By Edward H. Warner and Daniela Suarez de los Santos
On Thursday, March 26, 2015, Petróleos Mexicanos (Mexico’s national oil company better known as Pemex), BlackRock Inc., and First Reserve Corp announced a major investment project that will bring U.S. natural gas to central Mexico. This $900 million USD transaction represents the first large scale infrastructure investment in Mexico since its energy sector was opened to foreign investors in 2013. The energy reform in Mexico means a new era of partnerships, foreign direct investment, and future success stories in the country. Thus, the announcement last month is only the beginning. The questions to consider are: what are the opportunities, what are the challenges, and how can U.S. companies make this groundbreaking change work for them?
Mexico’s energy reform: what’s changed, in layman’s terms?
Mexico’s robust oil and gas production industry is now open to foreign businesses through production contracts, service contracts, production-sharing, profit-sharing, and licenses. For nearly 75 years, Pemex controlled all petroleum production in the country due to the 1938 ban on private sector participation in the Mexican energy industry. On December 21, 2013, in one fell swoop, that all changed. The Mexican congress approved and published the energy reform bill officially making the bill a law and drastically changing the Mexican energy sector. Mexico’s congress further altered the legal framework of the energy industry by passing the Hydrocarbons Act and reforming the Foreign Investment Act. While other laws and reforms were also passed, the Hydrocarbons Act and the Foreign Investment Act are the most prominent measures pertinent to U.S. oil and gas companies. The energy reform allows foreign businesses to compete for projects and use their skills and capital for oil development within Mexico’s border. Foreign businesses are required to bid on projects and Pemex is given the right of first refusal on projects aimed at developing Mexican resources.
Foreign investment: how can U.S. companies benefit?
U.S. companies can now partner with Pemex for energy projects if they have the experience and capital required for exploration in Mexico. The Mexican National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos or CNH) and the Secretary of Energy set forth minimum requirements for private companies looking to invest in Mexico’s infrastructure. Private companies can now look to CNH for information and published requirements on the system of “Rounds” that is being implemented. The bidding process and prequalification criteria for Round One were published on December 11, 2014. The first round of public bidding for shallow-water fields is expected to conclude by mid-2015. These lucrative contracts are expected to be awarded between May and September of 2015.
Local assessment: what are the challenges?
Foreign companies may have difficulty managing the different legal environment and the potential risks of partnering in a developing nation. These potential risks could include local dissent to the new energy reform and a still improving bureaucratic environment. It is too early to determine the extent of effective contract enforcement for these state-private partnerships in the country. Mexican government officials have commented that they will draw from the experience of countries such as Norway, Brazil and Columbia. These countries have already implemented state-private partnership agreements. Nevertheless, Mexico has shown tremendous improvement in its bureaucratic procedures for businesses operating in Mexico. Mexico introduced a broad range of e-services to improve the efficiency of tax payments, online business registrations, and the securing of construction permits. The new “e-government” push aims to improve the submission of electronic documents and to strengthen the transparency of government operations in Mexico as a whole. The e-government push could improve business operations, and potentially improve all infrastructure operations within the country.
Additional local partnerships: how can U.S companies use reputable local companies to help ease the process of integration?
Foreign companies must be in compliance with the new, government-mandated requirements in order to secure contract bids and ultimately fulfill those contracts. Businesses may consider partnering with local companies for CNH compliance or bureaucratic procedures involving permits, tax payments, and business registrations. For example, in the safety sector, companies like Cacer, S.A. de C.V. can help support foreign companies that are chosen to work with Pemex. Cacer offers oil industry safety training and qualification services to companies conducting oil drilling in Mexico. The offshore safety training company specifically works with foreign businesses to obtain the necessary certifications outlined by the new energy legislation bidding process, including the guidelines to work with Pemex.(1)
In sum, both opportunities and challenges abound with these groundbreaking energy reforms in Mexico. With the right planning and partnerships, hopefully the collaboration between Pemex, BlackRock Inc. and First Reserve Corp. will be the first of many opportunities where foreign businesses and Mexican companies work together in this new era.
If you wish to view an English translation of the Mexican energy reform decree, you may do so at the link here.
For more information or translation of the Spanish language links contained in this article, please contact Edward H. Warner.
About the authors: Edward Warner is an associate in the Baton Rouge office of Kean Miller. He has legal experience in both Central and South America and is fluent in Spanish. Edward joined the firm in 2013 and practices in the business, corporate and real estate groups. He represents clients in a variety of corporate, finance, and commercial real estate transactions. Daniela Suarez de los Santos is a Mexican attorney at law. She graduated with honors from the Universidad Cristobal Colon in Veracruz, Mexico in 2014.
(1) Conducting proper due diligence for all companies is vitally important to any potential partnership.