José Antonio Prado
Holland & Knight
View from the Top

Full Speed Ahead on Reform May Have Been Too Ambitious

Wed, 01/21/2015 - 12:11

Q: What areas of the Energy Reform are most urgently in need of greater clarity?

A: Clarity is very important in the upstream segment, and we have certain guidelines to follow since the exploration and extraction contracts were published. It is also very important for authorities to promptly issue the regulation for downstream and midstream, as decisions in these segments cannot be made in a matter of weeks. Companies have to present their plans to their international boards, which decide whether or not to invest. This is a big challenge for the government as hundreds of regulations must be issued. If the exact technical and economic information about these regulations is lacking, the new market will not work properly. This is a race against the clock and, in recent months, people have become very impatient to know what the real rules of the game are going to be.

Q. Was it a good decision to impose such an ambitious timetable, given that many rules and regulations still have to be defined?

A: It was a risky move but that is how the government wants to work. The impression created by the Energy Reform is very important in attracting players to Mexico. Unfortunately, this opening of the market came rather late. Furthermore, just because a great market was opened and the country had its biggest reform in 70 years, does not mean investors will come. The oil and gas business involves huge risks and big potential returns. People have to be very careful about how they approach Mexico, the results they will get, and the risks they are taking on. The government had no other option but to forge ahead and convey the idea that everything was going to be working very fast. Ultimately, large regulatory infrastructure has to be created. Since no private participants were allowed to operate in this business for a long time, the work is more complex as some of those responsible for passing the regulations have not had relevant experience. They must seek outside help to carry out the Energy Reform.

Q: What makes the Mexican model unique?

A: The model is unique because of the way it addresses the country’s particular situation and how it states the authorities will participate. There is still a prominent player, PEMEX, which companies will have to interact with in different ways, either as a partner or as a competitor. As a regulator, CNH will be handling all the contracts, from bid to execution. Then, SENER will determine the scope of the agreement or the clauses of the agreement and the Treasury will incorporate the economic clauses. There is also a social contribution that can range from 0.5-3% where companies have to pay landowners after paying taxes. In addition, companies have to thoroughly inform the landowners as to the purpose of the project, its duration, and the economic expectations. Those contracts must then go to either an agrarian court or a federal court to be ratified by the judiciary in order to avoid further interpretations. Such processes cannot be seen anywhere else in the world. Those are the unique features of our new law, even though most of these regulations have not been enacted yet.

Q: How should a foreign company looking to come to Mexico go about finding a good energy lawyer?

A: For the past 70 years, the only school for energy law in Mexico was within the country’s energy entities. Most attorneys claiming to be energy experts are good corporate and financial lawyers but have not had actual experience working within the energy sector or understanding what makes it tick. The sector is highly regulated and very technical, so there are not enough lawyers in Mexico that are sufficiently capable of working in the oil and gas industry. Finding professionals that understand this business and the new legal framework poses a great challenge to law firms.

Foreign companies should be very careful when selecting their lawyers. They should either pick a firm that has had past experience in dealing with PEMEX, CFE, the regulators, or a firm that has a deep understanding of the regulatory framework. This is not a matter of pure commercial law as it also includes administrative law and a whole new specific regime. My special recommendation would be for companies to seek a law firm that has had technical experience, and whose lawyers have been in the field or in energy generation plants. The right law firm needs its people to have experience beyond sitting at a desk writing contracts.