Jesús Rodríguez Dávalos
Partner
Rodríguez, Dávalos Abogados
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Critical Success Factors for Round One

Wed, 01/21/2015 - 13:26

Q: What aspects do regulators quickly have to learn in order to ensure that Round One lives up to its full potential?

A: Recent months have shown a real problem for the regulators. The restrictions placed upon them have become far too stringent. Even sending an email to an official working for a regulator can put someone in a compromising position. In order to guide the Mexican oil and gas sector through a challenging and exciting time, it is extremely important for the commissioners and the staff at CNH to listen to investors. Companies want to be certain that the regulators understand their needs before they invest billions in Mexico. This cannot be done if contact is limited, especially as Mexico is trying to build an industry based on Round One and the first tendered blocks. After all, it will be indispensable for both CRE and CNH to relate to investors in a completely transparent fashion. In this sense, the new rule that forbids commissioners from having direct contact with companies in the sector is a huge mistake. The authorities will have to experience a natural learning curve in how to structure and administer E&P contracts, among other things. People in the government have never done this. Therefore, it is a mistake that those on different sides of the sector cannot communicate and provide feedback. 

Q: What is the worst case scenario for Round One?

A: The worst case would be for the authorities to believe they have created a fantastic sector while those in the industry believe the exact opposite. This could easily happen as a result of a lack of communication. In a new framework as this one, communication is vital before things get moving. We are all starting from scratch, even experienced energy lawyers. There are certainly knowledgeable people around but they are balanced out by a lack of experience. PEMEX has never signed a contract such as those currently being proposed and, in my view, there are a couple of clauses in these contracts that will not work in practice.

Q: What are the main questions that your clients ask about Round One and the broader Mexican market?

A: Round One is very interesting. The Mexican authorities have an agenda and have complied with the deadlines that they have set themselves. Naturally, we are all stuck with low oil prices, which have nothing to do with Mexico, but there are a couple of other factors. As a country, we need to understand that we are competing for investments from international companies. To do so, Mexico needs to be so competitive that any company seeking to invest will want to put its money here instead of elsewhere. However, such competitiveness extends beyond the immediate impact of the Energy Reform. Mexico must ensure competitiveness in terms of HR, logistics, setting up offices, and beyond. Another concern relates to new regulations. While most agree the new regulation is positive, its complete impact will not be fully measured in the short term. It is only natural for companies to seek out every last detail. Companies are also questioning the structure of the contracts in Mexico and comparing them to those used in other countries. These are companies with a lot of international experience that will put the logic of the contracts in Mexico through the wringer. There are many specific questions related to the Energy Reform and Round One but nobody has all the answers. This is both a risk for companies and a natural consequence of such an industry overhaul.

Q: What needs to happen in 2015 in order for the Energy Reform and Round One to be seen as a success?

A: Success would mean that, by the end of 2015, authorities will have issued at least 20 permits for storage, infrastructure, and refined products. Another determining factor for success would be the absence of serious conflicts between communities and firms building storage facilities and pipelines. In relation to Round One, success would mean more than five companies really committing to big projects. If that happens, then we are moving in the right direction. It should be clear that the number of companies buying access to the Data Room is not an indicator of success. Many companies are interested in buying this access for future purposes or they need to make sure that the seismic information in the Data Room is of high quality. The simple fact that 39 companies have access the Data Room for phase 1 of Round One does not mean that the same number will be interested in bidding. These companies are entering the sector slowly, taking a very first step by buying this information. Again, five real proposals would show that Mexico is heading in the right direction and that companies are willing to take the risk.