David Jiménez Romero
Partner
Chadbourne & Parke
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View from the Top

Potential PEMEX Partners Should Be Cautious

Wed, 01/21/2015 - 11:47

Q: What significant opportunities would you highlight for private companies after the regulatory overhaul of the Mexican oil and gas sector?

A: In order to assess upcoming opportunities, it is vital to scrutinize certain basic elements of the Energy Reform. First of all, a wholly new legal framework was created, opening up opportunities for private companies as well as other public enterprises. Secondly, the old vertically integrated state monopoly has ended. National and international players will now find opportunities in exploration and production, not only through the awarding of E&P contracts and licenses, but also through the migration of existing integrated services contracts into proper E&P contracts with full considerations and retributions. The former model was, until now, governed by PEMEX to allow private companies to participate in the sector as service providers. The same will happen with the financed public works contracts, which can also be converted. This means that the Energy Reform’s main feature is that it allows private parties to explore and exploit new conventional and unconventional oil and gas fields. This will also translate into opportunities for many investors, operators, service providers, equipment suppliers, financial entities, and equity funds in different E&P activities encompassing shallow waters, extra-heavy oilfields, deepwater, and shale oil and gas.

Local and international players will have opportunities to participate through production-sharing contracts and profit-sharing agreements, as well as different kinds of service contracts. The new E&P contracts and licenses allow private companies to venture with PEMEX and other stateowned companies as well. Companies with experience in fields that require higher technologies, such as those found in deepwater and ultra-deepwater, will definitely benefit from this. Therefore, we will see a large amount of joint ventures in those segments. But while everyone’s eyes are on upstream activities, attention should be paid to the midstream and downstream segments as well. I am sure that we will see joint ventures in oil refining, as well as hydrocarbon transportation activities, either between private companies or between these and PEMEX. Another area of potential investment is related to the storage and distribution of oil and gas and their byproducts, for which PEMEX does not have enough resources. However, the most important aspect for the general public is the opening of retail activity, which will allow international and local players to set up their own service stations and to commercialize their own brands, not just PEMEX’s brand.

Q: What relevant factors should be considered by potential investors in order to minimize risks when partnering with PEMEX?

A: It is extremely important for potential partners to conduct thorough due diligence in order to minimize risks. They need to look at the fiscal terms provided in the new laws and contracts as well as ring-fencing and other tax features that will impact joint ventures. Potential partners will have to look at certain matters pertaining to technology, especially when venturing out with PEMEX. Even if the NOC knows the areas very well, international players might have better technology and it is important to complement these different skills. PEMEX has very experienced engineers in traditional fields, such as shallow waters, and unconventional areas like Chicontepec. However, it has little, if any, experience in deepwater. For this reason, the way joint venture contracts and joint operating agreements are drafted will be very important for international players that want to partner with PEMEX.

Q: How will Chadbourne & Parke manage to help its clients bid and win specific contracts in the upcoming rounds?

A: We assist our clients in setting up new businesses in Mexico in many areas, mainly oil and gas, power, and infrastructure, where we support and advise them during the public tender procedures. At this point, we will have to understand the new rules for public tenders, which should not necessarily vary from the old one because public tenders are still ruled by Article 134 of the Constitution. It is a natural step in our services to adapt to a new legal framework. Chadbourne & Parke provides added value to its clients because the firm has a strong practice dedicated to government procurement and contracting. Another service that we have been providing for a long time, and that will increase significantly, is the drafting and negotiating of joint ventures and joint operating agreements, not only with PEMEX but amongst different international players as well.