One of Mexico’s leading legal advisors and a Partner at Baker & McKenzie, Benjamín Torres-Barrón looks at the opening up of Mexico’s energy sector and provides some invaluable advice to potential investors about the sector and the services available to guide them through the country’s new energy scene.
Mexico has some of the largest energy resources in the world, but has delayed opening the sector to international competition the most. What are the main challenges and opportunities brought by this reform?
It took some time, no doubt. I think there may have been greater benefits if we had done it before. But, “may have been” is difficult to measure. Everything has its time. Maybe the perfect time for one is not perfect for another, but it doesn't necessarily make it late. More than timing, the fact that that the energy reform took place with little options to increase national production and profits was more worrisome for me. Possibly, it could have been a more favorable time to open the sector 10 years ago when we were producing 3.6 million barrels per day and oil prices were much higher. It is great that we did it now because there is a learning curve that we have to accept and that we would have with or without US$100 per barrel prices. Our country lacks a more qualified workforce and the regulatory framework has undergone a profound, complex, and complete transformation. However, the final pages of the Mexican energy aperture are yet to be written. 2016 is still a vital year for the completion and even the initial implementation of projects. New regulatory elements are published every day as well as regulations, methodologies, guidelines, etc., that strengthen the regulatory framework of the energy sector. We continuously advise numerous domestic and multinational clients on these developments and only expect interest to increase as the economic climate picks up again.
That framework has evolved from phase 1 of round 1, which was disappointing, to phase 3, which did meet expectations. What assessment have you made of that evolution?
There are very positive issues that the authority has corrected, both in the design of the contract and the process itself. It is certainly motivating to have more bidders and more offers made. But each phase is different. You cannot compare phase 4 deepwater projects with phase 3 of onshore exploration and production. The players, the level of investment, the contribution, the implementation period of the projects, etc., are entirely different. Perhaps you could be more successful at a macroeconomic level with only two shallow-water contracts awarded than having 25 financially uncertain license agreements with questionable pricing. So, I think the purpose of the game is not about awarding the larger number of contracts but rather to implement successful and profitable projects with adequate financial and economic balance to the parties.
What are the risks taken by new investors who plan on coming to Mexico?
The first one is the lack of regulation. 2016 is a year when some issues will finally be defined. These changes could tremendously impact what can and cannot be done with a project. But, much clarification is still required in certain areas, in both the electrical and the hydrocarbon industry. The main issue, in my opinion, beyond the regulatory ambiguity that I just mentioned, is the implementation of projects in the country. Although a certain lack of coordination can be seen between legislation and authorities, the main concern is on the real estate side. The rights of way and dealing with ejido and indigenous communities are issues to tackle since agrarian legislation does not keep up with the spirit of the energy reform. In the end, the vast majority of the energy projects may require some expropriation of land. The social, environmental, communal land, and real estate impacts are the public issues investors will need to carefully navigate when investing.
From the point of view of the market, how important is Houston and to what degree are US companies interested in coming to Mexico and forming an alliance with national companies?
Houston is extremely important. As the global oil and gas hub, many of the companies that are properly established here in Mexico have their headquarters and C-Suite executives in Houston. While several companies have an on-the-ground presence in Mexico, there is close coordination with Houston counterparts. There are other Houston-based companies which are not here in Mexico (yet) that have the potential to expand their businesses across the Gulf of Mexico and land border. For us, this is the trend we continue to see, as many of our clients are from the Houston area and are operating in the country. With our over 100 lawyers in Texas, and over 300 lawyers and 50+ years in Mexico, our knowledge of the market and integrated manner of working with these companies on both sides of the border is what sets us apart.
What is Baker & McKenzie's role in this new situation in the country?
Baker & McKenzie is a leader in the market and advises on some of the most important matters for companies in Mexico. Our standing in the market and unique ability to advise clients on their most pressing issues is why top energy companies entrust their Mexico projects to us.
Quantitatively, we represent a large number of companies in the sector: oil and gas (upstream, midstream, and downstream), and power (also downstream, midstream, and upstream), both in renewable and conventional electricity.
We are also opinion leaders. We identify gaps and ambiguities in coordination with regulators and commissioners to indicate which areas need to be explored and addressed. Given our global experience, we are able leverage this understanding to forecast what is missing or may be improved and what to possibly anticipate.
We also help our clients mitigate the inherent risks of their projects, and guide them towards the right projects for their business strategy and when they should pursue or pass on them.
What is the added value of Baker & McKenzie compared to other firms?
Our approach and capabilities to serve clients in Mexico is unique. We believe there is no other law firm better positioned to serve domestic and multinational clients in Mexico than Baker & McKenzie.
First of all, we have 50+ years of on-the-ground experience and are the largest law firm in Mexico, both in number of lawyers and in offices in the country. Our footprint covers the entire Mexican landscape through our five offices strategically located in the most active business centers of the country. We have a fully integrated team across areas of law that is organized and aligned to serve the needs of the energy industry. The reform is no longer a matter of identifying a single individual with experience and commitment; the reform requires true industry knowledge to implement the multitude of changes and opportunities for clients across the energy supply chain, both in Mexico and in regards to their overall business strategy.
We recognize there is an opportunity to provide this to companies looking to operate in Mexico and our firm's track record and energy practice is organized to fill this gap. Our team consists of some of the top oil & gas lawyers in Mexico and our collective industry experience of advising clients on numerous private and publicly disclosed matters place us as the "go-to" advisors for many oil & gas companies on their most important transactions and disputes.
Moreover, we have an unmatched global footprint with a seasoned team of attorneys that has participated in many other energy projects. For any energy public tender or major project, our team has any ability to provide efficient and cost-effective service in even the most challenging of projects. Our team has been involved in some of the largest and most complex transactions involving oil & gas, and understand the urgency companies who have won tenders to move along the project in a diligent manner with little risk. Our team can add value to any oil and gas transaction or dispute.
Additionally, we advise our clients in a multidisciplinary approach. Rather than providing general corporate advice, we are focused on the energy sector and have an array of lawyers and professionals on our team. The group I lead is an integrated, diverse group of attorneys, economists, mathematicians and accountants, but with a common denominator: we all have a focus on and a long-standing trajectory and experience in the energy sector. Unlike competitors, we have been in the market since 1961 and collectively have billions of dollars in deal experience and are leaders in our respective focus areas. I, personally, have been working in the energy industry for over 18 years, with all the academic background and practical experience that is needed, not only here in Mexico but also in other countries.
Our team also maintains a close relationship with the regulatory authorities, the players and the competitors. Because we are entrenched in the market, we keep a close eye on the opportunities and the risks of the business, which we are able to provide to the client that serves as additional business intelligence they expect from their most trusted advisers.
Furthermore, we facilitate opportunities for our clients to enhance their knowledge, network among other industry leaders, and provide them with many other value additions specific to our clients and that are market leading in terms of client service.
Finally, clients often find our wide array of professionals beneficial to executing their business ventures in Mexico. For example, when signing a power purchase agreement, a mathematical formula is needed to calculate the price/tariff. This work is performed by our mathematicians specialized in the energy sector.
In summary, we bring a full range and broad scope of advice to every energy transaction or dispute. In tax, environmental, dispute resolution, corporate, labor, power, regulatory, infrastructure, real estate, government relations, and other areas, our team has experts across the full supply chain. This way we have a competitive advantage over the rest; we look at things meticulously, thanks to collaboration that allows us to cover the huge volume of changes that the reform entails and translate it into risk mitigation and new opportunities for clients in either Spanish or English.
How is Baker & McKenzie preparing for the influx of new actors who can also operate in this sector?
Our firm is undoubtedly the most prepared to handle a large influx of new projects in Mexico. Our energy practice has grown gradually and has become more established every year, I would say, basically, as a result of the efforts that we have made, given that some time ago we began to integrate our energy practice across several disciplines in anticipation of the sector's aperture. The energy industry in Mexico will grow in a way that there is going to be work for everyone—it is impossible for a single firm to cover and advise on all of the projects taking place.
The fact that the framework has changed dramatically generates a kind of clean slate or new playing field that everyone is seeking to play in. What I mean is that in the energy sector, within our legal sector, there were leading, specialists who are widely recognized under previous legal regimes. There is now a new landscape in which the firms with the ability to best serve clients and the global connections like Baker & McKenzie will thrive.
We are getting results because we have a wide variety of projects. I think that while sub-specialization is very important—there are those who focus only on renewable projects or oil and gas—others are able to cover an array of areas. We are uniquely positioned so we can handle and develop all different subspecialties in the same firm, which translates to cost savings and efficiencies for our clients. This also means we have done different tenders, power plants, gas pipelines, etc. When clients come and ask for a gas pipeline project, for instance, we can share the relevant issues and how to mitigate them based on prior experiences and challenges we have encountered. This says more about us than anything else.
Have you already noticed an increase in your client base since the reform?
Yes. There has been a tremendous amount of interest around the energy reform from domestic and international companies. Because Baker & McKenzie offers unparalleled coverage, scale and cohesion in Mexico, providing clients in the energy sector with seamless legal support throughout the region, we continue to see growth across all of our advisory areas. This goes hand-in-hand with Mexico's economic forecast, which we expect to continue to be positive in the years to come.
Are you meeting the expectations your firm had of the Mexico Energy Reform before its establishment 18 months ago?
No. Oil prices were expected to be higher during the energy reform’s launch and implementation. Our expectations were a bit higher in the sense that we would not have to take into consideration the amount of cash flow and solvency issues that many oil and gas companies are currently going through. Possibly more investments would be taking place if prices had not have dropped, and clients would be less hesitant to launch new ventures.
Despite this current market reality, Mexico has seen an enormous influx of interest and positioned itself to receive short-term and long-term investments. This has translated into an increase demand to advise on these projects, which we have seen grow across our core services.