Mexico energy reform: With economic promises comes unprecedented risk

Mexico’s energy reforms provide an historic opportunity to revitalize its energy sector and bolster its overall economy, but a whole new crop of assets will have to be protected and attendant risks sensibly managed, says Cooper Gay Swett & Crawford, a Miami-based independent global wholesale, underwriting management and reinsurance broker group.

Last year, Mexico’s Congress gave final approval to energy reforms intended to open up the country’s upstream oil and gas sector to badly needed private investments. Such industry participation by other nations had been outlawed in Mexico since the 1930s. However, despite abundant oil and gas reserves, Mexico’s energy sector is underdeveloped and sorely in need of technological assistance and investment capital to bring it into the 21st century. Mexico already imports large volumes of natural gas by pipeline from Texas, and is in danger of becoming a net importer of oil as well.

“We are seeing major players moving in as apparently they are comparing Mexico’s energy prospects more favorably to their other projects in war regions,” says Francisco Martinez, CEO of Cooper Gay Mexico.

Shale and deepwater opportunities are being considered, but most of the projects are related to shallow-water exploration via shared production agreements. Mexico’s vast oil resources, including offshore and unconventional fields, will be opened to international companies, offering rewards, but requiring risk management processes.

Cooper Gay Mexico notes that it will be necessary for participants in Mexico’s energy sector to negotiate protections for investors such as well control, third-party liability, contamination, vessels and platform damage, protection and indemnity, bonds, and tailor-made products, depending on each company’s needs.

“Our presence in Mexico and our relationships with experts allows us to give guidance on risk management services and on registration processes that could be complicated to foreign companies,” Martinez says. “The future belongs to those who evolve with new proposals. As the world changes, companies must adapt to change, seizing opportunities quickly to stay competitive.”

However, with these opportunities come risks.

Writing in the June 2015 issue of OGFJ, attorneys with Houston-based law firm Vinson & Elkins and Mexico City’s Von Wobeser y Sierra said there is considerable political risk buried in Mexico’s new Hydrocarbons Law.

“The law contains vague and broad grounds that allow the Mexican government to nullify its exploration and extraction contracts, take back the contract area, and even to seek damages,” say Timothy Tyler and James Loftis of Vinson & Elkins and Claus VonWobeser and Marco Tulio Venegas of Von Wobeser y Sierra.

The law specifically prohibits international arbitration of administrative rescission, which is a mechanism for mitigating Mexico’s home court advantage in potential disputes, say the attorneys. Mitigating the political risk will be crucial for investors, they add.

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