Carlos Machorro, Partner – Antonio Massieu Arrojo, Associate – Cecilia Sarabia de León, Associate, Santamarina y Steta Mexico
Santamarina y Steta sat down with us for a candid discussion about the effects of Mexico’s new energy policies, the anticipated effects they will have on Mexico’s international investors, the current place of the global Mexican market and how the nation is overcoming any legal and energy obstacles it encounters.
In the few months since we last spoke, what has been keeping the energy practice busy, and what are some of the changes and milestones you have experienced?
Antonio Massieu (AMA): Last December, the first call for the bidding process on Round One was published. We have been assisting several companies that are interested in participating in the process. This stage is very stringent because you have to prove that you not only have the financial capacities, but you have to prove you have the operative capacities as well. We have several potential clients who are interested in working with us. The prequalification documents are due in March. This is what has been keeping the industry busy thus far.
Cecilia Sarabia de León (CSL): As it’s a very early stage, we are still in the clarification stages of the bidding process and most information is confidential. Therefore, it is too early to be able to discuss particular milestones, but what it comes down to is we have been involved in an exchange and preparation of information and requirements and the clarifying of doubts, as well as performing a deep assessment of the bidding rules and the contrac models. It is entirely possible that within the next ten days they will be releasing the second part of Round One. This will be very good for us because at the moment there are a lot of companies who are interested in participating.
With the opening of the energy sector, what is the current place of the Mexican market globally?
AMA: I would argue that Mexico is finally getting a chance to catch up with the rest of the developed markets. As you know, before the enactment of the reform, Mexico lagged behind significantly in the exploration and exploitation of oil and gas because the legal framework, at that time, did not allow foreign companies to come here and invest. Fast-forward and private companies are responding very well to the process, and I would say that Mexico is currently at the same level as other Latin American countries. I would say that in one or two years, we will have a comparable market with Colombia and Brazil in terms of private investment. Of course, we are just starting so the main thing that is lacking is a developed market; however, with what we are seeing right now, private companies are responding well.
What is the attractiveness of the Mexican energy from the perspective of international investors?
CSL: One of the advantages of the Mexican market, compared to those of the Colombian or Brazilian markets for example, lies within the measures regarding transparency and anti bribery practices that have been introduced by the so called energy reform; as many of us may be aware of, one of the main objectives of the energy reform is to eliminate corruption within the sector; this is one of the many reasons why foreign investors will want to invest in the Mexican market.
AMA: There has been a big emphasis on transparency and anti-corruption and there’s a mandate on everything that goes public.
What market trends in energy (i.e., hydro, solar, wind) do you see currently happening or that you predict will happen in the future?
AMA: Renewables are growing fast, and will keep growing in the future. We have been working very hard on these for the past four or five years, and we expect to continue working on it in the near future. Another thing we will be working on shortly is geothermal energy. As you may know, Mexico has some of the biggest resources of geothermal energy in the world , and we now have a law that regulates the exploration and exploitation of geothermal energy, which we didn’t have before. We have had many international clients that are interested in this sector, since a Round Zero-alike process will happen in the following months.
What are the most important challenges limiting the exploitation of Mexico’s oil and gas reserves, and how are the reforms, which have been recently enacted, going to overcome these obstacles?
Juan Carlos Machorro (JCM): Well, the reform is brand new and still in the process of being implemented. The legal framework is a brand new tool and has not yet been tested. Round Zero and Round One have just been put into effect. And, as you know, Round One has just been called and has just begun the process of being evaluated by the participants who have just confirmed their interest through the purchase of the relevant guidelines. It’s in the process as we speak.
On the other hand, you could say that for some of the assets for this process –and specially for upcoming rounds-, it’s not the best of times in terms of oil prices, which have recently decreased drastically. You might say that it would be better to wait for the market to settle down a little bit. But, having said that, for the time being, and considering the circumstances both economic and domestic/international, the response has been a good one.
What improvements does the government need to make in the regulatory framework and infrastructure in order to create a more attractive market?
JCM: One would have to wait a bit for the process to continue. I would say that the legal framework that has been put in place is a rather open one and the entire sector has followed that trend. Even the type of contracts that have been prepared, including the production sharing agreement that has been included as part of Round One, follows international practices and standards. It’s simply that we are in the very early stages, but in terms of the policies that are being put forward from a legal perspective it is moving forward and simply needs a little time to mature.
What is your assessment of the capacity of Pemex and the various regulatory bodies in embracing change and operating under a more ‘liberalized’ and ‘open’ market place? And, is Pemex ready for this change?
CSL We have to see how these changes develop, and how Pemex grows as a productive state company. All of the policies and regulatory frameworks have been put in place. We now just have to see how companies like Pemex and others implement these changes, and how they start building partnerships with private companies to carry out their corresponding activities. Again, it’s just a matter of seeing how all these changes develop within these companies.
JCM: Some of the legal tools are already there; for example, certain corporate governance ingredients are already there for the purpose of Pemex becoming more agile and flexible. The energy ministry granted most of what Pemex requested for the purpose of Round Zero. We will have to see how able will be and fast Pemex is going to react should it decide to participate in Round One. Pemex has taken concrete steps in this direction as we see from the new board of directors, and the new procurement being centralized.
Is Pemex ready for these changes?
AMA: When we talk about Pemex, we have to recognize it as a duality: Pemex as a competitor of the industry, and Pemex as a national oil company. Consequently, we juggle both aspects of our identity. Pemex as a competitor will experience some bumps in the process because it will be something new for us. Pemex has never gone into an open market before, so of course it will experience certain difficultiesalong the way. As a national oil company, Pemex has been working for a long time in some fields with great efficiency, especially in terms of shallow waters. The operation of Pemex was never an issue; the real issue was the administration of Pemex. With the new model set out for Pemex, we will be able to fix this. Despite our learning curve, people will certainly be able to work with Pemex.
What is Santamarina y Steta`s value proposition and the impact of the fast changing market environment on the firms strategic outlook and services portfolio?
JCM: We have been working to strengthen our project division in integrals, including the energy side of it. We intend to be a one-stop-shop for our clients, entailing matters of real estate, community practice, environmental, technical, and energy, along with financial, M&A, corporate, anti-trust, contractual regulatory and administrative matters that are currently associated with this type of projects. This will allow us to offer a unique type of product that is normally segregated in other firms.
AMA: Only a few firms offer this in Mexico, and we consider ourselves one of those alternatives based on our full-service nature and the way we have worked in fine-tuning the type of product that meets the expectations of a transactional oriented project. We have been working on this for the past three to four years and I believe that it’s now a reality. We know very well what and how to deliver for this market.
Where do you see the first investments coming from?
JCM: The way the process is decided, I would say that the initial investments will come from the upstream sector. There isn’t much attention in the mid-stream or down-stream sectors at this particular stage, which could possibly change based on economics and the way the market stands. Downstream we are looking at 2020 for purposes of the first investment, but upstream and shallow waters are where the first investments will be.
What changes is the Mexican legal landscape facing with the energy policy changes?
JCM: From a legal framework perspective, it’s still too soon to say. As I was saying before, it’s still a work in progress and has not been tested yet. The three stages that we have seen so far are the constitutional amendments, the issuance of new federal laws and amendment of existing federal laws, and the regulatory changes that have been enacted in the past months and are being tested as we speak. More administrative rules are yet to come so we need to wait and see. I’m sure some adjustments will be required along the way, but I don’t see a particular area of concern in which we need to test what has been done at this point in time.
CSL: There are some details of pending regulations we are still working to understand, but as interpretations develop, and the remaining pieces of regulation are issued, we will be able to apply them accordingly in accordance with the guidelines of Round One, hopefully, the interpretation and application of this new regulatory framework will be less complicated once the remaining details are put into place.
What is your perspective for the future of Mexico’s energy sector, and what are your priorities and ambitions for Santamarina y Steta’s energy practice in the near future?
JCM: We strongly believe that the next months and years will bring a lot of opportunities for service firms, including legal firms. Of course there will be a lot of work that will have to be developed by these service firms specializing in this type of project. Eventually, more specialized work will have to be developed in different firms and in different areas. I do believe that our workload and workflow will continue to increase, which is always good for us.