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Interview

Nicolas Borda, partner, Greenberg Traurig (GT), Mexico

“These changes will certainly not take place overnight through the mandate of a particular law. These reforms, as the most important energy reforms of the past 75 years, will take a certain period of time to bring about a change in everyone’s mindset, from the private sector to public sector,” explains Nicolas Borda, partner at Greenberg Traurig (GT), about the recent energy reforms in Mexico.


Given the transformations sweeping the Mexican energy industry, where is Greenberg Traurig (GT) focusing its efforts at this point in time?

The year of 2014 will be more about strategic analyses of the reforms and understanding the new changes and legal frameworks they introduce. This will enable us to explain to our clients the new regulatory and legal environment in Mexico, which in turn will endow them with the ever-critical first mover’s advantage.

We expect to have the secondary legislation approved by late April, or late May, should there be an extraordinary period in Congress. That is, the opposition party in Congress is looking to enact secondary legislation in other areas including telecommunications, antitrust and politics before the energy reforms. Hence, although the deadline for energy reforms has been set for the 21st of April, we could see a slight delay there. Subsequently, we will have the regulations issued by the executive branch sometime in the last quarter of this year. As such, 2014 will be a year dedicated to completing and understanding the new legal framework and studying the first mover advantages in different niches within the Mexican market.

On the other hand, as chair of the energy committee at the National Association of Corporate Counsels (ANADE), former chairman of the energy committee at the Mexican Bar Association and former founding president of the Mexican Academy for Energy Law, I am providing comments and suggestions to the Ministry of Energy and other regulatory agencies in the industry to improve the energy sectors’ legal framework, for the overall benefit of the country. Because we have clients of all shapes and sizes in various parts of the energy value chain, I am not advocating for any particular group. In this context, and as a former professor of energy law, I always try to hold a strictly objective view.

What were the objectives assigned when you first joined Greenberg Traurig?

I first joined Greenberg Traurig (GT), almost two years ago from the energy practice at Borda y Quintana, S.C. Attorneys at Law in Mexico City. The move was primarily driven by my commitment to have a larger global platform from which we could better serve our clients.

I am currently heading the energy practice of GT in Mexico City and frequently travel to the worlds energy capital—Houston, Texas. Within the energy sector, our team is involved in the oil and gas sector, as well as in the power generation segment. In oil and gas, we are deeply involved across the entire value chain, upstream, midstream and downstream. On the other hand, in power generation, we are active in the conventional and alternative energy areas.

With that backdrop, we are involved in the regulatory, transactional and dispute resolution aspects of these industries. As such, we have a comprehensive focus on the energy business, catering to all types of the industry’s legal requirements, including public policy.

Within dispute resolution, we are rather active in international arbitration. This includes both commercial and investment treaty arbitration. Similarly, we are also involved in administrative litigation in the energy sector along with commercial litigation. In the regulatory domain, we advise on a daily basis client’s before the Mexican National Hydrocarbons Commission (CNH), for upstream aspects, and before the Energy Regulatory Commission (CRE), for natural gas, LPG and power generation related projects. In addition to this, we have an open channel of communication with the Federal Electricity Commission (CFE), the vertically-integrated state power company engaged in the generation, transmission, distribution, and sale of electric power, as well as with Pemex, PMI, PPI and other affiliates.

We are also heavily involved in the legal issues surrounding government contracting and public policy. As you might know, Mexico is currently characterized with a real reshuffling of powers with the on-going reforms transforming the country. This enables us to ascertain the impacts of the new bills introduced to Congress at an early stage, and the implications they will have on our client’s businesses.

Working so closely with the authorities in the industry, how open are they to industry input in shaping the regulatory and legal frameworks of the energy sector?

Most of the people I have interacted with have demonstrated an eagerness to learn. This is rightly so since most of the topics we are now dealing with are new for Mexico, its legislators, and senators. They cannot be rationally expected to be experts in every aspect of the economy. Having said that, I have observed a very positive change in attitude over the past few years where legislators want to draft laws that are both competitive and efficient. Otherwise, they risk limiting the growth in technology, investments and job creation that the country so needs.

A key aspect of the reforms is the redefinition of organizational structures and responsibilities of Pemex and the industry’s regulatory agencies. To what extent do you think these organizations can effectively manage and cope with their new roles and responsibilities?

These changes will certainly not take place overnight through the mandate of a particular law. These reforms, as the most important energy reforms of the past 75 years, will take a certain period of time to bring about a change in everyone’s mindset, from the private sector to public sector. Regulators will need to learn how to regulate, as will Pemex need to learn how to be regulated and become just another competitor, albeit perhaps slightly privileged, operator.

Following the reforms, Pemex will transform from a state-owned monopoly into a productive state enterprise. In doing so, they will still be using a significant amount of tax payers’ money in their budgets because of the current fiscal regime of federal leases that is being replaced. They will need to evolve into a productive entity that engages in production or profit sharing contracts, as well as license agreements and joint ventures. This will create two sources of income for Pemex. Over the medium term, it is likely that Pemex will no longer need to dig into taxpayers’ pockets for budgetary capital. In addition to this, we could also expect to see Pemex affiliates listing shares in the capital markets, as Statoil or Petrobras have done in the past. This will help to streamline many aspects of the organization performance and transparency, increasing the attractiveness of the energy sector in Mexico.

Some have pointed to the Mexican private sectors’ relative inexperience in international markets and alliances as a potential challenge for transitioning into an open and liberalized market. Do you agree with this view?

Not entirely. It is difficult to generalize because there are a number of Mexican ventures and partnerships with foreign organizations that have been, and continue to be, successful. Conversely, it would also be difficult to generalize that all international firms will all face the same challenges here. For instance, it is reasonable to expect that our Northern neighbors in the US might find it easier to adapt to the Mexican business environment in comparison to an Asian firm, for example. Simultaneously, this to some degree is closely related to corporate governance issues. Majority shareholders will always have a stronger decision making power in any alliance.

On the other hand, what is often the case in Mexico is that companies tend to be family owned. It is also often the case that by the third generation, these companies are often bankrupt, sold or divested. In this light, it is clear that it would be better if these companies are instead institutionalized by installing a professional board of directors that adhere to international best practices and procedures, ensuring greater continuity of Mexican companies.

What are the necessary factors to get deepwaters and unconventionals moving in Mexico?

I believe the success of shale in the US has primarily been driven by a factor unique to the US: the ownership regime in the US which is different from that of most of the world’s nations. The surface owner is entitled to the mineral rights all the way to the center of the Earth. In Mexico, like in most countries in Latin America or the rest of the world, it is the Nation that owns the mineral rights instead. Following Mexico’s energy reforms, the nation will still continue to own these rights, whereas the operator will be eligible to hydrocarbons ownership only at the well-head.

This is the key differentiating factor. In the US, when George Mitchell perfected fracking technology, entrepreneurs there were able to acquire acreage, and quickly commence with exploration activities. They were not obligated to wait for the relevant authorities to issue bidding rounds, or anything of that sort. There were much more private dealings which enabled the business community to be creative and proceed with its development.

There are other aspects at play as well. The state of Texas, for instance, produces the same amount of oil as the country of Mexico. North Dakota produces the same amount of oil as the country of Colombia. Owing to Bakken shale, a primary oil play straddling the US border with Canada, production has been increasing tremendous in the US. This in turn is also possible as a result of the comprehensive availability of infrastructure, which is not the case in Mexico. Although building this infrastructure in Mexico will have a significant economic upside, Mexico’s shale rich regions in the north are water poor and that’s an integral component of fracking.

Having now firmly planted your feet at GT, what are your ambitions for the next few years, and how would you like to see Mexico progress?

GT is undoubtedly positioned in the right place at the right time to take advantage of the opportunities in the energy sector.

Mexico, as part of North America and Latin America, is uniquely positioned to take advantage of these great opportunities. As a block, North America can effectively compete with any other commercial block in the world. If Mexico is able to enhance its rule of law, as well as its security concerns, it will see its GDP grow at a very rapid pace over the next few decades. President Pena Nieto’s reforms have so far been remarkable and now we need to implement the secondary legislations in an efficient manner that will bring legal certainty to all players involved while ensuring a level playing field. As a country, we admittedly need to improve our rule of law, transparency and anti-corruption measures. If we can achieve this, while having our politicians agree over what’s best for the nation as a whole, then Mexico is guaranteed a very bright future indeed. Mexico needs politicians that are thinking about the next generation, not the next election.

 

To read more interviews and articles on Mexico, and to download the latest free report on the country, click here.

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