First-Mover Advantage

Q: What are your client’s main concerns regarding Mexico’s evolving energy landscape?

A: The first question that emerged after the governmental transition has already been answered. It was about respecting the oil and gas contracts that were awarded during the previous administration. These will be honored, although some interpretations emerged regarding pipelines and the need to continue with oil rounds. The second question, then, is what comes next for the power market. There will not be further editions of the long-term electricity auction unless this market scheme proves to be economically successful for Mexico’s new administration. CFE wants to generate its own electricity, meaning that they do not want to depend on energy purchased to private parties. This new philosophy is changing the way business has been conducted over the last few months, especially the way projects are structured, as these were originally designed to sell power to CFE under the auctions. As a result, the only available avenue for generators is to go through the merchant market or enter into a supply scheme with qualified suppliers. In addition, older market schemes, such as the legacy contracts and PIDIREGAS, are gaining traction in this new landscape. With the latter, companies did a great deal of business building infrastructure and turnkey projects for CFE over 20 years. With its revival, many companies will have access to new projects from the EPC side.

Q: How is Thompson & Knight helping clients understand find these untapped opportunities?

A: With the end or temporary suspension of the long-term electricity auctions, many companies are losing time focusing on the problem rather than looking for the opportunities this new regime offers. I foresee a major change in the social component of the power market. The “social energy” concept, means not only to produce energy and commercialize it, but to understand how this business can benefit an entire community. Among our clients, we are also promoting the concept of “first-mover advantage”. If you understand the regulation and know how to play with it by generating new business opportunities that are still intact, you will have a first-mover advantage. Waiting for the things to be restored or “to be as usual”, will make loose time to those who wait. First movers also prevail.

For instance, we supported a company in its first request for proposal (RFP), which is basically an auction. We came up with this idea two years ago. If a company requires power, we can call an RFP on behalf of the final off-taker so they can choose an energy supplier for the long term. This idea is not expressed in the law, but it is not forbidden either. As the Energy Industry Law (LIE) is not an administrative framework, it is supplemented by the commercial and civil codes of the country. This means the power industry is a commercial economic activity. Article 5 of the LIE encompass this concept and what industry is doing right now is looking for the small letters allowing more business opportunities. This is the kind of advice we provide, not only reading the legal framework, but actually understanding the business details.

Q: How do you foresee the collaboration between the public and private sectors evolving?

A: Our clients need a great deal of clarity regarding the legal framework, but they also need ways to communicate their needs and ideas to the administration. We have been very active in offering this information on behalf of our clients to the federal government. Sooner or later, the public sector will understand that private investors are not the enemy. Even though power is a strategic area, private power producers are very efficient in developing new capacity. The government is already considering farmouts and these associations between PEMEX and private companies could be replicated in the electricity industry.

Q: What will be Thompson & Knight priorities during 2020?

A: Everything that was meant to change, already did. During 2019, since CFE will require power infrastructure but will not rely on private generators, we will be promoting the understanding of the legacy financing contract framework, which will be surely replicated. Another priority is understanding new financial agreements and arrangements in regard to the International Standard Derivative Agreements (ISDA) that have been used to create more business opportunities. Understanding how to communicate with the government and how to submit cases under the new framework will be a relevant activity for us. This is the advantage we want to offer our clients as they seek to understand how to work with the new CFE. PPPs are waiting on the doorstep and this is the path to follow in the coming years.

Thompson & Knight is a US-based law firm founded in 1887 that is expert in energy finance, taxation, business transactions and litigation, with a century’s worth of knowledge of the energy and oil and gas sectors and a team of more than 300 attorneys.