good in
spirit, but its results will depend on factors that have nothing to do with the
extraction of oil. It is a limited reform but it was a step in the right direction. The
problem is to have it implemented as it is designed, and that everybody voices their
opinion. Even adelitas started making rallies. It is a very complex industry. (LSC)
I do not think there is any difference until the new contracts and rules of domestic

41

content are defined. Before, all the downstream was handled in an engineering
department within Pemex that just disappeared a month and a half ago. Now every
operating unit is going to have its engineering area. The changes have been a result
of the hard work of the Secretariat of Energy and the Senate to try to change
things because they have a bad perception about Pemex. But the first ones that do
not want things to change are the Pemex people because they already had a way to
operate. (CSC) The reform is stuck in the implementation phase. Pemex is
currently working on the new contracts. (LSC) The new measures have not landed
yet. In deep waters we will get results in five years or more, even if the most
capable company comes and it is given all the freedoms it wants. (LSC) Right now
we will have like about a third of the impact of the reform. The full impact of the
reform will not be felt until at least three years from now. It is being challenged in
the Supreme Court. It is going to get struck down because it was not well done.
Things did not work out for the PAN party in the last term elections, so they never
got the majority to pass it through. The PRI is not going to vote for it the way it is.
So, I do not see things changing until the next President. (CSC)
Insiders will probably oppose the reform. If you do not get rid of the people that
have the old mindset, even if you implement these new contracts, they are not
going to use them, or they will stop them to the degree possible. Pemex people will
always believe that they will do it themselves. Engineers were brought up in that
environment and you can understand why they feel that way. They are the only
company, they went to Pemex schools probably, they live in this culture, it is part of
their identity and, of course, they see it as a threat. They will say that they can do
it more efficiently or cheaply because they have a very strong connection to that
company. It is almost Japanese in a way. It is a very personal threat to have foreign
companies coming in. (CU)
The problem at the moment is to define who is responsible. SENER or CNH: they
have five contracts pending in Chicontepec with five major companies. Pemex is
trying to write these incentive-based contracts but they are not done yet. These
five companies are supposed to start in April but no contracts are yet signed. We
are negotiating and providing our services to them and getting commitments from
them, but I do not see the contracts being ready for April. Pemex does not know
how to proceed because this is a new animal. It is extremely difficult to move
forward on this. The service companies are at a huge risk. There are five contracts
of two years duration. Two for sure are not going to work. Three will do well. The
one contract that works the best is going to have a 10 year contract so there is
quite a good prize at the end of the day. (CSC)
9. In which ways will the energy reform affect the traditional entry
strategies mentioned above?
Most of the interviewees consider that the energy reform does not have any major
impact on the traditional entry strategies. It does not affect the strategies, they
remain the same. None of the strategies will be affected. (LSC) It will not affect
them, and this in itself is a bad sign. (ESC) It has not opened up new
opportunities for direct foreign investment. It has not allowed foreign companies,
for example, to participate in joint ventures, to share in projects or in the results of
projects. It has not changed contracting or subcontracting so far although it may
make contracting easier and more flexible for some companies when new
performance-based contracts are available and are tendered. But these contracts
have not yet been made public. They have not been awarded, they have not been

42

tendered. So really we can not know if there will be any improvement in contracting
conditions that may make them more attractive for international companies. At this
point, it is not clear that new contracting rules will make contracts more attractive
as it is not clear if they will provide greater legal certainty for companies coming
into Mexico. The contracting process is still an unknown factor. I believe there will
be changes but I am not optimistic that the changes will be very significant. (C)
An important element to bear in mind in terms of timing for the implementation of
the reform is that there will be a lot of opposition and resistance inside PEMEX to
implement the new scheme because the company is used to act as a mere
applicator of regulations, not to act under the pretext that the Secretariat of the
Comptroller will disapprove. Pemex officials were used to have a kind of doberman
watching over; now they will have to be reassured that they will be able to take
prudent business decisions like in any private company. Officials are being told:
starting tomorrow, here is your project and you have to build a business case with
it because that is what the law says and you have to develop a contract. Then you
have to bid it and set the parameters under which you will select the winner, based
not only on lowest prices but on efficiency and many other elements. Since the
process has changed very much, results will take a lot of time. Pemex idea is to
start with the big projects and then begin trickling down to the contracting areas of
Pemex. Pemex area of New Models of Contract has a titanic task ahead of it. They
will have to swim against the current, much as Canadians salmons do. A sign that
Pemex is still afraid to implement the reform and remains undecided is that it was
announced that the new regime will not be applied until the Board of Directors
approves the restructuring of Pemex Exploracin and Produccin. This is weird
because the rules on contracts have already been published in the Official Register.
There needs to be a cultural change inside Pemex. (LF)
The most important change for service companies is that they will be forced to be
part of some integrated package in the service business. In the last year or so,
Pemex has gone away from individual contracting. Things that used to be bought by
themselves are bought through associated services. You would have to find those
integrated services guys. But it is going to be a thing of selling to someone else.
That is really the big change. (CSC) The only real change so far is that companies
that operate with Pemex are starting to get familiar with what they will be able to
do and with the great benefits that the reform will mean for them. Many of the new
contracts say that as soon as the new rules on contracts enter into force,
companies will be able to migrate the contract and make the changes that benefit
both parties. This will benefit many contractors. Also, the new contracts will no
longer contain all the restrictions that used to exist before with regard to
adjustment of prices, agreements on remunerations, anticipated unilateral
termination. The old Law of Public Works had two very rigid schemes: lump sum
and price per unit. The regulation on price per unit was extremely complicated.
Each price per unit had to be justified and it was extremely difficult to adjust a price
because the seller had to demonstrate changes in the cost of financing, indirect
costs, etc., and this was practically impossible. The new regulation has nothing of
this sort. It only sets general parameters to set up the payments: there should be a
formula in order to determine them and it should be internationally acceptable.
(LF)
In some cases, there will also be an increase in local manufacturing. Canadians
pay a lot in taxes so the cost of manufacturing in Canada is among the highest in
the world and there is not a lot of tax benefit for us. It is essential for us to

43

manufacture abroad in order to reduce our costs. We have already become as

efficient as we can here, so the only way to reduce costs is simply facilities
management and labor costs. In fact we already purchased the land. We have not
built the facility yet because it all depends on how we market ourselves locally and
position ourselves for immediate and future sales. We have several opportunities
but in the last two years we have not converted them into actual orders. We have
done a significant investment and taking all the necessary steps to begin increasing
our revenue. Once we can achieve results, the next step will be to start local
manufacturing. (CSC)
In the medium term, some changes are expected. Also, the new regulation is more
flexible with regard to subcontracting and on how a group of companies may be
able to work on a project. The old scheme was extremely rigid. If one company
started the project with another company, it was forced to finish it with it, with no
changes allowed. This caused a lot of problems, for example, when one of the
companies involved went bankrupt. Now this is going to change in order to make it
more flexible. The new scheme could open opportunities for companies from
Alberta whenever there are ongoing projects and the companies involved have
difficulties to continue working on them or can not comply with the terms of the
contract. (LF) We are hoping for a greater private participation in the up and
downstream business. (LSC) The fact that Pemex recognizes explicitly the good
contractors is a 180 degree change. Pemex is saying: if you do a good job for me
you are going to have an economic reward that will make it more interesting.
(LSC) Over time, Pemex will deregulate activities that are not exclusive to the
company such as gas transportation. Until now Pemex does not subcontract, unless
it is in trucks, which is absurd. It is something that PEMEX has not wanted to
release. But it will end up doing it and this will open new business opportunities.
(CU)
Over the long term, the expected changes are: more use of enhanced recovery
offshore and onshore; more demand for alternative fuels and new efficiency
standards, with a strong impact on consumption and the construction of new
refineries; and, most importantly, a revision of the approach toward the lowest
possible price in bids. This became evident after the cases of the refineries of
Madero and Cadereyta. They were a national tragedy. The Koreans built two
turnkey refineries. They put in second class materials and did not finish on time.
Pemex ended up having to invest money to finish and they even countersued but
we lost in the Paris Court and paid US$800 million. The refineries have never
operated efficiently because Pemex got what was least expensive. This has to
change because it becomes very expensive in the long run. (LSC)
10.What are the main challenges ahead in the energy sector?
Practically all interviewees considered that the first and foremost challenge ahead
for Mexico is resolving the production issue. Domestic oil demand will grow and
Pemex will have less to sell outside. Mexico needs to find more reserves to replace
the production that is in decline and because the country itself is growing. Mexico
has to do more production and more exploration. They need to get a little bit
luckier. (CSC) The most important challenge is to stop the decline of production
and reestablish a sustainable production. Pemex will need foreign partnering and it
is still uncertain if the new law will be able to allow it. (ESC) Pemex has not made
any significant discoveries of new wells and needs to do so very badly. I do not
think that incentives are in place for discoveries to be made. So there is a risk that

44

oil production will continue to decline. (C) Remaining a net exporter and meeting
the energy demand with the declining reservoirs of oil are the biggest challenges
ahead. (CSC) The main challenges are to increase production onshore and in deep
waters, make Chicontepec production more efficient, and develop gas fields in
Veracruz. To develop this potential, Pemex has to have freer hands to perform as a
descentralized agency. Its potential is fantastic: before taxes, Pemex is the
company with the largest revenue in Latin America. The problem is the fiscal charge
it has. (CSC)
Another no less important challenge is to reform and restruct Pemex in a more
profound way. I do not think that this is something that will happen in the short
term. It will probably be medium to long term before it happens because I think
there is no political interest in doing more changes. Pemex needs reforms in many
different ways: it needs more refining capacity, to offer its employees more
incentives to achieve better results. I do not think that this will happen very easily if
Pemex remains a government-owned company. (C) The operation of PEMEX
needs not to depend so much on Congress and allow it to start operating as a
private company. (LSC) I do not know how Pemex can adapt to the reform right
now. There is no indication that the reform is coming forward in the assets. The
incentive aspect of the new contracts is only one of about 40 different things, it is
just a small piece of the reform. To change how Pemex does business will be tough.
We have no problem adapting. But for the Pemex administrator group it is
extremely difficult because the resistance to change is high. Pemex people will not
know how to deal with the new reform. (CSC)
No less important is the technological challenge. There is a need to increase the
recovery factor of the wells. Now that factor is around 20-30%. In Canada they
achieve 40-60%. There are many mature fields that have been abandoned and that
have a recovery factor of 10-15%. That is where the opportunities are for service
companies. (LSC) In the short term, there are many small systems in Chicontepec
that could be productive with the proper technology. (LSC) CNH has just signed a
mandate by which by the end of 2011 Mexico is supposed to recover all the gas.
The goal is realistic but it needs that someone does something about it. Nobody
takes it seriously. The recovery of that gas is probable worth $2 billion dollars a
year, not counting all the carbon credits and all the offsets, just in net revenue. If at
the end of 2011 Mexico does not comply, Pemex credit rating will be downgraded.
(CSC) To the degree that you allow the energy sector to evolve more
independently without having to support the country, you will be able to invest in
better technology and bring more experts from abroad. (CU) Mexico lags behind in
terms of the development of national companies with access to state-of-the-art
technologies. The government has not helped them with incentives to look for these
technologies abroad, to bring them, to support them, in order to create a domestic
pool of companies that could compete with foreign companies. In the last 20 years,
the spectrum of services in Mexico has been dominated by international companies.
There are no companies in Mexico that have developed Mexican technologies or
that have bought patents or have made associations to bring technologies into
Mexico and be the front-end of the business. There are some companies in the
drilling, transportation, logisltics areas, but none in the heart of the business where
technologies are. (CSC)
The resources to face these challenges exist: In 2009, in the middle of the
recession, Mexico was the country where there was the highest investment in
drilling worldwide. Rigs stopped operating even in the Middle East and here they

45

kept on working. Mexico is still among the top five countries in the world in terms of
oil resources. In the maps of the Department of Energy, one can see how on the
U.S. there is an enormous amount of red dots marking drilling points, and on the
Mexican side there is practically nothing. This just can not be. The potential that
one can see is impressive. (LSC)
A final mention was made of the need for a fiscal and labor reform. To implement a
fiscal reform is just as important to the energy sector as it is to everything else.
Labor reform is also something Mexico has to look at. Until they start confronting
the unions, the burden that they have to deal with is so heavy that it weighs down
the possibilities of success. The unions are far too powerful. They have to do a lot of
things, organize them in a better fashion in order to see the energy sector
improved. I do not think that they should look at the energy sector on its own
because so much is tied into it. The energy reform is not going to work if we do not
have these other reforms in place. (CU)
11.Was your company expecting to be profitable in the short term, say
one year, or over the longer term, say 2-3 years?
Companies recognize that their Mexican operations either have not been profitable
or have been hardly so in the short term: In our first year of operations, we were
barely profitable. We just covered expenses. Our earnings were all spent. (CSC)
We did not think we would be profitable right away. That did not happen. It took us
about two years to start making some money and it has taken us 10 years to
become reasonably profitable. There is a long tortuous way ahead. It is not
reasonable to expect a quick return. (CSC) The company did not expect to be
profitable in the beginning due to the conditions of the business in which they
entered. The logic thing to do was what the companies not entering the Mexican
market did. (ESC)
The main reason for this lack of short term profitability is mainly Pemex payments
system. Companies that come from AB should mitigate their expectations because
they will not get here a return on their capital as quickly as they would in AB. Most
companies understand that business in Mexico is more complex than in AB. They
should understand that when dealing with Pemex they will face long credit terms
because they pay at 60 or 90 days, which is a long time for a small company to
wait for their money. They need to have good financing in place in order to get to
the point when they have cash flow and start getting returns on their investments.
Some companies have done very well though. (CSC)
Another problem for AB companies is higher overhead costs than in Canada. The
problem is that if companies are not working already in Mexico they will not get in.
It is very difficult to get in. The barriers to entry are too high. Companies come
here, bid and lose money because they do not understand the cost. Our overhead is
considerably higher here, between 7-8% higher than business in Canada. Very few
companies net 8%. They may lose a lot of money. That is a consideration that
many companies should make. (CSC)
For most of companies, short-term profitability may increase going forward due to,
among other factors, multi-year contracts. Before, the contracts were for a year
tied to the federal budget and in that term we had to get returns. Now there are
multi-year contracts and we can program investments with a longer horizon (LSC)
Our current forecast indicates that we will be cash flow positive in 2014. (LSC)

46

Companies with very good niche products will be able to do very well because they
can get their technology cited as spec. Just be sure that the company has all its
patent protections before they come in. Pemex will include in the bid basis that you
have to use that product. (CU)
Another approach to achieve medium term profitability will probably be
diversification. We are not just oil & gas company. We have diversified into wind
power which I think is going to be very important for the future, and shipment by
sea and everything that goes along with that. We will be there for many years. I
see it to be very profitable and also good for Mexico. Within 5-6 months, we will
begin to analyze shipping opportunities. We are in the process of hiring an
individual who does know that market. With his expertise we will create a business
plan in that area. (CSC)
An interviewee summarized this point very well: To succeed in Mexico a Canadian
company needs: (1) To have a proven technology to make Pemexs production
processes more efficient; (2) Long term commitment. There is no place for
compaas golondrinas under the new model of contract. Companies should come
to bet for Mexico, for the growth of the industry, to help Pemex with technologies
that improve the exploitation of oil. (CSC)
12.If you had the benefit of your current experience when you first
started, would your strategy be different than it is now?
A few companies would have definitely changed their strategy: we would have
continued to support our international partner as a subcontractor but we would
have immediately started linking ourselves directly with Pemex. It would have
positioned us for revenues today instead of 5 or 6 months from today which is
critical today because in the last 18-24 months the global market has been terrible.
We desperately need revenues today. Waiting 6 months is just too long. We need to
position ourselves to be a part of the current rise in the market. (CSC) We used
an agent for the first year and a half and it was a failure. He misled us: what he did
and what he told us he was doing were two different things. But we did not have
enough knowledge or understanding of the Mexican market to challenge him and
say otherwise. It costed us a lot of time and money. He did not know how to do
business in Mexico. He may be in the construction area but does not know how to
work with Pemex. The agent did not think that I needed to integrate. He wanted to
be the front person and that is unacceptable. (CSC) We might have put a
Canadian underground a little earlier to run the first year or two keeping in touch
with him. The ideal is to have a presence early because the culture is very different.
In our case there are not a lot of Canadians who speak Spanish. You think you
understood a bunch of words but that is not really what they said. But if you hear it
three different times you start having a better idea. In the beginning you think you
understand because you think they used the right words but they can have different
connotations. But you get better with time and experience. (CSC)
Still, most companies consider that their entry strategy was the correct one: there
has not been any other way to do business outside of the framework of the Public
Works Law. (LSC) It has been useful for the company to say that they entered the
first bid, that they were pioneers, that they are committed with Mexico. In that
sense, they would have done the same. (ESC) In my experience, it is very difficult
to convince Canadians of starting a business because they see risks. But once they
are in, they are very good partners. (LSC) We could not have done things

47

differently because we were restricted by the contracting model imposed by the

Public Works Law. We moved inside the margins that existed and brought the
experience that we had. (CSC)
With the benefit of their experience, some companies would have done some finetuning in their entry strategy: I would have invested less in order to reduce any
negative impact on cash flow. (LSC) I would perhaps seek more automation,
getting as far as possible that I could from labor intensive. (LSC) I would have
entered in a more aggressive manner with regard to the terms and conditions of
contracts. (CSC) There are some things that we did in the first project that we
decided that we are never going to repeat. For example, community support
programs. (CU)
Experience shows that, of all the adjustments to entry strategies, by far the most
important is to plan ahead for the lack of cash flow. Typically when we sign a
contract we do not see money for six months. We are trying to borrow from local
banks against that contract because we can go to US$5 or $6 million of expenses
without any revenue. That is where we want to work more with EDC. (CSC)
13.How do you envision business conditions in the Mexican oil and gas
service sector in the coming years?
There were optimists among interviewees who see good investment and business
conditions in Mexico in the near future: things are going to improve. We can not
continue like this. We have passed the downturn and we are starting to have
growth again. Next 10 months look good. (LSC) PEMEX has an average
investment grade, which is good for a company of such a high risk. (ASC) Many of
the baby boomers who came from the US during the crisis are already going back
or will go back because things are improving in the US. That will give more
opportunities to those of us who decide to stay. (CSC) If Pemex continues with the
investment that was announced to us last year in November, our investment will
triple over the next year in Mexico. But it has to be according to Pemex plan. We
can not make an investment otherwise because in any other way there is not
enough market for us at this time. We currently operate in 23 countries around the
world. Mexico is one the places that offers the best opportunities for us. That has to
do with NAFTA, time zone, and the fact that our cultures are closely linked in terms
of how we conduct business. The attitude of most companies is not of positioning
themselves. I do not think that anybody is taking a wait and see approach. We are
basing all our decisions on what Pemex is telling us. Anyone that wants to do
business in Mexico for the long run, they better make their investments today if
they have not already done so. There is no wait and see at this point. It is either
already done or it is too late. (CSC) Further changes of the legal and fiscal
regimes will come as a result of diminishing reserves and production. This will
encourage companies to make more onshore and offshore investments. (LSC) I
am optimistic about the relationship between AB and Mexico. Very conservatively
speaking, 90% of all equipments in Mexico come from AB. Exports of equipment
from Alberta to Mexico have increased by about 180% in recent years. We estimate
that there are around 30 companies in Mexico. In the last two months, there have
two more companies coming into Mexico and that is after the boom. We are not
going to see a dramatic increase in the number of companies coming into Mexico at
this point because we have very good coverage throughout the sector. It will not
decline but we will not see a great increase. (LSC) Gas prices are starting to go up
again so we will continue to have the combination of push and pull factors through

48

the fall of this year when the drilling for gas starts in AB. Drilling happens in
November and then we will see what happens with the rigs because the prices are
going up. With oil there will continue to be more of a push factor because
production in AB has also fallen significantly so oil producing companies will have
more opportunities here than they would in AB because the reserves are not there
anymore. (CU) Business conditions may not be ideal but that does not mean that
there will not be opportunities. There will be opportunities in different ways and in
different times. (C) There are very good expectations for the oil service business
in Mexico because the country needs to restore a production level of 3 MMBD and
use incentive-based contracts to improve technological support. (CSC)
But on balance, most comments were on the pessimistic side. I think business
conditions in Mexico in the next three years are going to be extremely tough. Rigs
are starting to leave and going to other countries for a lot of reasons: bureaucracy,
lack of coordination, a lot of little things that add up to not making any money.
(CSC) 2010 is going to be difficult because of the economic situation in the U.S.
The years after that are also going to be difficult because of our own internal
situation. I recognize that things are going to be difficult before they start getting
better. (CU) Now they want to increase local content but they have not allowed us
to participate in anything more than as suppliers of services. Domestic content is
limited to labor and some metal mechanics and civil works. (LSC) Things look
complicated because of international competition. There are countries with better
conditions in the oil sector. The worst would be for Pemex to open up without a
strong regulatory agency. The status quo, not doing anything, is going to take us to
an unsustainable situation. The expected result is not for companies to get in, but
to increase production. Pemex invests in E&P a similar amount to what Exxon does
in the whole world. The problem is not lack of budget but lack of management. The
lack of security and reforms will not take us through the good road. (CSC)
Business conditions will not be especially attractive as the energy industry will
continue to be controlled by state-owned monopolies and these monopolies are not
efficient at organizing the industry. They do not respond to market conditions and
are not very competitive in their ways of working. So I am not optimistic about
business conditions in Mexico in the coming years. (C) For more oil & gas services
companies from AB to come to Mexico will depend on the energy reforms and the
other reforms that have to happen. I think that until there is an opening up of the
industry things will continue to stay static. You will not see a huge influx of
anything. The smaller companies may see opportunities. But I do not see how you
can expand these opportunities until there is more momentum. Companies that are
already here will stay to the degree possible unless things get really bad but they
will not grow as fast as they are in Brazil. If they have to choose between Mexico
and Brazil they will take that into account. I would say that things will stay fairly flat
until there is change or something happens in AB that pushes them to come down.
(CU)
14.If you were advising foreign companies wishing to target Mexico,
what would you recommend as a strategy? What would you advise
them in terms of expectations?
Study the needs of the market. Define what is the best entry strategy. It can
change from one kind of business to another. The market will demand different
kinds of works and will provide different kinds of opportunities at different times. So
companies have to study the market and the opportunities. If Pemex and CFE
continue to be state-owned monopolies they will be defining where the

49

opportunities are. Companies will have to watch very carefully the tenders that are
being offered and decide if it is best to enter into them directly or as subcontractors
for the winners of the contracts in order to be competitive. (CSC)
Breaking entry barriers through technological advantages. In Mexico, there are
many opportunities for companies that have their own technological developments.
This is a good way to break the entry barriers. Sometimes companies overlook the
importance of going to Pemex and try to convince them that certain kinds of
services or products are required, because if Pemex can be convinced of a kind of
service or product then it will probably carry out a tender to seek to purchase that
kind of product. It is important not to forget about the possibility of convincing
Pemex of a specific need. A company that does so will be in a good position to do
business. (CSC)
Be present, look for low risk investment, and be ready for the true (required)
opening. (LSC) This is the moment to be present in Mexico, but with low
expectations. The business might be profitable in 10 more years, but that is
another problem. If the company is able to keep its presence, that will be good, but
not because it obtains immediate results. If the companies are small, they must be
very capable. What is more in their interest is to become suppliers of Halliburton
and Schlumberger. (ESC)
Look for a good local partner, somebody who knows the market, with a work
system that is consistent with yours. Some foreigners look for companies that have
influences, but this has a risk. They should look for a good representative that gives
them assurance that things will go O.K. An important topic for foreign companies is
liabilities. To incur in liabilities drives them out of competition. Whenever a local
subsidiary is set up, it should include private agreements by which the partners
agree to exclude them reciprocally from any liabilities in which they could incur.
(LSC) Do not enter alone because three years are going to pass without anything
happens. It is advisable to look for partners who already know the way because
they have already taken it. In the future, companies will be forced to look for
partners. (LSC) I have not looked at a Mexican company yet. I would have to
become more familiar with what is available. Everything there that is modern is
coming from outside of Mexico. The only time I would partner with a Mexican
company would be in the future because Pemex is going to buy from the integrated
companies that are operating in the country. Once there are changes in the way
Mexican companies are operating and they begin purchasing this equipment and
managing it themselves, our company will need a local partnership. If we want to
start local manufacturing we would have to look at capable manufacturing facilities.
I do not rule that out at this stage if we do begin to manufacture in Mexico, which is
something we are seriously looking at, we can partner with a capable manufacturer
there or we can start with a Mexican company. (CSC) AB companies should not
come alone. A Canadian problem is that their products and services are very
expensive and they have little flexibility. Their quality is good but their prices are
high. Some bids with Canadian equipment are lost because of high prices. (LSC)
Listen first. Do not come with a catalogue of products or services. First you have to
listen and then select the product. Companies should work as HP: one selects its
computer the way one wants it to be. You have to listen to the needs of the
consumer. If you are a good person and you listen and you gave the person what
he needed, he is not going to buy from you just for a year, he will buy during 10
years. (ASC)

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Seek good legal advice. Structure the business well in order to avoid legal
contingencies. (LF)
Invest for the medium-long term. They should be very aware that contracts in this
industry in Mexico should be medium or long term. They have to consider if it is
worth investing for five years, see if they can cover their costs once they bid and
win the first contract, and generate a certain cash flow, and if they are willing to
stay and bid for other contracts. They have to define for how long they want to tap
doors, how long they are willing to wait until the doors are opened, and when to
decide that if doors are not open they will return home. (LSC) It would be good to
have an agent or a local partner to serve as an entrance point, someone who
understands the market. Then decide if they want to stay. Accept that in Mexico
you have to invest two years to develop relationships, etc., and see if it works. To
come all of a sudden and think that there is going to be a business in six months
does not work. Canadian companies need to understand that it is a long term
business. For those who decide to stay it is for the long run. To get a contract for a
year has no sense. It is too much of an effort. One must say: I am interested, I
think there are posibilities, I have the technology that is good enough, I enter for
the long run. First, I get to know the environment, I familiarize and, then, I invest
to open a formal office or hire more people. I would not enter by way of bring all
my capacity or invest too much until I understand it. (LSC)
Have a good knowledge of the business culture. If you are not engrained in the
culture, you will not succeed. (CSC) AB companies who are impatient have a
difficult time in Mexico. People who are inclined to study the culture and to study
how this market works at a more fundamental level, and are more patient to adapt
in an easier way to how things work here. Culturally, Mexicans and AB have a lot in
common. Mexicans are very entrepreneurial. AB are interested in getting the work
done so that they can go on a nice vacation, take a week and fly somewhere. They
work hard but like to have their own time. Mexicans work different hours that they
do in AB, longer hours but they also they take to relax. The frustrations that AB
have in doing business in Mexico are more personality-related than cultural. (CU)
When one understands local culture, it is possible to consolidate big business. If
not, we may make business, but we could do much more if we commit ourselves, if
we absorb the local culture. Canadians are used to work for 20-30 different
independent private companies. Here they have to understand that we have a
single monster called Pemex who is the big client. If one does not understand how
that monster works and reasons, and to what times does he respond, it will be very
difficult to make business in Mexico. Pemex is a very demanding client. Be prepared
to respond with large scales of production. Also be prepared to the fact that
business in Mexico is done more through local relationships than through
technologies. I have seen companies that fail but have a good relationship and
therefore are given a second chance. In general, Canadians are much more
conservative and have less knowledge of Latin culture than Americans. (CSC)
Be surrounded by people you can trust. Meet people who know how everything
runs. Have local people because each location is different. Seek advise to solve all
the menial problems (banks and so forth). I was given this job because of my
training as engineer. But I had to learn many things that were not taught in school.
You have to learn the culture and know that Mexico goes by its cultures and one
can not change many things. One must be very patient. My situation is very
different from the one of big companies who come with everything solved.

51

Expectations should be for the long term. Companies should have a very close
assistance for basic things which help and always take you by the hand to learn the
local rules (you can not fire people, you can only invoice certain days, you have to
present your IFE as I.D., your Internet connection may take one week, etc.). The
most insignificant things may alter your work plan. If you are able to get all those
things set up correctly, you will be able to be efficient and work under pressure.
Otherwise you will lose a lot of time. Companies should know beforehand the things
that they will be exposed to. (CSC)
Hire local personnel. The work done by people here is better than Canadians.
Maybe they are not physically as strong but their desire to work is very good and
we really have good workers from Mexico. The problem is that they have no
initiative. They are waiting for instructions and we want leaders, we reward leaders.
We prefer to hire someone that knows English because we can communicate. That
is bad because we might not be giving people who do not speak English a fair
chance. We are leaning toward hiring Spanish speaking people and be led by people
who speak English. Another strategy that we use is that we give people a career,
not a job. (CSC) They should not send a Canadian here because that does not
work. Here only we, Mexicans, know how to run the business. That is what they
have to understand. Then they come here, open a representative office, appoint a
Canadian as director general or send in a Colombian because he speaks Spanish,
but they do not hire people here. They create boards and all the decisions are taken
in Calgary. The local representative does not have any power. If they work this way
they are not going to make any progress. Companies should create local structures
with local people. They should not leave the whole business to the Mexicans
because somebody has to supervise. But the business side should be left to
Mexicans. (LSC)
Build strong relationship with clients and plan for long lead times. They have to
build strong relationships with their clients. They can not use a parachute approach.
They have to get to know their clients personally. They have to be accepting of the
Mexican people and accepting of the local culture. You can not come in and tell
them what to do because it is not received well. You have to be not aggressive. You
have to be more conciliatory and work on a strategy where you explain the benefits
of your product that can bring to their situation. But not by telling them you have
this thing wrong and I can tell you how to do it right. You have to be very sensitive
culturally with the clients in Mexico and recognize that Mexico has a lot of historical
issues that feed into this sensitivity. You should know some Mexican history before
you come in and try to understand the culture. That is very important to succeed.
(LP) The challenge will be how to integrate with Pemex. Pemex is a bureaucracy, it
is an elephant. To be able to navigate through that organization and work with the
decision makers to develop strategies and implement procedures is going to be a
very big challenge; I would say it is the biggest one any small or medium AB
company will have in the world. (CSC)
Study local needs and trends. If they are a competitor, do not come to Mexico. If
they are a complementary business, I would recommend that they come to Mexico
as a partner. We have already done the investment, we can easily grow from where
we are today and we offer a very good opportunity for an international company on
the back of us and we can grow together in unison with Pemex. As to expectations,
it would depend on what the company is offering. I would expect that they would
be able to grow their business at a corporate level. In our sector there is
opportunity depending upon their offering. There is a saturation of oil & gas

52

equipment provider coming from North America. There are certainly a lot of
companies operating there today. It would have to be a service that I perceive
going forward. We need to increase the amount of extraction from the wells in
Chicontepec, so if you can introduce a technology that can provide that to Pemex,
you would have a tremendous growth opportunity. Other than that it would be very
difficult to make a goal. The horizon does not look good. There is a lot of
competition. As a company we continue to see Chicontepec as an opportunity. Our
company has technology and processes that are complementary to Pemex strategy
to increase the extraction. I would seriously recommend to any company that
unless they have a technology that is already in place, that has a useful purpose,
they have to find a company where they complement each other. Otherwise, I think
we are overly saturated in terms of equipment offering. We do not want any more
competition. (CSC) Study the positioning of the large Mexican conglomerates in
the energy sector. Foreign companies that enter the market will have to have local
content and Canadians will be forced to partner. This will become almost a barrier
to entry. (ESC)
Study the good and bad of subcontracting. Our primary contracts are with
integrated service companies. To this date we have not had any single transaction
directly with Pemex. We just set up our registration with Pemex. As an equipment
supplier we sell a piece of equipment to an integrated service provider and then
they are the owner and our reputation rests on how well they manage and maintain
that equipment. That is good and bad. It is good internationally because we can
work with that client as a partner to increase overall performance, but in Mexico it
has not been working for use because those companies are running our equipment
and have had trouble training the local people to run the rigs and have had
problems hiring people to come and run the equipment because there were no
skilled people available. They were all working with the boom here. So, what
happens is you bring the new equipment in with incompetent personnel managing
it, and then that incompetent person trains the new people. So you develop this
culture of incompetence and that is what we have to grow away from. And the only
way to do it is directly link to Pemex: we sell to them, we train them to run the
equipment to our specifications and standards and that will be the secret to
success. (CSC)
Perseverance. Be patient and expect to spend a lot of money before you make
money. Relationships should be first and business second. That is a tough one
because people say that they do that, but they do not take the time and effort. I do
not believe that people will give the level of commitment and dedication required to
be successful here. (CSC) Many companies get desperate because they bid on a
project, get rejected and decide to leave. They have to be persistent. (LF)
There is no one-size-fits-all entry strategy. Companies need to come and see what
their competitors are doing, what has worked and what has not worked and find a
person with whom they can work. Not because someone says that they have a
brother or a friend to do the business, things can work out. That may or may not be
useful to you. You need to understand how work is done, how you bid, how you
present your goods, how you penetrate to high level people. There is no clear
cutting strategy that applies to everybody. Companies coming should know that it is
a tough market with lots of competition. Youve got to make up your mind that it is
going to take some time, youve got to be able to know that you are going to lose
money in the first year or two, but that you have decided to stay because you have
good products, good services and that you have something that Pemex can benefit

53

from. You not just show up there and then all of a sudden make money. I do not
think that it is different from other places, it just is more tedious. Things are pretty
cumbersome too. It is hard to give direct assignments to people, the technology
transfer or some way, because someone jumps and say: See how corrupt they are.
The fact that there have been corrupt people inside Pemex has caused so much
bureaucracy now. I do not know if the change in the energy reform is really a
regression to the old days or a move to get access to technology in a better way. It
can go either way. There is a lot of bureaucracy that makes things go very slow.
(CSC)

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APPENDICES

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1.
Appendix A TERMS AND CONDITIONS OF THE NEW E&P2
Following is a summary of Pemexs E&P current proposed terms and conditions for
new contracts under the Pemex Law. These terms and conditions reflect the general
model; specific parameters for each of the projects and contractual areas will be
determined considering the characteristics of each project and contractual area.

1. Legal framework

Constitution Art. 27 and 134, without changes

Pemex Law & Regulatory Law Art.27: Approved by Congress on November
28, 2008
Regulations for Pemex Law: Issued September 4th , 2009
Board Contracting Provisions: Submitted for approval on November 4th, 2009
Pemexs Tax Regime: Amendments to deepwater and Chicontepec projects.
There are no concessions, no production sharing contracts
All payments are made in cash, not in kind
Award through public bidding
Payment will be related to performance and results

2. Main features

Exploration/appraisal, development and production activities in a contractual

area
Fee per barrel plus partial reimbursement of contractors costs
Payments subject to the projects available income
Award to pre-qualified companies: bid on a fee per barrel
Reserves and production are owned by Mexico

3. Objective
The objective of the new contracts is to obtain services for the exploration,
development and production of hydrocarbon accumulations in the work area. All oil,
gas and any other hydrocarbons to be produced will be owned by PEP on behalf of
the Mexican nation. The contractor will perform the services in exchange for the
remuneration. The contract is not a production sharing contract, nor a concession,
and, therefore, it does not grant any rights to the contractor over the reservoirs
and/or hydrocarbons. Ownership of fixed assets associated with petroleum
operations will be vested with Pemex, who may approve leasing of certain movable
assets and buildings under conditions established in the contract.

Based on a PPT presentation by Pemexs Subdireccin de Nuevos Modelos de Ejecucin,

December, 2009

56

4. Duration and phases

In deepwater and in Chicontepec, the duration of contracts will consider two
phases, as follows:

5. Termination, suspension and extension

Early termination of contracts will be made if no discovery is made during the
exploration phase and/or if conditions make the project unviable or under material
breach. The contractor will have the right to surrender the contract, provided work
commitment has been fulfilled.

57

Suspension will be applicable in cases of force majeure, v.g. hurricanes, riots,

strikes, etc.
Contracts may be extended if deemed convenient by the Parties, prior to the
extinction of the term. The Contract might be revised to consider an extension to
the duration along changes in other contractual conditions such as fees.

6. Work program and budget

For each year, the contractor will prepare and submit to Pemex a work program and
budget for approval. For the first phase, the work program should include the
minimum work commitment. Pemex will review the work program and budget and
propose changes, but will not unreasonably withhold approval where the work
program meets sound technical and economic standards and the budget is in range
of benchmarked costs. Pemex will approve leases over a certain minimum financial
threshold. Presentation, review and approval of work programs and budgets will be
based on pre-established procedures.

7. Payments

8. Service fees
o
o
o
o

Service fees = 0.75 Expenses + Fee per barrel*Q

For each period, the payment will be the minimum between the available
cash flow and the service fees
Payment = min(ACF, 0.75 Expenses + Fee per barrel * Q)
Where:
i. ACF= Contracts available cash flow

58

o
o

ii. Expenses = expenses to be reimbursed (predefined concepts,

under pre-defined accounting and cost verification procedures)
Fee per barrel= covers the non-reimbursable expenditures plus the
margin, includes adjustments for inflation and sliding scale based on
cumulative production
Q = Production, measured at delivery point
Any difference between accrued service fees and payment will be carried
forward without interest, subject to ACF

9. Contracts available cash flow

The contracts available cash flow is the cash amount available for making
payments to the contractor. Pending payments will be carried forward

10.

Fee per barrel adjustment

59

11.

Cash flow

12.

Other financial terms

13.

14.

Carry-forward and debt extinction: If programmed payments exceed the

available income, the excess will be carried forward. Any subsisting carried
forward amounts will extinguish at termination of contract.
Exploration expenses: Contractors exploration expenses will be adjusted by
PPI until reimbursement according to the mechanism established for this
purpose.
Financial interest: No interests will be considered for purposes of service
fees carry-forward.
Currency: All payment will be made in US dollars.
Payments frequency: Monthly.
Taxes: Each party is responsible for corporate income tax an all other
general taxes and duties applicable to its activities.

Operational provisions
Measurement and delivery points: procedures for measurement of
hydrocarbons and delivery points will be established.
Pipelines and infrastructure: they may be constructed by the contractor,
subject to Pemex approval, or by Pemex. If it results economic, facilities in
the area may also be used to handle production from other areas; the
mechanisms to handle such productions follow the principles of a hub.
Technical Standards: the contract will contain references to technical
international standards of operation and specifications.

Governance
Governance mechanisms will be established to align the parties interests
and rule their interaction; therefore, making the projects execution viable.

60

15.

16.

Different levels of groups will be conformed. Members of both parties will

make the relevant decisions of the project.
Steering committee: Strategic. Six members.
Technical sub-committee. Depending on the problems characteristics.
Accounting sub-committee. Four permanent members, supported by
specialists.

Other provisions
Consortia: The contract can be entered into by a company or by a
consortium of companies with a joint venture agreement.
Change of control: Only to companies technical and financially qualified.
Should be approved by Pemex.
Confidentiality: The contract will not be confidential.
Accesses to data: All information created under the contract shall be
Pemexs.
Technology: The contract shall include training, transfer of technology and
R&D provisions.
National content: Provisions will be included in order to maximize local
employment and business opportunities for Mexican companies.
Secondment: For on-the job training and technology transfer purposes.
Arbitration: Under ICC Rules.
Force majeure: Appropriate force majeure provisions.
Applicable law: Mexican laws.

Bidding process
Promotion and feedback process
Pre- qualification of participants considering technical and financial
capabilities

The bid will consist of a discount to a maximum fee per barrel.

61

17.

Preliminary Calendar

62

Appendix B - LEGAL ISSUES INCORPORATION

IMPORT EXPORT
Companies wishing to enter the Mexican market may choose to incorporate a
Mexican subsidiary or joint venture company. If a local office is opened, or if the
buyer expects merchandise to be delivered directly to its plant or warehouse, the
foreign exporter will be confronted with a variety of import requirements under
Mexican law.
a. Start-up Operations
Incorporation
Canadian companies may choose from several types of Mexican companies that
may serve as a vehicle for conducting business in Mexico; namely:
1.
2.
3.
4.
5.

limited liability stock corporation or sociedad anonima;

limited liability company or sociedad de responsabilidad limitada;
general partnership or sociedad en nombre colectivo;
limited partnership or sociedad en comandita simple;
limited partnership with shares or sociedad en comandita por acciones;
and
6. cooperative association or sociedad cooperativa,
Each of these entities may be organized as a variable capital company or sociedad
de capital variable.
The common practice for Canadian investors is to organize their wholly owned
Mexican operation by creating a limited liability stock corporation or sociedad
annima with variable capital (S.A. de C.V.), parallel to a typical closely held
Canadian corporation.
In some instances, however, foreign investorsparticularly U.S. ones able to take
advantage of favorable U.S. tax laws with respect to partnershipschoose to
organize a limited liability company or sociedad de responsabilidad limitada with
variable capital (S. de R.L. de C.V.).
Another manner in which a Canadian company may establish an on-the-ground
presence in Mexico is by establishing a branch office of the Canadian entity in
Mexico. However, a branch does not have a separate legal existence from the
foreign company and therefore may expose it to liability for acts performed by the
branch in Mexico. Accordingly, as a general rule, it is not typically the preferred
vehicle for a foreign firm in Mexico.
Limited Liability Corporations

63

Assuming a S.A. de C.V. is the chosen vehicle, a minimum of two shareholders is

required for the incorporation of the company. The shareholders may be foreigners
or Mexicans and either companies or individuals. If the entity is a wholly owned
subsidiary, the common practice is to appoint the parent company as the majority
shareholder holding 99 percent of the capital stock and another affiliate company or
individual as holder of the remaining 1 percent.
The companys initial subscription must be at least $50,000.00 pesos (US$5,208.33
at an exchange rate of $9.60 pesos to the dollar). The initial capital must be at
least 20 percent subscribed and paid-in, the remainder to be paid as resolved by
the shareholders or the board of directors.
The company may be administered by a single individual or a board of directors
made up of at least two individuals. Foreigners, residents or non-residents of
Mexico may be members of the board. The directors are responsible for acts
inherently within the scope of their authority and for obligations imposed upon
them by law and the Articles of Incorporation.
Steps to incorporate a S.A. de C.V. are as follows:
1. A permit from the Secretariat of Foreign Affairs must be obtained for the use
of the corporate name. Three names are provided to the Secretariat in
order of preference, and the name is authorized on that basis. If all the
three choices are taken, a new list must be submitted.
The name
authorization takes about two or three days to process. Once authorized,
the interested party has 90 business days to incorporate or the authorization
expires.
2. A special power of attorney must be granted by each shareholder to
members of a law firm, authorizing it to carry out the incorporation tasks.
The powers must be notarized by a local notary public, and consularized by
a Mexican consulate in Canada. Thereafter, these powers must be translated
into Spanish by an official translator in Mexico.
3. The Articles of Incorporation of the company must be formalized before a
Mexican notary public.
Permitting Requirements
Once the vehicle of choice is incorporated, several other permits, notices and/or
registrations must be obtained/processed:
1. The company must be recorded in the Public Registry of Commerce of the
companys domicile.
2. The Company must obtain a Federal taxpayers number (Registro Federal de
Contribuyentes) from the Mexican tax authority, Hacienda.
3. The foreign shareholders in the company must notify Hacienda that they
hold shares in a Mexican company.
4. The company must be registered before the National Registry of Foreign
Investment.
Depending on the nature of the activity, federal, state and/or local environmental
and use permits may be required.

64

Importing Goods
If the Mexican company needs to import components, equipment or other goods, it
must obtain a Mexican importers license from Hacienda.
Before importing goods, it is necessary to check to see if there are any other tariff
and non-tariff import restrictions, such as Official Mexican Standards, or NOMs.
Office of Foreign Investment of the Economy Secretariat
In accordance with the Mexican Foreign Investment Law (the Law), all Mexican
companies with foreign investment and all foreign companies operating in Mexico
must register before the Mexican Department of Foreign Investment.
A Mexican company has foreign investment (1) when any of its shareholders are
foreign companies or individuals or (2) when all its shareholders are Mexican but
the percentage of foreign capital in any one shareholder company exceeds 49% of
such shareholders common shares in the company.3
The Foreign Investment Law restricts or prohibits foreign or private investment in
many sectors.
Although foreign investment in the electronics sector has no
restrictions, many other sectors do, including telephone, satellites, airports, radio
and television, oil & gas and electric power.
b. Import/Export
Exporting Procedure and Logistics
Before shipping any merchandise to Mexico, it is advisable to secure the services of
a licensed customs broker. Customs brokers are able to provide information on
applicable duties and non-tariff regulations. More importantly, they are able to
guide products through Mexico's sometimes convoluted and confusing customs
process in a timely and relatively hassle free manner.
The first thing that a company must do before exporting to Mexico is make sure
that the buyer is registered with the Importers Registry. This registry is filed with
the Treasury Secretariat (Secretara de Hacienda y Crdito Pblico, Hacienda). As
an exporter, it is also important to ensure that the Mexican importer has submitted
all the necessary information regarding packing, labeling, and quality standards
certification (Mexican Official Standards or NOMs) to the appropriate Mexican
Customs officials.
Customs brokers are limited in what they can do. Mexican import laws contain a
number of restrictions and disclaimers that are unavoidable. Certain classes of
merchandise are restricted or prohibited altogether if Mexico feels it must protect
its economy and security, safeguard consumer health and well being, or preserve
domestic plant and animal life. Most vehicles are subject to import quotas or
restraint under bilateral trade agreements, though quotas rarely apply to
automotive aftermarket parts and accessories per se.
3

Foreign Investment Law (FIL), Art. 2, par. II; Foreign Investment Regulation (FIL Regulation), Art. 1,
Par. III.

65

In addition to customs restrictions under Hacienda, many other Mexican federal

government enforcement agencies and departments impose import restrictions,
such as Health Secretariat (Secretara de Salud), the Commerce Secretariat
(Secretara de Economa, SE), the Communications and Transportation Secretariat
(Secretara de Comunicaciones y Transportes), and the Secretariat of the
Environment, Natural Resources and Fisheries (Secretara de Medio Ambiente,
Recursos Naturales, y Pesca, SEMARNAP). For example, SE requires a special
permit before used machinery can enter Mexico and fixes the import quotas
discussed above. Likewise, environmental permits must be obtained in order to
handle or transport hazardous materials including paints, oils, lubricants and other
substances used in automotive parts and accessories.
In turn, the Health
Secretariat requires certification prior to import for all products designed to have
physical contact with the human body.
Finally, Mexico has an elaborate system of mandatory federal standards that must
be complied with prior to import.
Importation Paperwork/Customs Declaration
One of the most important services that a customs broker can provide is the
handling of paperwork, especially the all-important customs declaration. Customs
declarations are not required for imports and exports related to foreign embassies
and consulates, electricity, crude oil, natural gas and personal effects. However, all
other imports require the importer to present a declaration in writing and under
oath to customs officials and provide documentation that verifies the customs value
of the merchandise. A copy of this declaration must also be provided to the
customs broker or attorney-in-fact. The customs broker prepares the import
documentation based on the information provided and pays any monies owing at a
private bank located within Customs. The customs broker then presents the
merchandise in the presence of customs official accompanied by the previously paid
customs declaration.
Commercial Invoice
In addition to the above, customs declaration, a commercial invoice or Pro-forma
must be presented when the customs value exceeds US$1,000. The invoice should
be prepared in Spanish; otherwise, a translation may be prepared on the reverse or
inside of the invoice. The importing company must also provide the bill of lading or
airway bill of lading, endorsed by the transport company. In addition, documents
showing compliance with applicable regulations and proof of the country of origin
and if appropriate, country of export, must also be provided. Lastly, a payment
guarantee for additional amounts that may apply if the declared value is less than
the estimated price of the merchandise established by Hacienda must be provided.
Special regulations also exist that govern the import of samples, demonstration and
promotional material. When these goods are to be used in fairs, conferences,
exhibitions, trade shows and conventions, they can be temporarily imported dutyfree according to Article 106 of the Mexican Customs law for up to a period of one
year, as long as they are returned in the same state they arrived. The goods must
be marked or otherwise identified for the exclusive use during the event, and must
be distributed free of charge. However, if the promotional material is to be sold at
the event, it must be imported indefinitely. This means that all duties must be paid

66

and that all applicable regulations and non-tariff restrictions are fulfilled. Only
when goods are imported definitely can they be sold. Likewise, if the items are not
marked to indicate that they are for the specific purpose of promotion, they must
be or returned once the event is over.
Packing slip/list
A packing list/slip must always accompany the shipment. This document allows the
exporter, the transport agency, the insurance company, customs and the buyer to
identify the goods to be imported. The information shown on the packing list/slip
must support the description on the commercial invoice. This guaranties strict
control, allows for the identification of the complete shipment at any point, and
provides a basis for registering complaints with insurance agencies should the
merchandise be damaged or missing.
Six copies of the packing list/slip must be issued by the exporter to the transport
agency. The packing list/slip must include:
1.
2.
3.
4.

Description of merchandise,
Value of merchandise,
Weight, and
Volume.

It is also advisable to include on the packing list/slip the box, parcel or pallet
dimensions as it aids in obtaining transport costs within Mexico.
Certificate of Origin
The Certificate of Origin certifies that the goods being imported have been
substantially manufactured or produced in a country that is party to a treaty or
trade agreement with Mexico, such as NAFTA. If the certificate is obtained, the
goods receive preferential tariff treatment. It must be presented without exception
with the shipment at the point of entry before goods can receive preferential tariff
treatment and avoid payment of compensatory quotas.
There exist various types of certificates of origin, depending on the origin and type
of commodity.
"Soft" certificates provide tariff preferences under free trade
agreements and do not require a visa from the government agency responsible for
issuing these types of documents in the originating country. "Hard" certificates of
origin are those that must be verified by the authorities of the originating country.
Free Sale Certificate
The importation of some types of goods involves the presentation of yet another
certificate at the point of customs clearance. A free sale certificate must be issued
in the country of origin of the merchandise to be imported into Mexico. This
certificate consists of a written statement made by the appropriate authorities
wherein it is declared that, in the country of origin, the goods may be sold and
consumed freely without exception, and that its sale does not require a special
permit.

67

Customs Valuation Process

In general, the customs value of goods is their transaction cost, except when this
value cannot be determined. The transaction value of imported merchandise is
equal to the price paid or payable for the merchandise, plus additional amounts for
any of the following:4
1. Any commissions incurred by the buyer with respect to the imported
merchandise.
2. The packing costs incurred by the buyer with respect to the imported
merchandise.
3. Transportation and insurance expenses and any other related expenses such
as merchandise handling.
4. Royalty or license fees related to the imported merchandise that the buyer is
required to pay - directly or indirectly - as a condition of the sale of the
imported merchandise for exportation to Mexico.
5. Proceeds of any subsequent resale, disposal, or use of the imported
merchandise that accrue - directly of indirectly - to the seller.
The price actually paid or payable for the imported merchandise shall be increased
by the amounts attributable to the above-mentioned items, however only to the
extent that each amount is not otherwise included within the actual purchase price
and is based on sufficient information. If for any reason sufficient information is
unavailable, the transaction value shall be treated as one that cannot be
determined.
It must also be noted that Mexican customs has the authority to declare that the
customs value has been determined incorrectly during or after customs clearance.
It is advisable to request from Hacienda a confirmation that the value of the goods
was correctly calculated to ensure legal certainty and avoid future valuation
problems.
General Import Tax Law
NAFTA has eliminated the majority of the tariffs on products likely to be sold in the
Mexican automotive parts and accessories aftermarket. There are very few dutiable
products remaining and they will be practically eliminated by the year 2003. The
second phase of NAFTA began in 2001, thereby preventing non-NAFTA raw
materials or other materials to be used in the manufacturing process from enjoying
the same tariff rates as the materials originating in NAFTA countries.
Customs Clearance
This is the final stage of the process. During customs clearance, products are
prepared for examination by the authorities. This process is as follows:

"A guide to clearing Customs in Mexico", The Guide to Mexico for Business, 8 th Annual Edition,
American Chamber Mexico, page 68.

68

Deconsolidation
Merchandise is off-loaded from the pallet or taken out of the container in which it
arrived for preliminary revision by the contracted transporter, parcel service or
customs broker. These agents verify that the packing materials have not been
broken and that the merchandise has not suffered any alterations or accidents.
Preliminary Examination
The customs broker or parcel service company examines the goods and documents to determine, among
other things, the value of the goods for customs purposes and their dutiable status, whether the goods
must be marked with the country of their origin or require special marking or labeling and whether the
shipment contains articles that must comply with non-tariff restrictions. Also the customs brokers
determine if the shipment contains articles that are prohibited in Mexico, whether the goods are
correctly invoiced and whether the goods are in excess of the invoiced quantities. If the merchandise
passes all of these tests, it is prepared for customs clearance. All required documents are annexed to
the shipment at this point.

Automated Manifest System

Once the corresponding import duties are paid, if applicable, the merchandise is
presented, with an entry summary, to customs officials. The entry summary is
scanned into the Automated Manifest System to define whether or not the
authorities will examine the merchandise or whether it will clear customs without
first being reviewed. A red light requires examination, while a green light means
the goods have cleared customs without examination.
Customs Examination
If it is determined by the Automated Customs system -- red light -- that the goods
must be examined, the shipment is carefully verified. Customs officials ensure
that:
1. Goods declared on the invoice in fact are the same as those presented
physically before customs,
2. Declared customs value was correctly calculated,
3. Harmonized Tariff Schedule (HTS) number is correct, and
4. Regulations and non-tariff restrictions have been observed.
Should customs officials detect any discrepancies, the authorities will levy the
shipment and begin the PAMA process (Administrative Procedure in Customs
Matters). If no problems are detected, the merchandise has cleared customs.
Second Examination
All merchandise must pass through the Automated Manifest System a second time,
regardless of the outcome of the first pass through the system. Shipments may be
examined again if a second red light occurs or they may pass without being
examined in the event of a second green light.
If a shipment is designated for review, the examination will take place within three hours. This may take
longer if discrepancies are detected. If the shipment is not designated for review, it will be released
immediately so that it can proceed to its final destination.

69

Appendix C QUESTIONNAIRE
The following questionnaire was developed and used in conducting the interviews.
Preamble:
Americompass has been retained to formulate and evaluate market entry strategies
for companies targeting the Mexican energy sector. We are interviewing you
because of your experience working in Mexico. The intention is to interview a large
number of people because of the make up of the sector, which is not homogeneous.
The information will be used to prepare a public document but the contributors will
not be identified to respect confidentiality.
Strategy Examples:
1. Agents
a. Sales agents
b. Marketing representatives
2. Local partnering
a. Politically connected (value of connected players such as former
PEMEX/CFE employees)
b. With complimentary expertise (value of engineering or contracting
firms with experience doing business with PEMEX/CFE)
3. Project joint venture
4. Going it alone
a. Green fields
b. Local sales/business development office
c. Acquisitions
5. Subcontracting or licensing
Questions:
1. Is there another strategy you would add to the list above?
2. Would you please describe your business under one of the following categories?

Consultants (including technical training, engineering and studies)

Service companies and subcontractors
Integrated service companies
Engineering and construction companies
Equipment suppliers
Exploration and production companies
Utility service providers (including pipeline transportation, storage and
local distribution)
Other

3. How long has your company worked in Mexico?

70

4. Please describe your market strategy and mention if it was the correct one
5. Has business met
expectations? Why?

your

expectations?

Exceeded

expectations?

Not

met

6. To what do you attribute to your companies success in Mexico?

7. What are the main difficulties (legal, regulatory, bureaucratic, etc.) faced by
your company so far?
8. What is your perception of the energy reform of 2008 and of the main changes
it will bring to the way Pemex conducts its business?
9. In which ways will the energy reform affect the traditional entry strategies
mentioned above?
10. What are the main challenges ahead in the energy sector?
11. Was your company expecting to be profitable in the short term, say 1 year, or
over the longer term, say 2-3 years?
12. If you had the benefit of your current experience when you first started, would
your strategy be different than it is now?
13. How do you envision investment and business conditions in Mexico in the
coming years?
14. If you were advising foreign companies wishing to target Mexico, what would
you recommend as a strategy? What would you advise them in terms of
expectations?

71

Appendix D LIST OF INTERVIEWEES

1. CARSO
Armando Rimoldi Rentera, Director General
Email: arimoldi@cicsa.com.mx
Website: www.cicsa.com.mx
2. ENERGIA A DEBATE
David Shields, Director
Email: dshields@energiaadebate.com
Website: www.energiaadebate.com
3. GRUPO DIAVAZ
Ildefonso Aguilar Bueno, New Ventures & Negotiations
Email: iaguilar@diavaz.com
Website: www.diavaz.com
4. GRUPO R / INDUSTRIAL PERFORADORA DE CAMPECHE
Abel Vargas, CFO
Email: avargas@grupor.com
Website: www.grupor.com.mx
5. HALLIBURTON
Ramses Pech, Principal Market & Business Analyst Mexico
Email: pech.ramses@halliburton.com
Website: www.halliburton.com
6. LOPEZ VELARDO, HEFTYE Y SORIA
Jorge Jimnez, Parner
Email: Jimnez@lvhs.com.mx
Website: www.lvha.com.mx
7. MARCOS Y ASOCIADOS
Daniel A. Marcos y Antonio Jurez, Partners
Email: daniel@marcos.com.mx and jajuarez@marcos.com.mx
8. PEMEX, Subdireccin de Nuevos Modelos de Ejecucin
Sergio Guaso, Subdirector
Email: guaso@pemex.com
Website: www.pemex.gov.mx
9. QMAX
Garrett Brown, General Manager Mexico
Email: gbrown@qmax.com.mx
Website: www.qmax.com.mx
10. REPSOL
Pablo Espresate, President Mxico
Email: pespresate@repsol.com
Website: www.repsol.com

72

11. TESCO
Hugo Alberto Morn, Vicepresident & General Manager
Unidad de Negocios para Latinoamrica
Email: hugo_moran@tescocorp.com
Website: www.tescocorpt.com
12. TOPCO
Gerardo Franco, Managing Director Latin America
Email: gerardo.franco@top-co.ca
Website: www.top-co.ca
13. TARCO
Jim Lysyk, CEO
Email: jim.lysyk@tarco.com
Website: www.tarco.com
14. TRANSCANADA
Lorena Patterson, Representative Mexico
Email: lorena_patterson@transcanada.com
Website: www.transcanada.com
15. TTS SENSE
Vince Fortier, Marketing Manager
Y Laura San Romn Oate, Administrative Coordinator
Email: vince.fortier@tts-sense.com and laura.sanromanonate@tts-sense.com

73

Appendix E REFERENCES
Alberta Employment and Immigration, Oil & Gas Equipment and Services:
Investment Opportunity Analysis, May, 2006.
Baker George, Update of Energy Reform in Mexico, in, Office of the Governor of
Texas, State of Texas NAFTA Office Mexico, Texas Energy Trade Mission 2008,
August 2008,
http://www.rrc.state.tx.us/commissioners/carrillo/mexico/2008/presentations/GBak
erUpdateonEnergyReforminMexico_Rev%202-Sep-08.pdf.
CanElson Drilling Joint Venture Signs Second Drilling Rig Contract for Mexico and
Starts Drilling Operations in Mexico, News Finance, November 30, 2009, in
http://ca.news.finance.yahoo.com/s/30112009/28/link-f-ccnmatthews-canelsondrilling-joint-venture-signs-second-drilling-rig.html.
Diario Oficial de la Federacin, Disposiciones administrativas de contratacin en
materia de adquisiciones, arrendamientos, obras y servicios de las actividades
sustantivas de carcter productivo de Petrleos Mexicanos y Organismos
Subsidiarios January 6, 2010.
Greig C. Walter, Doing Business with Pemex: A Small Companys Perspective,
Pemex Presentation, 2009 in,
http://www.buyusa.gov/houston/enduresmeppt2009.pdf.
Guaso Sergio, PEMEX New E&P Contracts, August 29, 2006
in
http://www.rrc.state.tx.us/commissioners/carrillo/mexico/2006/E&P__LIC__GUASO
.pdf.
Guaso, Sergio, Oil & Gas Contracts Under the New Pemex Law, 2008.
Industry Canada, Oil and Gas Equipment and Services Industry Report, October
2006, in http://www.ic.gc.ca/eic/site/ogt-ipg.nsf/eng/og00187.html#International.
Jimenez David, The Mexican Energy Reform: A Step Forward, 2008, in
http://www.energy-profile.com/files/JRA.pdf.
Lopez Velarde Rogelio and Valdez Amanda Mexico, in Warner Waide and Skene R.
Gavin eds., Project Finance in 38 Jurisdictions Worldwide, 2010, pp. 125-131.
Martinez, Insights & Observations of Doing Business in the Mexican Energy
Sector, Presentation of Bay-Inelectra and Constructora Bay de Mxico, 2006, in
http://www.rrc.state.tx.us/commissioners/carrillo/mexico/2006/MIKE_MARTINEZ.p
df.
Martnez Medina Mayra, "Alberta: lo que Pemex no pudo ser" en Energa Hpy, May
2007, pp. 36-51
Mexican Expansion: Whittaker Engineering Case Study, U.K. Trade and
Investment, 2009 in
https://www.uktradeinvest.gov.uk/ukti/fileDownload/Whittaker.pdf?cid=436338.

74

Olsen, Robert Mexican energy reforms a start, but not enough to halt declining
output, Petroleum Economist, 2008, in www.petroleum-economist.com
Olsen, Robert, How many Mexicans does it take to drill an oil well? Petroleum
Economist, 2009, in www.petroleum-economist.com
Olsen, Robert, Back to square one for Pemex's challenging Chicontepec oil project,
Petroleum Economist, January 4, 2010, in www.petroleum-economist.com.
Pascal B. Larry and Paramo Marcelo, The Pemex Law and Related Measures What
Energy Reform Means for Mexico, in North American Free Trade & Investment
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Appendix F - AMERICOMPASS
AmeriCompass is an international consulting group made up of a unique blend of
Mexican, Canadian and US principals offering over 50 years of combined experience
in assisting international companies to do business in the NAFTA marketplace.
Representing various academic and professional backgrounds, AmeriCompass
consultants have extensive experience in a wide range of sectors and disciplines.
Focusing on the Mexican market, AmeriCompass offers expertise in the following
sectors:

Energy (oil & gas and electric power)

Telecommunications & ICT
Transportation
Infrastructure
Manufacturing (autoparts, maquiladoras, electronics, etc.)
Housing & Construction

In each of these areas, AmeriCompass assists foreign companies in identifying and

implementing trade and investment opportunities in Mexico through a range of
value added services.
SERVICES

Project Development
o
o

Energy and infrastructure project

development
Manufacturing start-ups

Market Intelligence

Market assessments
Feasibility studies
Political and regulatory scans

Government Relations

Monitoring
Access
Advocacy

Trade Promotion & Development

Representation services
Matchmaking

Legal Services

Through its affiliated law firm, RosenLaw, S.C., AmeriCompass is also able to assist its
clients with the legal aspects of doing business in Mexico.

AmeriCompass in Canada and the United States

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Through full-time offices in Calgary and affiliated offices in Seattle, Denver, and
Washington, D.C., AmeriCompass is also able to link Mexican companies and
governmental bodies to trade and investment in Canada and the United States.