Manuel Cervantes
MCM Abogados

Helping Clients Dodge Pemex's Teething Troubles

Wed, 01/22/2014 - 09:38

“One of the main issues for onshore activities right now is PEMEX inability to meet all its payment commitments in the North Region, where most of the onshore activity is focused. This has had a considerable impact not only on large service companies working in Mexico but on the whole value chain. As a result, general activity in the North Region has declined,” begins Manuel Cervantes from MCM Abogados. “Some of our clients are reconsidering their strategy and business plan for Mexico. Others are relocating their equipment and assets to other countries such as Colombia, Ecuador, Argentina, and Brazil. Right now, it is difficult to say what will happen in the North Region.”

MCM Abogados has been helping its clients implement strategies to recover payments and to re-collaterize contracts in a way that remains profitable, even if at reduced levels. “We characterize the relationship with PEMEX, vendors, personnel, and all other activities affected by the decline in activity. We also help our clients enter the market in different regions. Companies may already have three contracts with PEMEX in the North Region, but that is no guarantee for securing a contract in the South Region. We can help our clients to make the transition.” Safety is an aspect that raises important concerns among Cervantes’ clients. The threat of cartels is constant in Tampico, Reynosa, and the surrounding areas in the north, which means the firm’s work is focused on reporting, monitoring and devising strategies to use PEMEX’s budget to implement new measures and controls to prevent leaks or theft of hydrocarbons from gathering facilities and pipelines. “We can help securing new technology contracts and provide support in the analysis of how to use PEMEX budget under a client contract to bring in these new technologies.”

“We are keeping a close eye on the latest developments related to shale gas. Mexican companies will have an important role as potential partners for international players looking to get a foot in the door in Mexico. We are in communication with US firms, mostly from Texas, to share information on the potential opportunities following the implementation of the reforms. If the Energy Reform allows for profit or production-sharing contracts in shale gas, Mexico has a good chance of attracting new investment but the profile of new investors would depend on the details of the contracts.” Cervantes feels that the ISC scheme has reached its limit following the outcome of the third round of bidding in the summer of 2013. “Even though PEMEX sent out the message that it was satisfied with the three contracts awarded, the reality was quite different. The three blocks that were awarded were more mature and will involve conventional activities and services, while the blocks that required new technology, unconventional services, and more risk and investment were canceled due to no proposals being submitted. This round showed that companies are not interested by the fee per barrel compensation, the model needs to change.” When pressed about a time-frame that can be expected for shale gas activities to become a reality in Mexico, Cervantes highlighted a new federal law on environmental liabilities that came into effect in the second half of 2012 in Mexico allowing for class action against local energy players as the key factor. “If the community perceives that there is environmental damage, it may now pursue action against PEMEX, contractors, and everybody involved in the project. It is not clear right now how PEMEX will deal with this new law but it will have an important influence on future regulation and guidelines for shale gas activities. Growing concerns for the environment and for sustainability issues related to the use of water in shale gas production mean that local communities will have to be shown that the right safety measures are in place. Once Mexico has the capabilities to exploit shale gas, then we can introduce the necessary changes to the legal framework. This is not something that we will see over the next few months; the project will need some time.” Many of Cervantes’ clients are preparing themselves for the anticipated shale gas rush by setting up joint ventures with US firms. “Once the legal basis is set for shale gas there will be a boom for the local law firms, which will be larger than the telecommunication boom."