Héctor Acosta
View from the Top

Energy Reform Depends on Transparent Rounds

Wed, 01/20/2016 - 16:05

Q: What have been the biggest and most important successes of the Energy Reform to this date?

A: The Energy Reform’s biggest success was the time taken for the implementation of Round Zero and Round One. The year 2013 was characterized by the constitutional reform, 2014 marked the year of the secondary reform and Round Zero, and 2015 saw Round One and the allocation of the first contracts. That means that in just two years, the legal reform took place, as did the allocation of the first contracts. Looking back, we waited 50 years before we were able to bring up the topic of private investment in the energy sector, after which we discussed it for 18 years. Yet, it only took two years to implement. The biggest success is this implementation speed, which was enabled by the long period of discussion that preceded it.

Q: How can you ensure effective dialogue between CNH, the Ministry of Energy, the Ministry of Finance, and the private sector on the design of the contracts?

A: When it comes to drafting contract models, we have many rules to follow, including the way we can incorporate recommendations from the private sector. We also believe we have a duty to establish equilibrium between the suggestions we receive from the private sector and the state interests that we are in charge of protecting. This balance allows us to reach a point where contracts are attractive for the private sector from an investment and utilitarian point of view, as well for the government in terms of revenue. In this regard, we have done well. I recently conducted an evaluation of the benefits that the state will receive through royalties and remunerations, which showed that R1-L01 contracts were in favor of the state with a majority of 62.49%. These contracts were for the exploration area and also included those for shared production. R1-L02, which also involved productionsharing contracts, favored the state at a rate of 75.90%, and R1-L03, which awarded licenses, favored it at a rate of 55.27%. All of these percentages have been a result of bids from the private sector, but they hinge on process from governmental entities.

Q: Many people believe R1-L01 did not meet the expectations. What were the main mistakes of this bidding round, and how did you learn from that?

A: Bidding phases cannot be evaluated independently, and the assessment must be carried out in relation to the entire process of Round One. However, I must admit that Round One should not have begun with exploration blocks, but rather with production blocks with proven reserves. This was a strategic error, rather than a mistake related to the content of the contractual areas or the contracts. We have nonetheless made modifications that would render the contracts more flexible without diminishing state protection. R1-L02, which offered production blocks, was much more successful and gave insight into the discouragement observed in R1-L01. One of CNH’s greatest successes has been its quick reaction in making the needed changes after each tender. R1-L01 did not send out the message we hoped it would, but this was rectified by R1-L03. I believe that this wobbly start, which was more a strategical error than a failure, will stay in the records as an anecdote. Fortunately, long-term results weight more than anecdotes.

Q: What is the role of the country’s anti-corruption institutions in the implementation of the Energy Reform, and how are they connected with the Ministry of Energy, CNH, and CRE?

A: The Mexican institution in charge of combatting corruption from an administrative point of view is the Ministry of Civil Service. Its activities are transversal, meaning it does not distinguish between topics related to the Energy Reform or any others. Nonetheless, the National Hydrocarbons Law established a few measures to combat corruption and promote transparency, which cannot be found in any other Mexican regulation. Unlike many other measures, these are preventive. The Hydrocarbons Law is linked to the anti-corruption legislation in the public contracts area, which establishes a series of sanctions and bans. The worst sanction for an operator engaging in acts of corruption would be a prohibition to its continued participation in tender auctions. In addition to the economic sanctions, depending on the incurred offense, IOCs would face the social consequences resulting from the international community gaining knowledge of its participation in corrupt activities.

When it comes to CNH, the administrative sanctions would correspond to the cancellation of the contracts and possibly conventional sentences. The disqualification from public auctions would be executed by the Ministry of Civil Service. Moreover, the individuals involved in these illegal activities could also be criminally prosecuted. Members of CNH are legally prohibited from liaising with bidding companies during the entire tendering process, and afterward, contact can only be established through audiences where there must be at least two commissioners present in the CNH premises. The audience is videotaped and we draft an act of agreement, sign it, and make it public. We are the first Mexican agency to put together a declaration of interests. The government entity is consciously ensuring that the processes are carried out with full transparency, and we are transferring this culture to all of our collaborators. It would be a shame for an act of corruption to tarnish the Energy Reform, as it is a reform that was achieved amidst a divided public opinion. Allowing for such an act to occur would provide validation to those who were opposed to it and would disappoint those who believed in it. We have to be relentless in the face of any deviation from proper ethical conduct.