Thompson & Knight LLP Partner Andy Derman joked that Mexico's 75-year-old energy policy has gone from "Gringos go home and never come back" to one of, "Please come and work with us."
Mexico's Congress is on track at the end of June to approve the secondary laws to its plans to open up the country to energy production with private companies as it moves away from its state-run monopoly with Petroleos Mexicanos, or Pemex. The constitutional changes were approved in December, and bidding by private companies, if all goes as planned, would begin next summer.
Even though Mexico's changes are sweeping and full of potential for the Houston energy sector operating south of the border, Derman and Gabriel Ruiz, a Monterrey, Mexico-based partner, said the secondary legislation and the implementation still leave plenty of question marks and concerns about "strong government oversight" moving forward.
There will be a "high of level regulation and government participation," Ruiz said. "It's a big issue, and it's one of the main comments and concerns going forward."
The growing Mexican bureaucracy includes CNH (the National Hydrocarbons Commission), SENER (Energy Ministry), SHCP (Finance Ministry), CRE (Electricity Regulating Commission), ANSIPA (the new National Agency for Industrial Safety and Environmental Protection), CENAGAS (the new National Center for Natural Gas Control), the new Mexican Petroleum Fund for Stabilization and Development and more.
Ruiz said Mexico is "in a little bit of a recession" and is "heavily relying on the energy reform" to boost the nation's economy.
"The current government will do everything in its power to get everything done as soon as possible," he said.
That includes scheduling debate of the secondary laws during the hugely popular World Cup soccer tournament, Ruiz said, noting, "I don't think it's a coincidence."
If everything works out in June, Derman pointed out that there is a December deadline for the federal agencies detailing the hydrocarbon regulations.
"How many people in Mexico are knowledgeable enough to implement all that needs to be implemented?" Derman said, noting that the U.S. would struggle with such major changes and praising Mexico for moving at an "incredible" pace thus far. "Do they have the people to make these deadlines in the short term?
"What about bribery and corruption with all these entities?" Derman said, noting that the proposed laws require a "high level of transparency."
"There was a recognition that having to deal with these bureaucrats …, you might have to deal with these (corruption) things, and the law is aggressively addressing transparency," Derman said.
"They're really trying to do this the right way," he said. "They might not have been able to do a better job."
Derman said the Mexican government will only be able to rescind contracts for "objective reasons" like companies not paying their royalties to the government.
Derman said he believes the Houston energy sector is in a prime position to capitalize on Mexico opening up because Houston is the energy sector of the world and because Mexico is so close to the region. He likened doing business in Mexico to the short flights and ease of commuting to Oklahoma City.
"I think it's going to be a really great opportunity, and there's going to be a lot of people looking," Derman said. "I think the largest risk will be competition. There's a lot of (global) energy focused on Mexico right now, pun intended."
The opportunities go far beyond oil exploration as well. Starting in 2017, private companies will be able to sell gasoline from their own stations in Mexico with Pemex permits. In 2019, private can sell their own gas from their own retail stations. Additionally, Pemex must reduce its role in natural gas sales to 50 percent of total sales in five years and down to 20 percent in 10 years.
But Ruiz cautioned that a lot of work remains and that American companies have a ways to go before they are producing oil and gas in Mexico and in Mexico's deepwater.
For starters, any American company doing business in Mexico will have to create a local Mexican subsidiary and additional subsidiaries will need to be formed for each contract a company enters into, Ruiz said. There also will be a "particular tax regime for the companies that will be involved in exploration and production," he said.
Companies will have to deal with public opposition in Mexico, as well as reaching agreements with Mexican labor unions.
The proposed laws also include 25 percent local content requirements that force companies to hire and contract with certain levels of local workers and businesses.
"At what point is it local?" Derman asked, wondering if a Mexican subsidiary of a Houston energy company would count as "local."
The proposed laws seek to address creating "oil and gas rights of way" to deal with property issues, Ruiz said. But Derman said "tensions" are unavoidable because, in Mexico, the property owners do not have claim to the oil and gas beneath the surface of their land. The government owns the hydrocarbons.
In cases of oil leaks and spills, Ruiz said, "there could be unlimited liability" in gross negligence.