Lorente Ludlow (WLL) – Derek M. , Managing Partner – Mexico
The Managing Partner of Mexican law firm, WLL, outlines his company’s strategy for competing for the new clients that will be arriving in the country as a result of the new energy reform, and assesses whether the regulation can be successfully implemented in the months and years ahead.
What opportunities do you see today for your firm in the oil and gas sector?
Woodhouse Lorente Ludlow (WLL)’s past experience in handling large infrastructure projects will certainly go a long way towards helping the firm move to oil and gas, as from a legal standpoint, projects in the two sectors are almost identical, from funding to execution. Mexico has a lot of potential now: after so many years, a true oil and gas reform is going to be put in place. Having informally advised the government on the power sector reform, we expect to be hired, along with CMS Cameron McKenna, as the legal counsel for the energy ministry for the implementation of the legal aspects of the sector’s reform.
A year ago, WLL teamed up with CMS in order to provide something that very few law firms will be able to provide to the oil and gas sector. I believe that the oil sector will be completely transformed in the coming years, and there are going to be legal needs in the sector that have been completely overlooked thus far. Our aim is to provide solutions to those challenges.
How important do you expect the oil and gas sector to become for the firm in the months and years ahead?
In past years, WLL has focused on infrastructure and renewable energy, which have been booming sectors in the last five years, focusing on building an unbeatable skill set in PPPs for hospitals, prisons, roads, airports and renewable sector projects. However, I suspect that because of the energy reform, all this work will pale in comparison to the opportunities we foresee in oil and gas. It will be a huge challenge to introduce a wholesale electricity market in Mexico, and to break up CFE into multiple generation and distribution companies, but even that looks small compared to the oil and gas sector.
The size and potential of the oil and gas sector in Mexico is a mammoth challenge: it is going to be very hard for the existing market to cope with the demands of the new sector. My exposure to oil and gas in other countries means I understand the scale of this challenge for legal firms in Mexico: it is a completely different world. WLL realized it wouldn’t be able to service this market unless we partner with a strong international law firm that has done this in many other countries. That is why we teamed up with CMS and became their office in Mexico, and today we can offer a full-service boutique law firm in terms of oil and gas, with a special focus on deep-water.
What was the thinking behind the choice of specialization in deep-water?
It was due to the fact that many law firms already have experience when it comes to onshore and shallow water in Mexico. Deepwater, however, is a unique market, and is kept to a very small number of players internationally: the firms that do have knowledge keep their cards very close to their chest. My experience in Angola working with BP helped me to understand this. When international oil companies arrive in Mexico, they will be looking for law firms that have actual experience in deep-water, and there are going to be very few of them available.
Through CMS, we can now offer these companies a very strong team. CMS has offices dealing with offshore in Aberdeen, London, Dubai, and Rio. They are already advisors to Shell, BP, and Eni, and many of the companies that will be interested in this market.
Other companies have not yet realized the potential of deep-water in Mexico. Because of Mexico’s maritime boundaries, there will be huge areas to explore, and the potential is extremely high, given the precedent set on the US side of the border. Some of the experts working alongside the Mexican government understand this potential, and that is the true explanation behind the reform to me – all the rest is secondary after this.
What is your assessment of the energy reform as it currently stands? How consistent is the secondary legislation in terms of the spirit of the original constitutional amendment, and what are the big issues that you see coming out of it?
The original initiative was well thought out, and I initially thought it would work, despite the fact that it would have been a very hard to sell to the oil majors. However, when it was presented, many of the ex-Pemex people that are now consultants created very strong political pressure, which was backed up by many of the oil companies. Suddenly, the government began to feel that if they didn’t push the reform further, it would not work.
This led to the government pushing the secondary legislation much further than initially expected, and the opposition has not been strong enough to stop it. Now, we have no brakes, and the government is opening up everything, including the potential for production sharing and profit sharing. The problem with this ‘everything goes’ approach is that we might end up with nothing in the end. To avoid this, the government needs to start focusing on what it wants to achieve in each area.
I am pleased to see the openness to major reform, but it is important to remember that it almost never happens right first time: we are too immature, and the concept of open reform is too novel for Mexico. What this means is a very interesting time ahead for international oil companies: they might well make a lot of money at the beginning, because they are stronger than the government, and have more experience. The government is scared to death of what is going to happen, because they think if they go too far in order to ensure investment, they will lose a lot of value, but if they lose too much value, no money will come. Striking a balance is not a science, it’s an art; there is no certainty that we will find the right balance yet, as certainty only comes with experience. All Mexico can do is try: read the right books, have a strong regulator, staff it properly, then hope to find the right model agreements, test the waters, and accept that the route you have taken is speculation: not even an expert can tell you whether your plan is going to work because there are so many variables.
Will the newly-planned system of regulation work to create a more transparent system, or will it result in bureaucratic chaos?
Mexico has learned a lot about regulation from some very painful mistakes, such as in the telecommunications sector, where regulation was too little, too late. I was part of the team that put together the regulation for the natural gas sector, we created the Energy Regulatory Commission (CRE), a body that was absolutely corruption-free. It was staffed with people at the highest possible salaries at that level, to attract quality, and the work that was done at the CRE was excellent: the privatization of natural gas existing assets ran very smoothly.
It was from this process that the government learned what could be achieved, and that has created the right environment to ensure that oil and gas regulation will run smoothly. The government knows that it needs to have a strong regulator, start it properly, and provide the right budget, or it will be overwhelmed by the industry.
With an overhauled regulatory framework, a new cast of regulatory actors to deal with, WLL has to understand the whole landscape very quickly to be able to advise your clients. How do you prepare yourself for this?
Firstly, we are hiring more people. It is very easy to attract talent, because we are well known for valuing our employees as people, and go out of our way to ensure that they are happy and fulfilling their personal aims, while providing them with a competitive salary. We can cherry pick the people we want with oil and gas experience because right now, they are not sufficiently valued by their current employers. Because our work in the sector has not yet ramped up, we are able to catch up on all the reading we need to do in order to prepare ourselves: CMS has helped a lot in this preparation. The company has been advising in deepwater for over 20 years, and were part of the North Sea story from the very beginning.
This knowledge from CMS, combined with WLL’s understanding of the Mexican market, will leave us very well prepared when the time comes, in a market where real knowledge of deepwater is scarce.
How do you intend to get the message out that you are a partner of choice in this new area?
As a company, we must choose which segment of the market on which to focus. There are three choices, as we see it: one is working for the government. This choice would prevent us from acting for the private sector, at least for a time. We are already advising the government in the power sector, and although it means we are earning less than we could by working with the private sector, in the long-run it will pay off: developers will be very keen to work with a company that has a unique experience of the legal framework surrounding the sector. This has already happened to us with PPPs, which we were instrumental in establishing in Mexico. We do not want to work this way in the oil and gas sector, and even if we did, we would already be too late: we would have needed to start three years ago.
So this leaves two other options: one is to focus on the 20 or 30 largest oil and gas companies, and the other is to focus on the 3000 small companies that service the market. We have decided that because of our profile, our best option will be to focus on the very large companies, because they are already clients of CMS all around the world. It will therefore be easier to present to those companies and make sure they have us on their radar.
In the next three years, what can we expect from WLL?
In three years, we will be busier than ever, thanks to both the power and oil and gas reforms really moving into gear. We expect to be twice or three times the size we are now, and creating new partners specialized in the specific areas of deep-water. It’s very exciting to think, because no matter what happens, we know we will be busy and happy doing our business in a new environment. We have been waiting for this for 20 years; finally, it has arrived.