Sergio Beristain
Beristain + Asociados

Opportunities for the Legal Optimization of Contracts

Sun, 01/22/2012 - 14:23

Before the 2008 Energy Reform, two laws were applied to Pemex’s contracting activities: the Public Works and Services Law and the Acquisitions Law. Often, application of these laws made contracting a dicult and opaque business, explains Sergio Beristain Souza, Partner at Beristain + Asociados. “The biggest challenge for the authorities before 2008 was making any collaborative oil and gas project successful, because they were restricted by these regulations. The situation was not clear for anyone.” The confusing nature of the contracting situation made it easy for the darker side of contracting to thrive; backdoor deals slipped under the radar. Beristain Souza says that corruption made the complex contracting situation before 2008 even trickier for companies to navigate.

Since 2008, Mexico’s Public Works and Services Law and Acquisitions Law are no longer applied to Pemex, although they are still utilized in other public institutions. However, Beristain Souza says that the new system is still far from full implementation and adoption, and that regulation created by the Energy Reform has not fully cleared up problems with the NOC’s contracting. Firstly, the CNH, created by the reform, is still finding its feet as a regulator. Secondly, although positive steps were taken to bring professional directors to the Pemex board, there are still political influences at every level, from both Congress and the labour union. These boards are now responsible for approving every contract that Pemex signs, which is leading to slow project approval cycles.

Two other hurdles currently stand in the way of the smooth implementation of the 2008 regulations. The first is that constitutional challenges reached the Supreme Court and delayed the full implementation of the laws by around 18 months. The second hurdle, according to Beristain Souza, is that many in the oil and gas industry, even those on the legal side, still have not adjusted to the new regulation.

Pemex is now regulated by three sets of laws: the Pemex Law that came out of the 2008 Energy Reform to replace the laws previously governing the NOC; the Civil Code, and the Law of Public Workers. Although Pemex is struggling to come to terms with the impact of its new legal framework, Beristain Souza believes that, in the end, the framework will result in better interaction between Pemex and the private sector, and between Pemex and its employees.

Beristain Souza believes that the contracting process will be much smoother now that the Civil Code is being applied to Pemex, as it has a strong history of successful utilization in Mexico outside of the oil and gas industry. “The most important issue after dealing with bureaucracy and corruption problems is to create value for the Mexican nation. As such, the Civil Code is the best law that could be applied to Pemex. Pemex is worried about this, because of the huge implications of adopting such wide-reaching regulation. However, the Civil Code has a long history of implementation and precedent in Mexico, and has the ability to solve many problems. By applying it to Pemex, the chance to make comfortable and transparent contracts becomes a reality.”

In order to smooth the transition, and in the long-term improve the Energy Reform’s implementation, Beristain Souza believes that Pemex should create a training area where the new regulations can be explained to key employees, from technicians to board members. “There has to be a balance between the oil industry and the Civil Code. Therefore, we need to place clear definitions that cover the scope of Pemex’s activities in the Civil Code in order to ensure that everything is well regulated. This means defining exactly what is crude oil, what is gas transportation, and how a pipeline is constructed and installed, in order to provide companies with better opportunities to invest in Mexico, which will happen because, with the use of the Civil Code, they have better guarantees that they will be treated fairly and equally.”