• Lessons and
  • Carlos de María y Campos, Francisco Fernández Cueto and Antonio Borja
    Partners at Galicia Abogados
  • The time has come to put to the test our Energy Reform. The constitutional reform, the secondary laws and the regulation of the sector at last have come out of the lab and are facing reality. In the hydrocarbons sector, the awaited amendments to the legal and constitutional framework seem to arrive late.

    The first actions to bring to life the new legislation is occurring at a moment in which hydrocarbons are more expensive, difficult to extract and compete against environmentally friendly alternatives. Moreover, the global economic context could not be more adverse. On the contrary, the start of the new electricity market, although subject to complex rules not yet completely understood, has attracted a much more greater interest than expected.

    The first steps: bid rounds for oil contracts
    The National Hydrocarbons Commission (CNH) was in charge of carrying out the bid process andawarding the new oil exploration and production contracts: the bidding process through the “Rounds”. The first Round, Round Zero, was an exclusive selection process for Petróleos Mexicanos (PEMEX), in which approximately 83% of the proved and probable hydrocarbon total reserves and 21% of prospective resources, were granted in diverse assignments. The rest of the “oil inventory” of the Country remains “available” to be offered to the best bidder. The Rounds were carried out in the middle of an unexpected and brutal fall of oil barrel prices, which has been a consequence of the “perfect storm”: overproduction of Organization of the Petroleum Exporting Countries (OPEC), incorporation of Iran to the market, the deceleration of China´s economy, non-foreseeable oil exports by the “tea cup producers”, small Chinese producers that stopped marketing their product in China and had to sell it in international markets. With such prices, a lot of the companies of the sector did not have the necessary resources to take the plunge into the available Mexican oilfields.
    The first bid process resulted disappointing: only two areas were awarded; the second one improved and three areas were awarded. In the third bid process, rules were clearer and license contracts were granted (licenses provided greater benefits - as developers took higher risks - than the models used in previous bids.) 100% of the bidding areas were granted. The fourth bid process is for deep-water blocks (offshore) and increased bidder’s interest has been shown. It looks like we are learning.

    An energy industry without clarity, without transparency, with impunity, will not prosper.

  • The electricity market auctions
    In parallel, the creation of the new electricity market has brought new players to engage in the different activities of the productive chain in the electricity industry. Moving from a state monopoly to a market model represents a monumental challenge, not only from a regulatory perspective, but also from a cultural standpoint. And although the new rules are extensive, complex, and the doubts have not yet been entirely resolved, we had to start with something: the first auction was organized for a single purchaser, the new Federal Electricity Commission (CFE), now under a more “commercial” mandate then when it provided “public services”. CFE submitted a purchase offer to acquire power capacity, electricity and clean energy certificates “CELs”. The interest to participate in the auction has been overwhelming, more than a hundred bidders with more than four hundred and fifty offers that cover various times and volume required by CFE. The proposals include solar, wind, hydro, combined cycle, and cogeneration. The bidders that “prequalify” (i.e. that satisfy the bid requirements) can submit their price offers in late March*. It looks like a good start, but we will have to wait and see the first results. An then, put the system in operation.

    Changes are in process
    It is not the first time that Mexico embarks in an innovative and ground-breaking process of regulation in an industry. We have already modernized the rules of the automotive, telecommunications and banking sectors, among many others. These experiences always imply a learning process for the Government and for all the new participants.
    As bidding processes have been taking place, rules have been clarified in certain cases and become more flexible in others, seeking to avoid contradictions. Authorities and bidders have initiated a direct dialogue that has brought appropriate solutions. Transparency has been privileged, which has increased trust in both parties. It is clear that we must be patient and take the necessary time to understand, test and improve the rules.
    Besides, the cultural change that we envision is not going to be easy. We are moving away from a monopoly scheme we had for many decades. The process of taking decisions, the reasons behind them, the commercial practices, the objectives, the personalities of public officials are very different in a state-driven industry than in a market-based economy.
    The ideology that was created around PEMEX and CFE during decades generated deep roots. The expected ideological and practical change will not occur magically, just because new rules were issued. And more importantly, the legality of the process should be respected. A few days ago, former president Ernesto Zedillo declared that Mexico needs three things to grow steadily: “the rule of law, the rule of law and the rule of law”. An energy industry without clarity, without transparency, with impunity, will not prosper.
    Particularly, in the oil industry, the challenges are colossal. The global environment is almost catastrophic. Oil is seen as a resource that is just about to be obsolete: electricity is now generated from renewable sources; laws are looking for clean generation; internet has reduced the people’s mobility needs, thus, reducing the use of fuels. Massive production of electric cars advances. Oil is increasingly more complex, expensive and harmful to the environment.
    It seems like we spend too much time debating what to do. Our decision-making processes have not moved according to reality. We have to think better and act faster. We cannot continue watching solutions being made “on the other side” to later import or copy them. We don’t want to end like the tough, but indecisive boxer that, as a commentator narrates: “when he could, he didn´t want to; and then… when he wanted… he couldn’t”.