Shining a Light on Regulatory Compliance

Q: How has the institutional balance for regulators in the industry impacted the application of its regulatory framework?

A: No laws, secondary laws, rulebooks or even guidelines have been modified. However, some ongoing processes have undoubtedly come to a halt. The private sector has seen a slowdown in activity while activity in the public sector has increased. This by no means is a bad thing and can be a positive development. The main impact has been on the category of permitting. Permits and authorizations have been delayed or at times even put on hold indefinitely. This has left many companies unable to market their products and services. Not having a storage permit after US$25 million has already been spent to building a storage tank, for example, puts many companies in a precarious position as those costs have to be added to a financially unstable balance sheet. This is a direct consequence of the developments in 2019. Government representatives might claim that no permits were denied, and perhaps they were not, but the fact that so many were put on hold was enough to create a severe impact.

To some degree, this changing institutional balance can be best expressed in ASEA’s changing role as a regulator, which has been drastically reduced since Luis Vera’s exit. ASEA’s supervision of industrial safety plays an enormous role in the sector’s development. During Luis Vera’s brief tenure, we witnessed a flurry of activity: backlogs were cleared and regulatory units became much more vigilant. At one point, they even managed to close a plant that had already been the target of millions in investments because it was not complying with the regulations. Unfortunately, Luis Vera had to resign because his leadership began to be at odds with the government’s agenda. Since then, ASEA is still technically performing its duties, but it is now on the shelf, so to speak. They will look at the paperwork and approve what needs to be approved but its capacities are diminished because it no longer has its own priorities as an institution. ASEA must once again grow its presence in the industry so that it can guarantee industrial safety in all of the sector’s projects.

Q: How are you able to oversee your clients’ projects when so many relevant decisions are being made outside of Mexico?

A: It has been difficult. One of the more notable examples of this is Shell. They have been vocal regarding their intentions to not only respect all local content regulation but also expand upon it. However, when we and other companies like ours approached them to offer our services in regulatory compliance, their answer was that none of those matters are managed through their Mexico office, all that work is happening in Houston. The question then became, how can we offer our services in Houston? For Shell, regulatory compliance in Mexico is a particularly complicated issue due to their heavy involvement in the deepwater sector.

We already have deepwater operators in Mexico, and their activities are arguably taking place within legal confines, but it is hard for us and for them to know for sure. PEMEX used to hold the exclusive concession to explore these areas and did so under its own regulatory framework. Now that CNH is assigning all these contracts, companies have a lot of questions about how to proceed and how to deliver the necessary social and environmental impact studies before getting their plans approved. We have not specialized in the offshore sector but there is already an ecosystem of Mexican companies dealing only with these grey areas and the clarity that is necessary for these processes to go forward. Still, companies need to meet us here in order for that to happen. The same holds true for investments. Since most of the deals are done outside of Mexico, the guidelines that structure the movement of those resources are different and thus these companies are unlikely to hire Mexican companies or personnel to assist them with their management. Many of these companies come to Mexico with their entire law firm, which is then clueless in its pursuit of regulatory compliance. There is a lot to read but not a lot of day-to-day guidance. This has definitely affected our market strategy.     

Q: How will you take advantage of all the deepwater exploration contracts and the opportunities that will arise from these?

A: We have been in close communication with a number of companies, particularly regarding regulatory compliance on social, environmental and industrial safety matters. Unfortunately, they are in quite a rush due to the deadlines for the work plans stipulated in their contracts. Without an effective regulator to demand these studies from them, there is less urgency to contract our services. Also, since many of these companies are foreign, they are playing a waiting game until they can expand their presence and workforce in Mexico, such as hiring their own legal team to oversee all of these requirements. However, despite these obstacles, we are positioning ourselves carefully to offer our services as more of these projects and contracts come to term.

Q: Where do you see the most urgent need for successful regulatory compliance? 

A: There is more urgency to comply with social impact requirements in onshore projects, particularly in the state of Tabasco. In regard to measuring its success, I would use this distinction as a guidance: there are two types of impact studies in Mexico, desk studies and field studies. In the category of social impact studies, the only real and reliable ones are field studies. Staying within the confines of whatever data happens to be available from social databases, such as those managed by INEGI, dooms you to inaccuracy. You need to take a tour of all sites and communities involved and perform your own surveys, even if they are informal. Otherwise, you risk that stakeholding communities will not be properly notified of the project’s possible impact, not to mention your client running into the larger issue of facing organized social or community opposition.

Frap Soluciones Integrales is a consulting firm that specializes in regulation, project development, storage, distribution and management of hydrocarbons in Mexico. It provides support for the development of social and environmental studies.