Business and Development: Challenges and Opportunities in a Rapidly Changing ...
Mexico Energy Reform_Byline Copy
1. A NEW DAWN OF
ENERGY-FUELED
ECONOMIC GROWTH
AND LEADERSHIP
CHALLENGES
Mexico’s
Energy
Reform
Lewis Adams, Associate Principal – Global Industrial Practice
Meredith Ashby, Principal – Leadership Consulting
Chad Hesters, Partner and Regional Sector Leader – Natural Resources Practice
2. KEYTAKEAWAYS
Constitutional change relating
to the Mexican energy sector
implies a strategic shift and need for
quick adaptation for Mexican and
multinational companies.
Private sector will drive this energy-
fueled economic growth into the
spotlight and a critical question is
whether leadership can deliver against
these heightened expectations.
Successful organizations will be
those that can quickly assimilate
information relating to energy reforms
and react accordingly.
Established and emerging
companies in the energy sector
will need a comprehensive talent
development and retention plan to
maximize the opportunities.
The ability to operate in a dynamic
environment with a myriad of
potential constituents will be essential
for leaders of companies looking to
grow in Mexico.
The Mexican oil and gas industry has a history
rooted in the nation’s identity, but step-change
for the landscape is now underway. During the
last 20 years, declining production, political
stagnation, globalization of consumption, and an
underperforming economy have contributed to
inevitable change.
This shift has encouraged cautious optimism in
Mexico’s economic transformation. The kick-start
from the energy reform has the potential to spur
meaningful economic growth, drawing focus to
global talent implications and leadership needs for
the future.
THE PATHTO REFORM
The oil and gas industry has a pivotal place in
Mexican history. Early expropriation led to the
development and creation of the public company,
Petróleos Mexicanos (PEMEX), which currently has
operational jurisdiction over hydrocarbon reserves
throughout the country. For the past 70 years,
PEMEX has grown to become the economic lynchpin
for the state. According to INEGI and the SHCP,
Pemex represents roughly 7.7% of Mexico’s GDP, 16%
of exterior commerce, and 35% of the public sector
income. Pemex has production at roughly 2.5 million
barrels per day, which has declined from a peak of
more than 3.4 million barrels per day in 2004.
A 2012 change in government provided the catalyst
that led to the well-publicized constitutional energy
reform – approved in late 2013 – and opens the door
to private sector participation in the oil and gas
A new dawn of energy-fueled economic
growth and leadership challenges
2 Mexico’s Energy Reform
3. sector. While secondary legislation is still to be defined,
many local and international businesses are considering
how to take advantage of the potential opportunities.
PUSHING FORWARD
‘Can it happen and if so, what will it look like?’There are
several possible iterations of regulatory outcomes, which
form at the intersection of ’acceptable’government
and private ownership / operation of Mexico’s plentiful
hydrocarbon assets. These outcomes are promising,
but only on the basis that they can be effectively
implemented, monitored, and regulated.
A deep and thorough examination by political, industry,
and other respective stakeholders (including NGOs)
is underway and, regardless of outcome, will require
adaptation to this new environment. There will clearly be
a need for strategic leaders who can deliver against these
heightened expectations.
CULTURAL IMPLICATIONS
A phenomenon that both foreign and local companies are
likely to experience as a consequence of Mexico’s energy
revolution entails adapting to new norms. Given the
cultural heritage of hydrocarbons in Mexico, the shift to
more private participation is likely to require patience and
cultural sensitivity over the mid-term.
The changes coming to the industry are broad in scope
and exemplary of an exciting new future. With these
changes also comes uncertainty in an industry that has in
the past represented stability. For many years there was
a direct alignment of the strategy, structure and culture
within the industry. Now, with a new strategic direction
and restructuring, the culture that worked in the past will
need to shift to meet future needs. Indeed, the strategy
and structure of the industry is being reformed through
directive, however, that does not work for the culture – it
needs to be systematically shaped to bring alignment with
these new conditions.
The most well-documented and anticipated organizational
change is that of PEMEX, which aims to transform from a
large, state controlled body to a more independent, lean,
and market-oriented company. Many within the industry
have compared this change to that of turning an oil
tanker, but clearly the organizational will is there. PEMEX
CEO Emilio Lozoya is facing one of the biggest corporate
transformations in the 21st Century. His vision for PEMEX
is inspiring – he predicts the energy reforms to generate
an additional one percentage point of GDP and millions of
new jobs, plus exponential growth reaching well beyond
the energy sector. Therefore, successful energy reform may
not only create a stronger and more competitive Mexico,
but also set the stage for long-term economic stability and
wealth-creation opportunities for its citizens.
The critical points for Mexican and foreign companies of all
sizes looking to capitalize on energy-related opportunities
reside within the nuanced assessment of cultural change,
technical requirements and open market competitive
strategies. The companies who earnestly prepare to
address these issues are far more likely to successfully
ramp-up in this new operating environment.
TALENTWARS
There is an audible undertone of caution at the many
energy forums and conferences that are being held in
Mexico, regarding the daunting challenges of addressing
new talent requirements and new leadership strategies.
It is generally acknowledged that the resource demands
will be unprecedented going forward and the talent pool
of qualified Mexican talent is finite and underprepared in
key areas.
A combination of an underperforming education system
for the last 20 years, the pull of skilled workers to the
United States, and the rotation of top talent to global
assignments has created a diminished pool of available
executive leaders in Mexico. Given the above factors, along
with the well-known industry demographic challenges,
the necessary executive and technical leadership within
the Mexican market will be in short supply.
While international expatriate talent may help meet some
market demand, the developing talent pipeline in Mexico
is not presently robust enough to satisfy the remaining
needs of the energy industry. The industry recognizes
that the opening of the energy sector in Mexico will lead
to a battle for talent across management disciplines and
is preparing to provide much needed human capital
investment. The established local and international players
in the Mexican labor market are conscious of new and
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4. potential entrants eyeing their strong local talent base,
and are scrambling to put retention strategies in place
to fend off poaching. Additionally while a continued
defensive stance in retention is important, organizations
should also ensure their ability to find new ways of
engaging and developing their robust talent pipeline.
Culture change links to the talent wars as organizational
cultures that are more collaborative, accountable,
openly communicative, and care about the well-being of
employees will likely have an advantage over competitors
in recruiting talent. Successful people want to be part of
an organization built on this type of platform.
CRITICAL COMPETENCIES
In addition to understanding the regulatory environment
and the commercial landscape, companies looking to
capitalize on energy opportunities should consider the
following questions:
• Are there sufficient organizational capabilities
in place to ensure success?
• Does our operational and technical leadership have
the skills required to adapt and grow the business?
• Do we have the right leadership structures and
collaborative environment to drive alignment,
going forward?
• Do we have the necessary risk management and
safety leadership place to gain / maintain our
‘license to operate?’
• Are there mechanisms in place to close
any critical gaps in all the above?
Critical competencies needed for effective leadership
in the emerging Mexican energy market may include
effective diplomacy skills, change management expertise,
and the ability to scale the organization with growth.
Objectively assessing the existence and degree of these
competencies within leadership ranks will be critically
important prior to the execution of a business strategy.
LOCAL AND
MULTINATIONAL LEADERSHIP
The emphasis on local content requirements has already
been ratified by the government’s major legislation
with the percentage of locally manufactured goods
and services to be clarified in secondary legislation.
This stipulation has broad implications for the broader
economy and could mean excellent opportunities for both
established and start-up Mexican companies.
The experience of North American energy services firms
operating in Mexico have demonstrated over many years
the proven success of commercial relations between
PEMEX and foreign investing companies. Ideally, these
organizations have highly capable local leadership who
can balance the demands of operating in the Mexican
business environment while meeting objectives of
their large global entities. However, companies must be
open to the idea that new skill sets and approaches may
be required.
As legislation is finalized, exploration, production and
oil field services companies will begin executing on
their investment plans for 2015 and beyond. While
these multinationals have the technical and emerging-
market know-how, they will need to take a fresh look at
their regional talent base. Furthermore, it is likely that
international companies entering the Mexican market
will need to engage in commercial partnerships or joint
ventures to balance risk adjusted profitability.
A DOMINO EFFECT
Today, Mexico is at the epicenter of a talent battle and
the push / pull for top talent won’t be restricted to
the energy sector. Equally intriguing is the significant
domino effect that energy reform could have on the rest
of Mexico’s industrial, financial and consumer sectors. A
burgeoning internal market will see competition intensify
for leaders who can manage controlled growth. Local
content requirements of the energy reform will spur
additional demand and put more emphasis on leadership
needs in feeder sectors for the energy markets, such as
manufacturing and service companies.
4 Mexico’s Energy Reform
5. 0
1000
2000
3000
4000
5000
6000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
UNITED STATES
CANADA
MEXICO
VENEZUELA
BRAZIL
COLOMBIA
UNITED STATES
6,486,000 barrels
CANADA
3,138,000 barrels
MEXICO
2,593,000 barrels
VENEZUELA
2,300,000 barrels
BRAZIL
2,061,000 barrels
COLOMBIA
944,000 barrels
AMERICAS CRUDE
OIL PRODUCTION BY
MAJOR COUNTRY AND
2012WORLD RANK
Thousand barrels per day
source: US Energy Information Administration
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6. According to CEO of Mexichem, Antonio Carrillo Rule, the
domino effect will be coming from four different areas:
1 The investments coming from new projects in the
energy sector which he believe will take a few years.
2 From the‘de-bottlenecking’of the country. On one
Mexico’s biggest problems is the lack of natural
gas at competitive prices which is reducing the
competitiveness of the country.
3 The reduction in energy costs which will make Mexican
companies more competitive and will be able to grow
and generate new jobs and income.
4 All of this will bring general economic growth and
eventually a stronger middle class which should create
stronger internal consumer spending.
In his view the changes will take a few years to really show
strong signals but we should start seeing some impacts
12–18 months from now.
“For companies interested in
being successful in the context of
the Energy Reform they will have
to have five things in mind when
hiring top executives.
1 Look for well rounded, and
fully-bilingual individuals,
2 with a profound knowledge
of the Energy Sector, 3 vision for
the future, 4 capacity to grow
the business and 5 a genuine
interest to develop future local
talent. Companies might
have to re-learn their talent
and retention strategies to be
successful, and be willing to
do new things, be flexible and
creative. Some solutions won’t
require capital expense, but will
require a willingness to explore
unconventional solutions.”
Albert De la Fuente
President & General Director
Shell Mexico
Regardless of the final construct
of reforms, it is clear that a
significant change from the
status quo is upon us and
companies should take action
now to build, assess, and
position their leadership teams
as we enter this exciting new
chapter of leadership and
growth within the Mexican
energy sector.
For additional information on the
Heidrick & Struggles Global Talent Index please visit:
www.globaltalentindex.com
6 Mexico’s Energy Reform
7. Securing a company’s prosperous future
through the acquisition and continuous
development of leadership talent is an
ongoing process – and one of the most
critical endeavors a company will pursue
to ensure long-term success. That is why
so many of the leading organizations
have Heidrick & Struggles as a business
partner and strategic advisor.T H E L E A D E R S H I P CO M PA N Y ®
T H E L E A D E R S H I P CO M PA N Y ®
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