Loose Ends Pose a Threat to InvestmentWed, 02/24/2016 - 11:48
Q: How have the recent political environment, global economy, and dropping oil prices affected the mindset of companies looking to invest in the Mexican energy industry?
A: The thought process of investors has been impacted, and we see this clearly in company investment procedures. The current situation was neither expected nor speculated upon, so it turned out to be far more complex and regulated than anticipated, with a lack of contractual freedoms. The way in which private players can participate with PEMEX has to be further defined, since the differences between the two types of contracts players can use are not precise. Further detail is needed on how the profit sharing will work in terms of where the cut will be, the perception of participation, tasks players must carry out to earn participation, and finally, requirements of PEMEX. This lack of clarity may be attributed to several factors, ranging from policy to private interests, but at the end of the day, the contracts have to be perfectly defined so as to leave no room for interpretation or mistakes.
Q: In what ways have rescission and arbitration affected the energy market and its main players?
A: One area that urgently must be addressed is the administrative rescission, which is not an easy concept for financiers of projects, investors, and players given that it heightens the levels of insecurity of purpose, and can be taken at a whim by the government and by the productive enterprise of the State. Another highly complex issue that needs to be further explored is how the arbitration will play out. If we combine this lack of definition, high taxation threats to producers, and the backdrop of the oil price, we see a rising wave of worry that seeps into the decisions of the private sector, both national and foreign. As it stands, the arbitrage between the price of oil and extraction costs is what governs in Mexico; however, if the price tag is coupled with insecurities and high taxation rates from international market trends, then it might discourage investment. We hope this does not occur, and in our experience, we continue to see a heightened interest in the Mexican energy industry from international players. PEMEX must evolve into a world class company, and it is freer now to be clearer in its control and operations, but it must take measures to thrive on a level playing field.
Q: Do you see enough urgency in the government to make sure the country has an adequate rule of law?
A: I do not believe the Mexican government is fully prepared, although I do not doubt that there are enough qualified personnel on board. However, issues like money laundering, tax evasion, irregular economy, and extinction of ownership are brought to mind. We are finding ourselves with a system that cannot even process the number of requests the government is claiming to receive, causing the portal to become bottlenecked. Are these responsibilities the government can withstand, bearing in mind the situation it is in? I do not think so, and it is important to deal with the process in an adequate manner, since there is a lot at stake, such as people’s livelihoods, businesses, and economic losses.
Q: In your opinion, which factors must the government take into account in order to ensure a stable energy sector?
A: During this time the government has been juggling two aspects: policy and business. The former is abstract, so there is flexibility in whether it works, whereas in the latter, there is no margin for error and it has to be addressed in the right manner. Otherwise, it will result in a considerable dispute and the credibility of the government will be put in jeopardy, since everyone will expect the outcome of the dispute to be regulated by arbitration or the courts.
Another important variable to take into account is the people. Some cynics may rejoice in the lack of preparedness and might see it as a cue to do what they please. Others might see this lack of guidance and knowledge as dangerous factors that will interfere with their decision to enter the market. Companies will have to choose a camp and I hope that international and Mexican investors have clear strategies, and are aware of how to salvage their own patrimonies and how to deal with the situations appropriately. Ultimately, the price of oil will continue to fluctuate and we cannot predict its significance in the Mexican economy in the next two years. The Energy Reform should not be seen through a short-term lens because the industry will be dealing with projects that last over 15 years. If parties sit down to discuss the real consequences of the Reform, this may motivate the government to expedite its procedures.