Challenging Times Are Coming for Energy Market

Q: How did 2021 impact your outlook on the value generated by upstream activities in Mexico’s oil and gas industry?

A: We focused on the energy companies entering the Mexican market and on those developing projects. These segments and midstream natural gas projects, such as those by Sempra Group, are substantially increasing and so is their need for services related to the structuring of projects, regulations and transactions, among others. While exploration and production operations fell, midstream natural gas and electricity projects grew. Many are still determining what to do with their current or pending projects. 

Q. What opportunities are companies entering the market seeing, particularly in midstream?

A: The sector has an extensive portfolio and a relationship with the Mexican government and stakeholders. Companies are not as much entering the country as increasing their portfolio. We have analyzed other projects in midstream and guided clients that might not know how to manage their project after the recent regulatory changes. Many planned and financed projects for storing petroleum suddenly had to shift their time frame to every one or five years, depending on their revised strategy with CRE. 

Some disputes with CRE have been abandoned but those are still affecting project financing, offtakers and others. We have to follow successful cases, such as that of Sempra Group in the context of gas exports. But their operations are not the same as many others in midstream, particularly regarding delivery of petroleum. 

Q: What legal resources do operators waiting for permits or approvals have access to?

A: There are hundreds of different procedures. With some firms, we participated first in the analysis of their circumstances and later worked with them once the regulations were put forward. That was the case for solar projects. 

The players involved in the development of delivery terminals and warehousing are very different in terms of size and country of origin from those developing solar energy projects. But in any project indefinitely paused by a regulatory component there is a line of frustrated investors that might lead to commercial arbitrations, setting suppliers against the company. It is a complex chain. The frustration of project developers is just the tip of the iceberg; it affects project financing, investors, teams and others. 

Q: How can companies forced to enter litigation handle their investor expectations?

A: Litigation is typically a strategy to negotiate a settlement. But it is different when the industry is in a relatively good place and litigation focuses on isolated cases of compliance from a moment as complex as that which we are living today. Now, companies do not have the privilege of strategic litigation. They are focused on survival. Energy sector litigation is very different from business-as-usual as it follows a wave of frustrations within projects.

With respect to our investment arbitration practice on energy and oil and gas, we are glad to advise that, by teaming up with global law firms such as Sidley, we have been successful in key cases, such as the one awarded a few months ago, under ICSID to PACC Offshore, a large Singaporean corporation. Unless the Mexican Government re-focuses its conduct on respecting the rights of investors in the Energy sector, there will be a tsunami of treaty arbitration cases, such as the one mentioned, in which Mexico most likely will not be successful.

Q: Is it in the interest of regulatory and public authorities to reduce this wave of litigations?

A: Yes. The government’s strategy has been to get rid of collective issues by negotiating or addressing them on an individual basis. This puts the industry in a delicate position because the government’s strategy toward individual companies is different from that used toward an allied sector. 

Q: How would you describe the way in which activity has changed or increased in the secondary market for E&P operators in Mexico?

A: The secondary market has changed from four years ago when we participated directly or indirectly in five of the relevant high-level transactions taken by renowned operators. The world has changed and not in the way we expected. Mexico’s current situation is likely a singularity of this governmental administration; it is a type of parenthesis as long as the regulatory instability does not make companies end their activities in the country. 

Another change is that energy companies have proposed a transitional model for the coming years under the context of COP26 and the transitions undergone by the oil and gas industry. This model had a transversal effect for secondary markets and others that will likely stabilize after the pandemic. 

Q. How does Goodrich, Riquelme y Asociados’ advice on these matters help companies be better prepared to face the lingering uncertainty plaguing the environment?

A: We became acquainted with CNH during its first years and we oversaw the relationship between PEMEX and the commission. Companies are worried about the institutions in a country that aims to have energy markets but does not have regulators. If the country is to have a market, it should provide an even playing field. There are also concerns regarding public policy. If there is to be a market, the country needs a regulator. If the competitor or client becomes the regulator, the system will crash.

Q: What are the most important aspects of your 2022 agenda and the goals you want to fulfill this year?  

A: The sector wants certainty and for everything that is with the courts to be resolved. The potential energy reform is a large concern. I would like for the country’s institutional design to be maintained. Optimized at most but maintained. Also, those acquired rights are respected. It is not just to change the rules when companies are already operating and to stop granting permits or to revoke them through one-on-one negotiations that determine the permit’s future. If acquired rights and institutional design are respected, that will be enough.

Goodrich, Riquelme y Asociados advises IOCs and key players involved in exploration and production activities. Its services include representation in public procurement processes related to pipelines, LNG terminals and other downstream facilities.