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Interview

with Benjamin Torres Barron, Partner Baker & McKenzie, BAKER & McKENZIE

01.09.2011 / Energyboardroom

2008 was a very important year with the passing of the Energy Reform bill which carried high expectations for revolutionizing Mexico’s hydrocarbons industry. However some of our interviewees believe that it is a failed reform. Since the government was guided more by what was feasible than what was actually necessary and there was never a clear sense of direction to the change needed in the oil industry. Additionally, the proposed reform only dealt with oil and did not address wider energy sector issues. Do you agree and if not what would you say have been the positive aspects of the reform?

I have to admit that the energy reform has not been as effective as it should be, particularly when you consider the length of time it took the government to implement it. It may be true that the reform is not what everyone expected, since there are certain aspects in which it could be improved. However, I believe is a step forward. As you know, the first set of rules for the reform package was enacted in 2008. It really took some time to complete the entire reform process as until a few months ago, the first round of the E&P model contracts was released. This length of time consumed to implement and complete the energy reform it is one of the major criticisms – because in this field, time is of the essence. There are many examples I can use to expand why timing is important for Mexico and its energy industry. But I have to say that, it is not easy to implement a complex and sensitive reform with a rigid framework subject to several political, social and idiosyncratic issues. However, one must note that there was some effort made to hear, collaborate and participate with all the organisms and institutions having influence in the industry as well as to make it effective by securing important agreements and consensus on the terms and conditions of what this reform should contain. There have been certain improvements with respect to our previous legal framework. I think the greatest achievement of our energy reform is on one side, the DAC (Disposiciones Administrativas de Contratación) or the “Administrative Procurement Guidelines”, which include more flexible mechanisms and add particular features to facilitate contracting with private parties. It is a rather modern contractual structure that is designed to encourage private parties and our national industry to “dive” into deep waters. Maybe later than sooner (not as early as we would like), but finally Mexico will be able to exploit the challenging deep waters in the Gulf of Mexico, whereas before, Pemex was unable to do so. Furthermore, I have to emphasize that the energy reform, is not only related to oil matters. The reform package also contained specific features related to renewable energy and energy efficiency. Some progress has been made on this front, particularly in the electricity sector. In terms of renewables, the power industry has been more effective as a result of the policies and the guidelines that the Mexican Energy Regulatory Commission has issued and implemented to encourage the use, and exploitation of electricity based on renewable sources.

Indeed, and as far as I understood, one of the interesting developments has been wind power in the south of Mexico
Agreed, there is significant progress increasing the capacity of wind power specially in Oaxaca and also there are new grid transmission policies helping to effectively discharge renewable and co-generation outputs and deliver it at competitive conditions to its off-takers. New and attractive concepts have been introduced, such as the energy bank, the compensation of energy, and the single transmission tariff used to serve power to the consumption centres.
Bottom line, notwithstanding the many constraints, challenges and rigid obstacles in our energy environment, there have been significant advances in electricity based on renewables, , and Pemex has been able to use the best of its resources with whatever tools it has available.

They say the new contracts are a step forward but the international service companies will be wary of them because they are complex and there is a lot of risk. As a result, they will prefer to partner with a Mexican company and then the big companies will come in for deep water. Is this what is going to happen?

That is exactly what is going to happen. Oil and gas companies, which are risk takers by their DNA, can bear the risk. Hence risk is not the issue, it is the return. They will be willing to bear more risk if the return is enough to even out that risk. Taking into account the actual situation of the sector, we anticipate a lot of joint ventures of majors with local companies. As you mentioned, the real interest and revenue for international oil companies will be in deep water. However, what is important for most of international oil companies is the ability to book the reserves. At the moment, if an international oil company goes into a field for E&P, our legal framework does not allow them to book these reserves. However, I have to say that this prohibition to booking reserves is not clear enough and is subject to different arguments and interpretations with respect to its scope and mandatory effect.

Pemex is now going into deep waters. Would you say that Mexico has a sufficient regulatory framework to implement basic rules and procedures for these kinds of activities?

There is not a black and white answer. However, I would say that the framework has been adapted in order to motivate investors to continue or increase their participation in deep waters. The legal framework is there and available for investors. It will therefore become a reality! There are still is uncertainty to overcome yet, unitization, cross border fields, to mention a few.

Given the current global trend to secure more energy sources, it can be risky for Mexico to continue to depend on hydrocarbon-based energy. How important is it for the country to diversify its energy portfolio and increase the use of other energy sources, especially renewable sources of energy?

It is extremely important, just as important as is going into deep waters because the Mexican government has realised that it is vital to increase oil and gas production but . however, it is also relevant to save and reduce energy consumption by promoting a positive mix of energy generation. Having said that, the Mexican government has tried to motivate the development of electricity generation based on renewable energies and energy savings based on energy efficiency. I think biofuels could also contribute with valuable features to reduce our hydrocarbons dependency but Mexico is behind on this subject and there is need to do some extra work on that front.

Do you think the goals that the government has declared in the Estrategia Nacional de Energía are going to be feasible, of 25 percent of renewable energy by 2012?

There has been some confusion with these numbers. The government has indeed mentioned 25 percent, but we are really talking about 7.6 percent referring to wind power, biomass and geothermal, whereas the aggregate 25 percent would include hydroelectric power which thereafter makes it feasible.

Despite what happened in Japan what is the potential of nuclear energy?

Nuclear power is globally a subject as sensitive as oil and gas is in Mexico, if not even more. The public opinion had forgotten about that (Chernobyl) until the Japan issue came along. The problem is that nuclear energy, whether we like it or not, is the cheapest technology to generate electricity. It is a source of power that is very reliable. If a nuclear plant is well managed and has adequate and updated technology, it is extremely unlikely that it would fail. A lot of things need to happen at the same time to have a catastrophic failure . The dilemma here is that people do not want nuclear plants in their back yard but at the same time, everyone wants and needs cheaper power. We may come to a point where generating electricity becomes so expensive and maybe even no longer available at certain areas that I believe the these nuclear risks and concerns will become obsolete. You can only rely on renewable sources up to a certain point. But if the sun does not shine, or the wind does not blow, then you will need a nuclear plant to operate on a daily basis that can deliver power regardless of nature. The key is to keep a reasonable mix between nuclear, renewable, and hydrocarbons, because an energy mix is what creates a mature energy market.

Baker & McKenzie differentiates itself from its competitors by offering an industry-focused practice. Has this model continued to give the company a leading edge in Mexico, and overall, what is your assessment of the firm’s positioning in the Mexican market today?

What our firm has to offer in the market is unique. We have an industry focus and I think that the energy practice which I lead for the Mexican offices represents this. Our energy team is composed of many professionals from different backgrounds (not only attorneys). We understand the market and the industry, and all of us work together as a team to provide our clients with high quality services. Since our professionals are 100% focused in the energy sector, we have a good network and connection “pool” within the industry, including regulatory authorities, PEMEX and CFE. In countries like Mexico, the network is really importantWe provide our clients with legal and professional advice based on experience. In the energy industry, we are a group of 30 professionals involved in different areas such as regulatory and contractual law, tax, IP, litigation, labor, environmental, accounting or transfer pricing to list just a few. We are specially dedicated and focused on this market. We have a significant number of people available to begin and complete in-house any project. As time is of the essence in energy endeavours, our resources allow us to deliver our tasks sooner than anyone else. Other firms are often specialized boutiques, and therefore, only have a few attorneys that can only work on one project at a time. These boutique firms are so specialized, that if they need for instance, a litigation attorney, they will need to outsource him. The problem arises when you need to retain and coordinate different firms. At Baker & McKenzie our clients don’t face that kind of hazels since we are a one-stop shop to them.Founded in 1949, Baker & McKenzie advises many of the world’s most dynamic and successful business organizations through more than 3,750 locally qualified lawyers and over 5,700 professional staff in 69 offices in 41 countries. Baker & McKenzie is known for having a deep understanding of the language and culture of business, an uncompromising commitment to excellence, and world-class fluency in its client service.Furthermore, Baker & McKenzie celebrates 50 years of operations in Mexico; we have five offices in Mexico (Mexico City, Juarez, Monterrey, Tijuana and Guadalajara) where we count with more than 400 professionals highly specialized on diverse law disciplines, and as a global firm, we provide a value-added to our clients. Typically, transactions often involve cross-border issues, such as international tax treaties and international business transactions, or dispute resolutions under several jurisdictions. We can involve professionals from many other countries and make use of their expertise. This definitely gives us a great advantage. For example, I work on a daily basis with my Houston colleagues who have considerable expertise in contractual situations and business terms relating to oil and gas matters..

You mentioned something interesting about understanding the market and understanding the people. When we interviewed one of your colleagues at Baker & McKenzie Russia (Paul Melling) he commented that you cannot really understand the industry unless you really understand the regulatory environment. Saying that, how challenging is that to do in a country like Mexico where the rules of the game are not clear?

It is very challenging. They are open to interpretation, there are so many arguments, and they are evolving all the time. The laws have changed so much recently in Mexico with respect to the market that you really need to dedicate time to understand the business and update your industry’s contacts list.

How is Baker & McKenzie helping its clients with regards to future opportunities that the Mexican oil and gas sector will have?

In several different ways. First of all, we organize different seminars as a courtesy for our clients, during which they are able to do networking, as well as understand the changes in the market and legal environment.We also prepare and provide our clients energy market reports, where basically we provide news on the oil, gas and electricity industries. We know that our clients need to stay informed about the upcoming tenders and projects, as well as any changes to the law, or emerging economic and business situations that they should be aware of. Our bulletins are presented in a high level report that summarizes in three minutes what our clients should be able to understand of what happened that week and what is expected in connection thereto. Also, we provide clients with alerts on new investment opportunities. We send bulletins on the new changes. For example, when the energy reform changed, we sent bulletin reports about what this was really all about and the expected outcome of the reform. We do all of this in a very business oriented manner, trying to avoid academic discussions.We also offer courtesy door to door meetings during which we provide one-on-one seminars for 3-4 hours addressing the issues and matters they specially have interest on. We also organize videoconferences and training webminars. We participate in several industry seminars that are not only organized by us, but that we sponsor, and provide courtesy passes to our clients. Also we provide local advice and contact when our clients’ business becomes international.

For two years in a row the Mexican Magazine Petroleo y Energia has nominated you as one of the top 100 most influential personalities in the Mexican oil and gas industry. What have your contributions been in order to make the list? And most importantly what does this mean to you?

To be honest, it has cost me a lot of sacrifice and time! I think that what I have done is to truly love the industry and my practice. Since I know how important it is for my country, I try to help out with my know-how about the industry to improve what needs to be enhanced. And having said that I have been networking within the government and within the private sector to see what can be done better. I take the time to work on diverse projects, write and do a lot of presentations so people can understand better the industry.As time goes by, the number of energy projects that I have been involved in has increased dramatically. Hence, clients recognise our expertise, new clients come along and our firm becomes stronger in the energy sector. My partners have acknowledged and recognized this effort that is why they have entrusted me with the leadership of the energy sector within our firm.

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