Forging a Path in the New Legal FrameworkWed, 02/24/2016 - 11:07
Q: How would you compare the legal framework surrounding the Energy Reform with that of other countries that have passed a similar regulation?
A: It is important to make a division between oil and gas industries and electricity in order to obtain a holistic perspective. In the former, we see a crucial change in a legal framework that has stagnated for 60 years. The new production-sharing agreements and license agreements for oil production and exploration we are now seeing were prohibited in the past, while in other parts of the world they were being successfully implemented. We also see radical changes in downstream; the law that has been enacted, amended, and enforced allows private participation in refining, processing, transportation, distribution, and commercialization. In the past it was impossible to carry out joint ventures, so the only thing PEMEX was allowed to do was subcontract other players, but now PEMEX can partner up with the private sector.
The creation of the Mexican Petroleum Fund is significant and it places us on the same level as other countries such as Brazil, Norway, and Colombia. CENAGAS has been created to act as an independent manager of the largest gas pipeline system in Mexico, guaranteeing open access and addressing concerns regarding availability, trading, and capacity. We are studying the markets that served as a basis for the consultants that were hired by the Mexican government to draft this legal framework. Additionally, the possibility for the private sector to co-invest in transmission and distribution represents a promising area of opportunity for many players.
Q: How are you helping to establish alliances and partnerships between US companies and local players, and what are the major concerns of companies entering the Mexican market?
A: We are assisting companies in creating partnerships and joint ventures in the sector. Recently, we have received constant visits from international investors carrying out independent research. The have complex questions revolving around regulatory concerns based on their experiences in projects that have been developed in other countries. There are also questions regarding the contracts because many players have gotten used to working with 25-year IPP contracts. The year 2015 is a transition year and we are receiving questions about how the market will look in subsequent years, and what sorts of projects will be developed. There are also questions about transmission and distribution, and how the contracts will function under this scheme. At the moment, we need to carry out research and learn how similar contracts work in markets under the same rules.
Q: With the Energy Reform seeking to diversify the energy mix, how do mechanisms like the model contract need to evolve?
A: CFE has created a new department for Energy Modernization. This area will be in charge of studying and drafting the new contracts that the market is expecting at the end of this year. These contracts must reflect the vision that Mexico is an evolved market and that any players wishing to enter can do so by assuming the appropriate risks. For the gas industry, I would like the contracts to reflect some caution regarding the gas supply and the barriers developers and investors will face. Additionally I would like the permits to acknowledge the environmental problems that may arise. Finally, right of way is also an important consideration, and under the Reform there is a new mechanism to negotiate, secure, and register rights of way.
Q: What do you believe is the role of legal instruments, and which other elements influence the growth of the industry?
A: Some companies are concerned about entering a country that demands a combined cycle power plant to secure electricity production. In these cases, gas companies are forced to risk gas prices, sometimes build the pipeline, and look for traders. There must be a balance between natural gas and renewables. Our client base is diverse; we have lenders, developers, off-takers, and traders, and recently we have begun to receive visits from Mexican investors. The competition between energy law professionals is very aggressive. Given that the market was essentially monopolized by CFE and PEMEX, there were few law firms specializing in the energy industry. We have a new challenging task ahead of promoting and educating the next generation of energy lawyers.