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New transparency provisions derived from the Energy Reform in Mexico Javier López de Obeso. 1
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• The Mexican hydrocarbons market was considered one of the most closed in the world
Exploration and Production
Refining and Retail of gasoline
Norway
Brazil
Colombia
Saudi Arabia
Cuba México
México with Reform Concessions or NOC association with IOC
Yes
Yes
Yes
Yes
Yes
NOC with international operation in upstream
Yes
Yes
Yes
Yes
No
No
No
Yes
?
NOC association in downstream Yes
Yes
Yes
Yes
Yes
No
Yes Private participation in refining. Yes
Yes
Yes
Yes
Yes
Free market in retail of gasoline
Yes
Yes
Yes
No
NOC with international operations in downstream
Yes
Yes
No
Yes
No
No
No
No
Yes
Yes
Yes
Yes. 50% of a refining in TX
Source. Mexican institute for the competition. IMCO
3
New Secondary Laws
Laws that have been amended
. 1. Foreign Investment Law
2. Mining Law
3. Public-Private Partnerships Law
4. Federal Fees Law
5. Law of Fiscal Coordination
6. National Waters Law
7. Federal Budget and Fiscal Responsibility Law
8. General Law of Public Debt
9. Organic Law of the Federal Public Administration
10. Federal Law of Para-State Entities.
11. Law of Acquisitions, Leases and Services of the
Public Sector
12. Law of Public Works and Services
1. Hydrocarbons Law
2. Hydrocarbons Revenue Law
3. Petroleos Mexicanos (PEMEX) Law
4. Law of the Mexican Oil Stabilization and
Development Fund
5. Power Industry Law
6. Federal Electricity Commission Law
7. Law of Coordinated Energy Regulatory Agencies
8. Geothermal Energy Law
9. Law of the National Agency of Industrial Safety
and Environmental Protection of the Hydrocarbons
Sector
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Structural Reforms. Energy
Articles 25, 27 and 28 of the Constitution were amended in December 2013 Under Article 25, as amended the Mexican government will
 Continue to be in charge of strategic areas. Maintain property and control of entities and new State Productive Enterprises (SPEs).
 Provide the right conditions to include the private sector in the national economic development.
 To be in charge of energy planning. Structural Reforms. Energy
Under Article 27, as amended:
 Hydrocarbons resources will remain the property of Mexico. Oil exploration and extraction activities will be carried out by the State through SPE assignments and contracts with private entities.
 SPEs may work with the private sector. But, the relevant leases and contracts must specify that subsoil hydrocarbons belong to the State.  Planning and control of the electric system will be carried by the State. But, with respect to transmission and distribution of electricity 3
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Structural Reforms. Energy
Under Article 28, as amended:
 The Mexican Petroleum Fund (a public trust) will be established
 The National Hydrocarbon Commission (CNH) and Energy Regulatory Commission (CRE) will be strengthened
With respect to oil and gas, the constitutional amendments to articles 25, 27 and 28, will allow private investment in upstream, midstream and downstream.
Pemex and CFE will be transformed into “State Productive Enterprises”, with budgetary, technical and operational autonomy (2‐year transition)
Pemex will be permitted to form associations in exploration and production of oil and gas, refining and petrochemicals
Pemex and CFE will have a more flexible and competitive fiscal regime, so it can retain a larger share of its profits for reinvestment
New contracting framework. Expected to follow international industry standards:




Production sharing: % of production
Service: Fixed or variable payment where the operator is the responsible for the operations.
Profit sharing: % of profits
License: Onerous transmission of the hydrocarbons once they have been extracted f
th
b il
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The reform is promoting greater transparency and accountability in the oil & gas sector. The secondary laws, such as the Hydrocarbons Law and the PEMEX and CFE laws, include the following transparency provisions:





Transparent Bidding rounds
Tender documents will be public
Contracts must include transparency clauses
Disclosure of payments associated to oil and gas
Audits by external auditing firms
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. Hydrocarbons Law
Assignments: (Asignaciones) Mexican State to PEMEX or other State’s Productive Company
Agreements: (Contratos) Entered by Mexican State with PEMEX, other State’s Productive Company or private
parties (E&E Agreements)
Awarding of agreements through bidding processes
Direct participation of the Mexican State in agreements under certain events (30% max.)
Arbitration in accordance to Mexican laws and in Spanish
Private parties may express to SENER their interest over certain fields
Mandatory participation of the Mexican State in agreements related to transboundary fields (20%)
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New transparency obligations. The Ministry of Energy, has as the obligation to inform on a monthly basis, the number of assignments and permits in effect, as well as their terms and conditions, and the Information on the areas subject to tender in Exploration and Extraction Agreements, including
their five‐ year program.
New transparency obligations. The National Hydrocarbons Commission shall be responsible for making available to the
public, on a monthly basis, at least the following information:
I. The results and statistics of the tender processes of Exploration and Extraction Agreements;
II. The terms and conditions, and rules of tender processes employed to award Exploration and
Extraction Agreements;
III. The number of Exploration and Extraction Agreements in effect, as well as their terms and
conditions;
IV. The number of authorizations granted, and that are in effect, as well as their terms and
conditions;
V. Information related to the technical management and oversight of Exploration and Extraction
Agreements, and
VI. The Hydrocarbon production volume per Exploration and Extraction Agreements. 8
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New transparency obligations. The Energy Regulatory Commission shall be responsible for making available to the public,
on a monthly basis, at least the following information:
I. The number of permits it issued, and that are in effect, as well as their terms and conditions;
II. The volume of Natural Gas transported and stored in permitted systems, including the National Integrated Transport and Storage System for Natural Gas;
III. The used and available capacity at the facilities and pipelines of the Permit Holders;
IV. Statistics relating to the Transport, Storage, Distribution, and Retailing to the Public of Natural Gas, Petroleum Products, and Petrochemicals, at a national level, and
V. The results and statistics of the activities of the managers of Integrated Systems.
New transparency obligations. From all the public officials. The actions of the public officials in the exercise of their duties and authorities, derived from the contracting procedures, their previous acts, and those related to the execution and management of Exploration and Extraction Contracts, as well as the management and supervision of the Allocations, Permits, authorizations, or any other act or procedure related to the activities performed under this Law, shall be subject to the constitutional principles of legality, honesty, loyalty, impartiality, and efficiency.
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New transparency obligations. To private parties. Notwithstanding the specific provisions on anti‐corruption matters, individuals and corporations, whether national or foreigners, that participate in the contracting or permits governed by this Law, shall be sanctioned when they carry out any or all of the following:
I. Offering or providing money or any other benefit to a public official or third party that
participates in any way in any action or actions within the contracting procedure, in exchange of
that public official carrying out or refraining from carrying out an action related to his duties or
with the duties of another public official, for the purpose of obtaining or maintaining an advantage, regardless of the receipt of money or a benefit obtained;
II. Any conduct or failure to act whose purpose or effect is to avoid the established requirements or rules to obtain any kind of contracting or that simulates compliance therewith;
III. Representing political influence or power over any public official for the purpose of obtaining for himself or for a third party, a benefit or advantage, regardless of the acceptance of the public official or of the public officials or the result obtained.
Best examples of transparency derived from the Energy Reform in the Oil and gas. National Hydrocarbons Commssion. www.ronda1.gob.mx
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New PEMEX Law
The new regulation will allow develop different hiring procedures in accordance with the nature of the service or the public work. The principles of equality and transparency among all the participants will have to be considered in all the procedures.
General requirements in the bid rules, avoiding reduce the amount of participants. General terms and evaluation criteria to be applied. Consider the principles of honesty, transparency, maximum publicity, equality, competitively, easiness and expedite, when applying different schemes of contracting, like pre‐qualification stages, discount offer rounds or price bargaining.
Article 75.
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New PEMEX Law
By general rule all the contracting procedures will be in an open bid procedure. The Board of Directors can allow different alternatives of adjudication, like auctions, determining the un‐tie criteria. By exception, when the open bid procedure is not the most convenient procedure to ensure the best price or conditions to PEMEX, the Board of Directors will authorize the different procedures to determine the awarding scheme. Article 77.
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New PEMEX Law
When the open bid is not the best procedure to ensure the best conditions of price, quality, finance, opportunity or other circumstances, previous authorization of the responsible authority, PEMEX will make a close invitation or direct awards, if one of the following situations occur, among others:
I.
There are no other alternative services or reasonable technical substitution, or if there’s only one market option or seller with a patent or author rights.
II. Exist justification for the acquisition or leasing of goods of specific brand. III. Consulting or engineering studies, research or training. IV. When is impossible to determine the scope of works to be performed in the maintenance of goods.
V. Services or parts to remain valid the original warranty of the equipment. VI. Procurement to develop technological innovations. Article 78. 27
•
City Bank. Oceanografia case.??? •
HP. Payments to former PEMEX officials to retain IT contracts. Expenses were registered as legal fees or consultants. •
Stryker: payments to government employees in Mexico and other countries. Expenses were described as consulting and service contracts, travel expenses, charitable donations, or commissions. •
BizJet: payments to government officials in Mexico and Panama to secure government contracts
•
Wal‐Mart: Ongoing investigation of payments to government officials in Mexico to secure building permits and variances
•
Orthofix: payments to doctors employed by an instrumentality of the Mexican government
•
Tyson Foods: payments to veterinarians for products’ certifications
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FCPA Enforcement – Does happen in Mexico!
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¡Gracias!
Thank you
Javier López de Obeso.
[email protected]
Javier practices primarily in the areas of Mexico energy, international trade and cross‐border business, corporate and securities, manufacturing, and transportation and logistics. He advises clients on matters involving Mexico law, enabling ScottHulse to provide clients with single‐source, dual representation in both the U.S. and Mexico.
A frequent guest speaker at professional and industry conferences on matters related to energy and the Foreign Corrupt Practices Act (FCPA), Javier advises companies in matters related to governmental and regulatory compliance as well as social responsibility programs. His assistance includes the development and implementation of internal policies, practices, and compliance programs to reduce corruption risks for companies operating in Latin America.
Mexico Energy Reform &
The New Electrical Energy Market
New Opportunities & Challenges
Brian Weihs, Managing Director & Head of Mexico, Kroll
February 21, 2016
30
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Proprietary
Confidential —
External
Use Only
and
Confidential
— External Use Only
15
2/22/2016
Mexico Energy Reform – Opportunities & Challenges
Outline

Mexico’s Energy Reform

Electrical Energy Reform

Current Status of the Electrical Energy Reform

Electrical Energy Investments

Compliance Challenges

Land Rights Issues

Key Compliance Takeaways
31
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
Mexico’s Energy Reform

Includes oil, gas and electrical energy

Previously monopolized by state enterprises – Pemex (oil and gas) and CFE (electrical)

The reform opened significant aspects of these industries to private enterprise and converted
Pemex and CFE into commercial enterprises

Driven by inadequate investment by the state monopolies, inefficiency of development and
production, and high energy prices to industry

Key elements: (1) separation of functions (regulation and production/distribution), (2)
incentivize competition, (3) transparency

Required constitutional reform, secondary legislation, creation of new state agencies.
32
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
16
2/22/2016
Electrical Energy Reform

Why focus on electrical energy?

Private investment in generation, to compete with CFE

CENACE controls the National Electrical System and designs expansion of networks

CFE builds and operates the networks (can contract private investors)

Secretary of Finance (SCHP) sets consumer rates and CFE supplies consumer and commercial customers

Wholesale and industrial supply open to market and rates set by market

Clean Energy Certificates

Renewable energy micro-producers can sell their energy
33
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
Structure of Reformed Electrical Energy Market
34
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
17
2/22/2016
Current Status of the Electrical Energy Reform

CFE restructured (10 new subsidiaries)

CENACE restructured and strengthened

CRE continues as regulator (licensing, rates)

Spot market opened on January 31

Existing market players are the usual suspects – CFE and Fenix (JV operated by Electrical Union)

SENER anticipates a year before the market matures
 Analysts anticipate several years
 Difficulties in licensing, uncertainty about regulations
35
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
What is driving electrical energy investments?
Expansion of gas supply, demand for electrical energy
36
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
18
2/22/2016
Renewable energy potential
Feasible generation scenarios to 2018 according to CENACE prefeasibility studies
*Graphic from PwC/CESPEDES Study Oct 2015
37
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
Compliance Challenges
Bid Processes
 Continued allegations of corruption in large public bids
 Increased scrutiny
 New Transparency requirements in energy reform and in
General
 New National Anti-Corruption System
 New anti-corruption prosecutor (not yet appointed)
 NAS not yet implemented – details unclear
 Application to state and municipalities - theoretical
Contracting processes


38
Same public entities
Limited additional scrutiny
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
19
2/22/2016
Compliance Challenges (cont’d)
Local Issues

Land rights and community issues

State and municipal issues (licenses, taxes, land-use, etc.)

Local partners

Security
Regulatory issues

Uncertainty and lack of clarity

New obligations and enforcement

New or revamped regulators
39
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
Land rights issues

Numerous energy projects delayed or stopped by community and land issues
 La Parota hydroelectric project
 San Antonio hydroelectric project and others near Puebla
 Mareña wind project (Oaxaca)
 Morelos gas pipeline

Challenges





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Land tenure and communal land possession (ejidos)
Manipulation of land rights/prices
Dependence on local partners
Unclear processes
International requirements of community consultation
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
20
2/22/2016
Key Takeaways for Compliance

In-depth understanding of project challenges
 Regulatory
 Key partners, participants and stakeholders
 Local environment

Detailed mapping of compliance requirements
 Risk factors related to partners, participants and stakeholdersHolistic (challenges above)
 Implementation of compliance program from Day One (first contact)

Expert advice and support
41
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
Thank You!
Brian Weihs
Managing Director - Mexico
[email protected]
T +52 55 5279 7250
42
Mexico Energy Reform & The New Electrical Energy Market – New Opportunities & Challenges  Brian Weihs
Proprietary and Confidential — External Use Only
21
2/22/2016
Mexico – cases and what is next?
February 21, 2016
I. The current scenario
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Does it sound familiar?
Macro Outlook & Approach
Macro-economic
initiatives
Public
Policies
Corrupt
Officials
Fraud &
Corruption
Ambitious
Entrepreneurs
/Companies
“Culture” &
Competition
Legislation/
Enforcement
Author: Fernando Cevallos
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II. Cases – real examples
Cases in Mexico
1. Security is critical --- Where?
2. Intersection between corruption and extortion
3. Looking for a representative in Mexico --- “Mi
amigo, no es su amigo”
4. Election time? --- No bribe, no gain
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Mexico: a dynamic security environment
2009
2012
2010
2013
2011
2014
Source: Control Risks – Risk Maps
Case: Intersection of Extortion and Corruption
Author: Fernando Cevallos
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III. What is next?
Companies’ DNA/Decisions
In a high risk environment:
Risks
Corruption
Pressures
Decision
 How does one ensure that
partners and competitors are
ethical?
Dilemmas?
 How does one change the
culture of doing business?
Alternatives
 How does one get
competitors and stakeholders
on board?
 Returning favors? Think
about it.
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GLOBAL Ongoing Efforts…
 Global initiative: ISO 37001 (Antibribery Management Systems)
• An anti-bribery management system standard, currently under
development
• It is designed to help an organization establish, implement, maintain,
and improve an anti-bribery compliance program or “management
system”
• It includes a series of measures and controls that represent global
anti-corruption good practice
• The standard is flexible and can be adapted to a wide range of
organizations, including:
• Large organizations
• Small and medium sized enterprises (SMEs)
Mexico Ongoing Efforts…
• Embassies, Chambers of Commerce, Civil Associations and small
groups discussions about how to influence the SNA secondary laws
• Main civil and embassies are involved, including the US, UK and
Canada
 Grad-Program and international certification of Ethics and Compliance
by Tecnológico de Monterrey (Mexican private university)
 Raising the bar, preparing new HR talent
• Specialized blogs with content in Spanish written by Mexican / Latin
American specialists
• Creating a group of discussions in local language
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At the end ---- How/Where Are You Operating?
Ethics
High
Low
Low
Healthy
Company / Too
easy and risky
market
Strong Company
/ Sophisticated
market (utopia)
High Profits /
High risk market
of corruption,
money
laundering,
cartels
High Profits /
High exposure of
fines and
penalties
Compliance
Author: Fernando Cevallos
High
Do It Right – Adjust, and Do It Right Again…
 The E&C program should be tailor based on:
 Country/province/neighborhood
 Industry
 Operations size and logistics
 Macro-factors and indexes
 Micro analysis
 Economics trends align with the Company’s strategy
 You cannot be monitoring the E&C program sitting on your chair – stand-up and
go or hire local specialists (internal or external)
 Costly? Think about the ROI.
 Technology could be you allied, but also could be your worst enemy. Don’t get
used to the comfort zone – be proactive and proactive and proactive!
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2/22/2016
Thank you!
[email protected]
Office. +52.55.5000.1700
Mobile. +52.1.55.5401.0385
www.controlrisks.com
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