A Good Start But More Work To Be DoneTue, 01/21/2020 - 17:18
As one of the latest countries to open its oil and gas industry to private players, Alejandro López-Velarde, Managing Partner at López Velarde, Wilson, Abogados, believes that Mexico must recognize the importance of this transformation for the economic growth of both the country and PEMEX. But he cautions there must be patience. “The government needs to understand that to see results in the oil and gas industry, it is necessary to inject the required capital into the NOC. In five to 10 years, the desired results will be noticeable.”
While the industry has benefited from the changes introduced by the Energy Reform, López-Velarde believes there are still several points to be addressed for the oil and gas industry to become a fully-fledged machine capable of increasing the country’s production levels. Among the first points that should be improved, according to López-Velarde, is PEMEX’s finances. “PEMEX needs to be strong and capable of competing on both the national and international levels. For that to happen, the NOC requires a strong and healthy budget,” he says.
López-Velarde also recognizes that allowing PEMEX to partner with private companies has been a great step forward. “There is no deepwater project in the world that is developed by only one operator. Offshore projects particularly require several companies sharing the risk and complementing their areas of expertise,” he says. “The fact that PEMEX is now allowed to enter into partnerships is extremely important and beneficial for the development of E&P activities in the country.”
Mexico’s antitrust efforts to build a stronger economy have been stepped up recently, which is why López-Velarde also highlights the fact that even PEMEX requires a legal defense before the country’s antitrust commission COFECE. “Being a pioneer in winning cases for PEMEX before the Federal Economic Competition Commission (COFECE) gives us the tools we need to better understand the rules of the game and apply them with other clients,” he says, “We helped PEMEX to avoid paying a sanction of around US$34 million.”
The law firm has successfully represented several oil and gas companies, from small and local businesses to major players with global operations. “As a boutique law firm, we can provide personal services to our client. No matter their size, every client is managed by one of our partners who is committed to providing a personalized service that best fits the clients' needs and expectations,” López-Velarde says.
Although it has faced off against COFECE in court, López-Velarde explains the firm is completely neutral and also works closely with the antitrust commission. “COFECE knows on which topics we support its view and on which we do not. We disagree, for example, with its opinion that Mexico’s fuel market has the proper conditions for the private sector to start working in the country,” he says. “It is not possible to have the proper conditions as long as almost all the storage, distribution and transportation infrastructure, which is small considering the size of the country, is owned and operated mostly by PEMEX.”
He also believes the Ministry of Energy still has too much influence over the industry. “If COFECE or CRE decide that a company must be sanctioned for some reason, the Ministry of Energy has the last call and can veto the regulator’s decision,” he says. Having said that, López-Velarde is confident the government is taking all the necessary steps to end PEMEX’s monopoly. “It is also placing a great deal of importance on being careful enough to avoid the creation of any kind of new monopoly from the private sector in the process,” he says.
With broad experience in the downstream sector, López-Velarde believes the country needs to restructure the current tariffs applied to refined products to consolidate attractive business models. “While there are over 500 permits granted to private companies to import fuels, only nine are economically viable,” he says. “Those permits are for self-consumption and they are economically viable because they are not subject to the Special Tax on Production and Services (IEPS). As long as this tax remains one of the highest in the world, in terms of fuels ROIs will not be high enough for companies to launch viable businesses in the country.”