Jorge Jiménez, Partner, López Velarde Heftye y Soria (LVHS), Mexico
“At this point, we are undoubtedly at a cross roads involved in the reshaping of the industry. As such, we are in the process of piecing together the elements and understanding, along with industry players, the role each participating party will be entitled to play. In addition to this, we are also assessing the opportunities available in the market and the type of interactions that can occur between domestic and international companies.”
LVHS is a Mexican full service law firm with attorneys experienced in handling the unique legal needs of international clients. What are the firm’s areas of specialization?
Since its inception in 1995, our firm has been dedicated to serving the energy sector. In fact, LVHS was established at the same time when Mexico took its first step towards partial energy market liberalization in the mid and downstream of its natural gas segment. This was the catalyst that inspired the creation of LVHS and thus became the first energy-focused practice in Mexico.
Although it was surprising that a country as dependent on the oil and gas industry was void of any energy practices, it was also indicative of the way in which the industry has functioned in Mexico for decades—with a single operator that lacked regulations.
Over the years, we evolved from our initial coverage of the natural gas segment into the exploration and production of hydrocarbons, and subsequently into the power industry and renewable energies. Today, LVHS caters to a variety of the energy sector players, addressing all the requirements an organization might have, from a legal point of view, with respect to its participation in the domestic energy industry. This includes considerations from the regulatory side to legal structuring, as well as corporate matters, project finance and joint ventures, among others. In doing so, we have built up a strong relationship with the major players in the domestic market which have been, and are likely to continue to be for a long time ahead, the Federal Electricity Commission (CFE) and Pemex.
The Legal 500 has ranked LVHS with the highest ranking in the energy and natural resources practice areas, as well as other domains. What are some of the firm’s defining projects or milestones?
Being the first players of our niche into the Mexican energy sector when the sector began opening up, we were able to work hand in hand with the Energy Regulatory Commission (CRE) in developing, for instance, the first wholly private power production projects. We have also worked together in developing the regulatory structures that are still widely applied to this day for power production. Similarly, we have been quite successful in participating in the development of all three LNG terminals constructed in Mexico (Altamira in Tamaulipas, Costa Azul in Baja California and KMS in Manzanillo, Colima). Of course, each of these presented great challenges for a variety of reasons. For instance, from a financing point of view, the restrictive regulatory environment around the terminals was something difficult for international lenders to address through adequate structures. Financing a long-term contract for an LNG terminal that was anchored by the vertically integrated power monopoly, the CFE, which could in certain instances unilaterally terminate the contract, was a complicated hurdle. Having developed these sorts of new and challenging projects, along with other landmark Mexican ventures, our firm has earned itself widespread recognition of leadership in the sector.
With such a rich experience in the local sector, how well developed would you say is the Mexican legal environment, particularly in the energy field?
The legal environment in Mexico has also been undergoing a major overhaul over the past few years. It is no secret that Mexico is often associated with slow legal procedures, bureaucracies and intricate administrative procedures.
Nevertheless, the situation has been evolving and there have been a number of major changes being implemented in the financial sector, as well as antitrust laws and government procurement processes, among others. These improvements have allowed for a much more sophisticated profession and provision of legal services, leading to a higher degree of specialization in the industry, higher quality of services as well as a more competitive environment. Simultaneously, however, this has also resulted in additional pressures on the legal system to keep pace with industry developments.
In sum, we have been seeing that many of the relatively newly established agencies have also become more sophisticated from a bureaucratic or administrative point of view. For instance, the CRE has not only become increasingly specialized, but also more streamlined in its procedures with professionally oriented officials. The same applies to the CNH, which has the mammoth task of regulating the giant that is Pemex, and now also other private operators.
What impact have the energy reforms had on the sector’s legal environment and how are you responding to these?
At this point, we are undoubtedly at a cross roads involved in the reshaping of the industry. As such, we are in the process of piecing together the elements and understanding, along with industry players, the role each participating party will be entitled to play. In addition to this, we are also assessing the opportunities available in the market and the type of interactions that can occur between domestic and international companies.
When a market monopoly suddenly becomes opened up to the international community, one thing that happens is that the only parties that possess the transitory knowledge are the foreign players. The private parties lack the experience of operating in a non-monopolistic environment and this represents one of the major challenges characterizing Mexico’s transformation. In this regard, domestic industry associations will be key in the shaping of national content rules that have to be different from Brazil or Colombia and specific to this market. I believe that instead of forcing national content through inefficient regulations, the authorities should focus on creating productive chains that would promote greater cooperation across various parties in the value chain as well as greater knowledge and technology transfer, among others.
From a legal perspective, were the energy reforms as comprehensive as you previously imagined and to what extent are they what Mexico needs to develop and modernize its energy sector?
They are certainly not as expected, because they are more comprehensive! The depth and far reaching implications of the reforms were indeed a pleasant surprise for me and certainly for most others in the industry. We find ourselves very optimistic about the future. That is, it was no secret that the energy industry desperately needed an overhaul, but we expected a reform that would be far more limited and on a piecemeal basis. When I first saw the bill presented by President Peña Nieto, and then what the Constitutional reform came out like, I remember thinking to myself that this goes above and beyond what we expected. Obviously, the devil is in the details and we must be mindful of what the package of secondary legislations look like and how they are ultimately implemented in the near future.
Nevertheless, we are highly optimistic about Mexico’s future. The reforms, as currently implemented in the constitution, are what Mexico needs and we are happy to see its incorporation into the constitution before its centenary. Although much of the attention has been unevenly directed at the upstream opportunities alone, there are an ocean of opportunities scattered across the entire industry value chain, and the country as a whole, that will result from Mexico’s energy renaissance. It is truly hard to grasp the opportunities unlocked by these reforms.
Do you think that too much focus is being given to the secondary laws, given that the fundamental and key aspects of the reforms were outlined in the amendments to the constitution?
Yes, to a large extent, the fundamental steps have been taken and the secondary law cannot limit what has been outlined by the constitutional amendments. For instance, the amendments are detailed enough to outline the industry’s transitory path and goes as far as detailing the type of contracts that will eventually be implemented. In addition to this, it also states the so-called “round zero” timelines in which Pemex determines what fields it will operate itself and which it chooses to forgo.
These amendments cannot be undone by the secondary legislation. In reality, what these legislations will determine over the next few months will be how easy or difficult the implementation process will be. The largest hurdle is now behind us.
Unlike the 2008 reforms, the current ones have really drawn the attention of the global energy community. How soon do you expect we will see investments to begin flowing in and which type of companies are best positioned to reap the benefits of the reforms?
Unlike in 2008, the latest energy reforms have the depth to attract all sorts of industry players, including the majors. As noted, the reforms are detailed enough at the constitutional level to clarify that companies will be able to book reserves, which is the crux of international investors.
Much like the case of ‘the boy who cried wolf’, no one really anticipated, or believed, that the reforms would go as far as they did. In our view, this has created a great deal of enthusiasm across the international investment community now that they have a clearer picture of the playing field. Having said that, there will be an increasing level of investments flowing to Mexico in the near future from the traditional heavyweights in all of the industry. Simultaneously, we also see a lot of opportunity for North American companies with experience in exploiting unconventional resources. Developing Mexico’s shale resources, estimated as the sixth largest technically recoverable reserves of shale gas in the world, could potentially position the country as a major component of the North American energy revolution.
How can LVHS support and assist these prospective investors’ ambitions? What makes your firm the partner of choice?
LVHS has a strong track record in Mexico’s regulatory environment, achieving great success in implementing novel and challenging projects from a legal point of view. We have also established excellent channels of communication with all the relevant agencies in our field at the institutional level. Having played an important role in the market, we enjoy intelligent interactions with the regulators, as well as Pemex and the CFE.
Not only have we played a critical role in the development side of important projects, but we have also contributed meaningfully in the financing aspect, which has enabled us to understand the concerns associated with financing various energy projects.
Furthermore, we have worked with organizations across all the relevant jurisdictions and, as a result, have a firm understanding of foreign investors’ potential concerns. We have developed the expertise necessary to assist international investors in all aspects of doing business in Mexico’s energy industry.