Juan Carlos Serra
Partner
Basham Abogados
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View from the Top

Unveiling Future Challenges in Midstream

Wed, 02/24/2016 - 15:39

Q: Periods of economic recovery, such as the current one, have often been rife with M&A opportunities. Do you believe the Mexican renewable and clean energy sectors might be about to undergo such a period?

A: I do not believe we are in the M&A stage yet. Projects are beginning to be developed and once those endeavours become operational and bear fruit, then we will start looking at M&A activity. One can concede that there have been some mergers and acquisitions in the hydrocarbons sector, mainly foreign oil and gas companies acquiring or partnering with Mexican ones, often in the services segment, with the aim of complying with the national content rules. These M&As are something we are starting to explore, but I do not think the renewables segment is experiencing such activities yet.

Q: To what extent will the requirement of local content influence M&A between Mexican and foreign companies?

A: The national content requirement may be fulfilled through input from locals. If a company carries out an acquisition to comply with national content rules, it will need to maintain the acquired firm’s current operations. This entails employees, assets, and local facilities, among others. In my view, foreign players will try to buy local companies to gain local presence, but not to meet the national content requirements. An important aspect to bear in mind is that under the tenders, the company that will need to comply with the national content requirements is the one receiving the concession from the government. If a supplier does not honour the rule for any reason, the concessionaire will be held responsible. Companies will still be relying on local suppliers that are trustworthy and have become aligned with the international operating standards of the big players. Basham has been involved in the construction of projects such as the Los Ramones pipeline and the new container terminal in the Lazaro Cardenas port. With this track record, we have been able to identify a trend of private equity funds seeking assets related to natural gas pipelines, ports, water treatment facilities, and even highways. These funds might not necessarily become the final operators of the business, instead owning a minority stake. Nonetheless, they have an appetite for what is occurring within the Mexican industry. Funds will want to invest in more sophisticated, well-structured projects, raising the quality of the sector. As more investment floods the country, assets will become more valuable.

Q: The pipeline and natural gas transportation market has been open to private participation for years now. What are the lessons learnt that were applied in the wake of the Energy Reform?

A: The most important aspects are regulation and the development of projects, especially when completing a checklist ranging from right of way and environmental issues, to pricing and CRE’s decision-making process. Public consultations will be prevalent and this might delay projects in some cases, such as hydrocarbons projects, which have specific requirements outlined in the Hydrocarbons Law for conducting public consultations and social impact assessments. Mining firms already engage in these practices because the International Labour Organization demands those consultations, requiring that mining corporations present environmental impact assessments and carry out public consultations before they can be granted an environmental approval. Now that this is written into the law, more requirements are likely to surface for projects before their development. The formalities surrounding these procedures, such as consulting, serving a party, notifying a party, and giving a party the ability to challenge, will be difficult to navigate, but it will also provide plenty of work for law firms. Another important consideration is the development of storage capacity for natural gas. Since 1992, private companies have been allowed to invest in transportation, distribution, and warehousing. Warehousing still requires more investment, and this may be seen when ports are developed.

Once companies start bringing fuel to Mexico, ports like Salina Cruz and Tuxpan will see an optimal development. All that we have are the three LNG facilities in Ensenada, Altamira, and Manzanillo, but these are basically warehousing for CFE. These three facilities are anchored to a natural gas supply agreement with CFE and to the supply of certain private parties. As a result, there is a lack of storage facilities at the moment.