Ernesto Marcos
Partner at Marcos y Asociados
Marcos y Asociados
View from the Top

The Devil is in the Details

Tue, 03/06/2018 - 13:09

Q: In your view, what have been the Energy Reform’s high and low points?

A: The most prominent achievements of the reform are the inherent constitutional changes carried out after its enactment. Prior to its signature, there had been two decades of discussion about the dire need for an Energy Reform. This plan took many shapes, including limiting private participation to service contracts, shared production and shared profits contracts. The core point of contention revolved around setting the reform’s legal boundaries. I believe a critical achievement on the legal front is that the Energy Reform’s upstream legislation allows for all types of contracts: licenses, production sharing, profit sharing, to name a few, with The Ministry of Finance and the Ministry of Energy through CNH picking the most adequate type of contract to be applied depending on the tendered location.

During deepwater Rounds 1.4 and 2.4, the general consensus among industry experts was that the number of blocks awarded was greater than expected, making them two successful rounds. Round 1.3 was successful in allowing Mexican companies and startups to create E&P companies but overbidding was prominent to the detriment of some projects. Shallow water Rounds 1.1, 1.2, 2.1 and 3.1 were successful in attracting the interest of players such as ENI, Talos Energy and Fieldwood Energy. These projects are moving forward and will eventually attract sizable investments.

The part of the reform that was probably overshot was the expected time frames. E&P activities for instance, are not expected to show positive results from investment inflows before the first five years. But overall, we believe the Energy Reform has proven to be superior to models in initial discussions and negotiations.

Q: Is Mexico’s legal framework mature enough to bolster the potential of the oil and gas industry?

A: That is where the challenge lies going forward. The devil is in the details and from our discussions with industry experts, we understand the industry is confronting these challenges. These include environmental impact assessments, land agreements, community negotiations for onshore projects and drilling permits. All these secondary processes are delaying the normal course of the project pipeline. Regulators need to concentrate on what is important and streamline these processes so the industry can live up to its potential. Another key element is involving other government agencies in supporting these processes. The Ministry of Energy is clearly committed to the reform’s implementation but for dispute resolutions, a coordinated group is essential. This should include the Ministry of Communications and Transportation for ports and rights of way, the Ministry of Interior and SEMARNAT.

Q: Is there any particular issue requiring further legislative work?

A: E&P legislation was the first stage of a broader effort to regulate all the links of the oil and gas value chain. Natural gas storage regulations are a close second since regulatory concerns organically transitioned toward using an abandoned field as a storage facility. Another aspect revolves around classification of reservoirs. CNH is working to regulate oil fields that spread beyond the limits of a single block. To be truly fruitful, these efforts require inter-ministerial coordination.

Q: How will the presidential elections affect the continuation of this process?

A: While we do not believe a new administration can revert the advancement of the reform, there is a possibility that the pace will slow due to the handover process. The industry hopes efforts will be made to make the transition as short as possible. The challenges now lie in the details of the reform and we would like to see the new administration address the ministerial coordination required to further consolidate the success of the reform.