Benjamin Torres-Barrón, head of the energy, mining and infrastructure practice group, Baker & McKenzie Mexico
The Head of the Energy, Mining & Infrastructure Practice Group explains how overhauling the Mexican tax regime and adopting ancillary legislation on anti-trust and maritime law can still impact the overall success of the headline energy reforms. He also discusses why service agreements have actually been a good formula for shallow water fields and sheds light on the likely ownership structure of hydrocarbons to come.
Baker & McKenzie enjoys and leverages a global presence that spans seventy five offices across forty seven countries. Within that, what is the strategic importance of the Mexican office for your regional and global operations?
The Mexican oil and gas industry has been important to Baker & McKenzie’s Global Oil & Gas practice and the Firm at large for more than 15 years which is evident in the fact that we have five Mexican offices. However, it goes without saying that the strategic importance of Baker & McKenzie’s Oil & Gas practice in Mexico has grown exponentially due to the recent energy reforms in our country. We anticipate a significant increase in business opportunities over the mid-to long-term and are responding to the immediate needs of our clients primarily through a dedicated energy task force, who work continuously on analyzing the reform and secondary laws and its impact on our clients’ business, and training.
In addition, we are integrating our specialists attorneys who can draw on their experiences gained from other jurisdictions such as Brazil, which underwent its own liberalization process. This experience will be very valuable for example in the drafting of upstream contracts, for which there is no real precedent within Mexico.
Furthermore, in January of this year, we hosted the Global Oil & Gas Institute in Houston, which addressed the emerging opportunities in the Mexican oil and gas market and the potential implications of the reform package. Several client attendees included prospective entrants into the Mexican market such as international oil and gas majors and service companies. The Institute was followed by the Global Oil & Gas Webinar Series and a Mexico City event which specifically addressed the reform.
Baker & McKenzie is a full service law firm with capabilities to assist clients in oil and gas transactions throughout the entire value chain from upstream to downstream. Can you provide our international readers with an overview of the scope and focus of activities of the energy practice that you head up? What are the hot topics on your desk today?
Our clients need to understand the reform process and much of our focus is on monitoring the progress of the secondary legislation and analyzing the impact on our clients’ business, particularly as it relates to risks and opportunities. Other hot topics include the ancillary reforms on tax, anti-trust and maritime law as well as the development of model contracts in the upstream sector.
Baker & McKenzie’s legacy experience in the Mexico oil and gas industry, increased commitment to Mexico and expertise in energy law, and across related legal aspects impacted by the reform including corporate structuring, labor law, tax, intellectual property and environmental regulation places our Firm at a great advantage over its competitors that no other energy sector law firm can match.
When we last spoke to you in 2011 about the 2008 energy reform package you sounded disappointed and told us that the adjustments had been too slow and not nearly effective enough. From a legal perspective, what do you make of the reforms this time round? And to what extent are they what Mexico needs to develop and modernize its energy sector?
The reforms are much more ambitious and exciting for many reasons. The speed at which the federal government managed to forge consensus and push through the constitutional amendment took everyone by surprise. In addition, lawmakers have not shied away from sensitive and controversial issues such as the provisional booking of hydrocarbon reserves. This is crucial because the ownership structure of hydrocarbons will drive foreign investment in Mexico‘s energy sector. Finally, the reforms are revolutionary as they include an overhaul of the tax regime which increases the likelihood of successful results. Historically, the federal government has relied on Pemex’s profits to such a degree that too little money has been reinvested back into the company, thus inhibiting its growth and development. Fortunately, the tax bill should improve the situation and create a more competitive Pemex.
Not only will upstream oil and gas contracts be implemented in accordance with international norms, but we are witnessing the liberalization of the midstream and downstream oil and gas sectors as well as the power sector as a whole.
How important in this process is the secondary legislation that is currently undergoing formulation?
Contract types such as concessions and licenses, will be a key determinant in the success of the reforms. Our hope is that the law will be detailed enough and drafted in such a way to leave no doubt that private companies are being granted concessions with a full foreign investment allowance. There is obviously a lot of pressure on the government to have the secondary legislation approved by the end of April, but it is very important not to rush the timetable and risk omitting important details. The provision for the booking of reserves, for example, is already enshrined in law, but it will be important for the legislation governing the drawing up of contracts to be aligned so that there is no ambiguity. This is not so much a legal issue as a question of clear financial accounting and consistency.
To some degree, the ownership structure of hydrocarbons and contract types have been the center of the energy reforms debate and are a key determining factor for foreign investment. Following the implementation of the reforms, which authorities will determine these elements and what sort of contracts can we expect to see?
Unconventional resources including shale gas and deep-water plays will be licensed, however, there may be scope for profit sharing in cases where Pemex is seeking partnerships with private entities. Service contracts will remain as the more favorable contracting structure for those assets granted to Pemex, which are estimated to be 30%-40% of Pemex‘s request, by SENER.
Contrary to what is often written, service agreements have actually been a good formula for shallow waters and oil and gas service companies like Petrofac, Halliburton and Weatherford who have demonstrated that this model can be very profitable. It is not so much a question of the service contract template having failed, but more a matter of requiring different contracting models for more risky, difficult fields that require substantial investments in technology and have been left underexplored.
The bottom line is that service agreements will be employed for those traditional wells that Pemex performs best at, whereas new frontiers that Pemex has not been able to reach alone will be handled either through association or individually by private contractors. Production sharing and licensing will be used for deep-water and shale because those are the only models that may qualify for the booking of reserves and this is where we expect to see the oil majors participating in a big way.
How is Baker & McKenzie positioning itself to take advantage of these new opportunities? And how is the firm differentiating itself from its competitors?
We anticipate a number of US firms to come in and service their existing clients as it relates to the energy reforms, but this will prove to be a challenging task because years of on-the-ground experience and understanding the local way of doing business is required to be successful. Meanwhile, many of the larger private companies will have legal counsel in-house, but will be seeking the expertise of local Mexican lawyers.
In this sense, Baker & McKenzie is well placed to respond to the revolutionary reform of Mexico‘s energy market. Our longstanding experience in the domestic market and five Mexico offices provides our clients with a local understanding backed by a global platform that is unmatched. Already many reputable law firms have been in touch about partnering with Baker & McKenzie in Mexico because they simply don’t have the relevant capacity and knowledge here on the ground.
What advice would you give foreign executives when considering starting business in Mexico?
My advice to foreign executives is to be responsive to the new opportunities and possibilities that are unfolding and to keep open eyes. The speed and depth of the reforms mean that the business paradigm is shifting dramatically and what has worked in the past might not work as well in the future.