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Local Content Policy for the Oil and Gas Sector in Mexico

14 Oct, 2019 KDIS News Center 607

2019 Int’l Alumni Essay Contest 2nd Prize Essay

Local Content Policy for the Oil and Gas Sector in Mexico

ALVARADO PITALUA, Jorge David (2014 MDP, Mexico)

In College my formation was that in Actuarial science which provide me with a strong mathematical and logical basis, and I started to work early in public service with experience in Mexican Congress and the Mexican Ministry of Economy as advisor to the Minister. After this I started the MDP Program in KDIS, this program since its beginning provide me with a strong policy analysis, hone my mathematical skills to apply them in real life problems and to analyze qualitative factors with a wide vision, which includes an stakeholder and their main concerns examination among others.

When I returned to Mexico, after KDIS, I got assigned to a new Unit, which was just formed, this Unit has the objective to promote the Local Content for the Energy sector, and was particularly important since in 2013-2014 there was a most important reform in the Mexican Legislation which ended the public monopoly in the Sector and open both investment opportunities for local and foreign capital.

The foundations and formation acquired in the MDP Program allowed me to participate fully with the specific regulation for the Local Content Policy, the background analysis, consultants oversee and management of the process.

The first action taken was the development of a methodology to measure properly the local content, which was an important technical effort done before the Unit was properly constituted due to a legal mandate. When I was integrated to the area this task was already completed but far long from implemented, since there was a new measurement method a taskforce was constituted in order to try to recollect previous related information, try to adjust that information to the new methodology and stablish a base and an objective value for the next years. One of the finest points of the Local Content Measurement Methodology was that it was insert in a legal framework with several Free Trade Agreements and WTO Commitments decreasing the scope of actions and policy that could be develop, also define a local production in a similar manner to NAFTA rules of origin according to which the important details are if its produce in Mexico and the intermediate parts production country.

I was designed as technical leader on the Ministry of Economy side for this project, in which I apply the tools and abilities developed in the KDIS, first through a research of similar projects at international level, review the technical capabilities of the country, apply an analysis of industrial complexity and probability of industrial development given the current exports; all of this included a negotiation with the personnel of the National Oil Company (PEMEX) which made previous measurements of local content with a different more lax methodology.

One of the most important lessons of KDIS was the integration of hard data and a detailed analysis with the negotiation skills and strategies to make public policy work, all soft skills promoted and encouraged in the MDP program, in this case both proved invaluable since the data was scarce and did not provide all the detail needed there was a natural opposition from PEMEX both because of the attributions lost (the measurement was made internally before the 2013-2014) and because the new obligations and the implications for the company, it also started to include the international major oil companies which were already interested in participate in upstream sector for oil and gas.

The result of the negotiations and the collected information provided for a base ground for the suppliers development policy, a first local content estimated in the different kind of projects (deep water, shallow water, on shore, shale gas), all of this was the information of PEMEX which included the international major suppliers as Weatherford and Schlumberger and local suppliers like Diavaz and Grupo R; capturing a level close to reality but since there new players would  was the entrance of new players there had to be consider the actual capacity and it’s possible saturation and a possible preference for international players.

All of this considerations were the result of classes of the Industrial and Trade Policy Track in the MDP Program in which similar situations and literature about the topic was cover thoroughly, in this there was an important amount of examples and an emphasis in cover the more topics and have a healthy and close relation with the industry in order to be able to make adjustment in the strategy and policy to archive a successful industrial development, this prove a key for the rocky part of the policy since there were none fully operational projects in deep water and nonconventional oil resources so all the target were theoretical and require several interactions with the industry players.

After this intense work to stablish the regulations, base and target values and supplier development strategies there was the following implementations part, in which the difficulties were increase in magnitude and number, first of all the bidding rounds were a success which result in more than a hundred new contracts and tens of new players most of which were just initiating their operations in Mexico with a limited staff. One more time the emphasis for an effective communication of policy objectives, and always open channel of communication for answer and doubts with the industry proved invaluable and are often understated in a pure data driven decision making focus.

In the implementations process there were several issues that conflicted with the planning made, first of all the reduction in the international oil prices by more than 50% in one year, and the contraction in the overall activity international, leaded to a local supplier crisis in Mexico in which many small and medium companies went to bankruptcy. This situation affect negatively the local content level and its prospective and made some adjustments necessary in which the national and international experiences studied in KDI,  provided some light in actions to be taken and to made a fine tuning of this adjustments to a level expected to maximize the development and be achievable. This process require the use of econometrics and modeling tools studied both in the basic classes in KDIS and Econometrics and Monitoring and Evaluation of Public Policy.

Lately I participate in the development of a Monitoring an Evaluation system for detecting irregularities, atopic data and other signs of wrongdoing by both the suppliers and operators of contracts in order to aim the verification process, which starts form an statistical analysis of behavior of goods, the history of different companies, a tracking on relevant investments, and imports.

All of this and the positive results in the policy were the result of the best of my ability to apply the lessons of the MDP Program, and it contribute to a potential local content of almost a 37 billion dollars from the 108 and contracts signed.