On March 5, 2019, King & Spalding hosted an Energy Forum, titled “Shifting Dynamics in Latin America”, to discuss the political and regulatory changes in Latin America and their impact on investments in energy. Latin American governments are shifting, with the majority embracing pro-market policies and regulations with a view to fostering foreign investment in the region, especially in the energy sector where investors demand stability and incentives for long-term investments. The event began with a presentation by Nick Panes of Control Risks, addressing the general outlook of political risk in the region considering major geopolitical issues in other parts of the world. Here is a link to the presentation.
The remainder of the program was in a panel format where experts addressed the following topics: (i) upstream investments in Argentina, Brazil and Mexico; (ii) Latin America after Lava Jato - FCPA considerations, including anti-corruption due diligence, investigation and audits; and (iii) focus on energy in Mexico under President Andres Lopez Obrador or AMLO.
Upstream – Competing for Investment
The panelists agreed that there have been political changes in Argentina, Mexico and Brazil that affect the policies of such countries regarding foreign investment.
In Brazil, the new regime is proposing changes in upstream regulation that favor foreign investments, such as the Petrobras divestiture plan, changes in local content and tax, and plans to incentivize the participation of foreign investment in the Pre-salt. The National Agency of Petroleum, Natural Gas and Biofuels has been working to improve the tender protocol of the bidding rounds and the concession contracts.
In Mexico, the new administration has stopped new oil rounds for the next three years resulting in a potential slowdown of foreign investment in the upstream sector. The new administration has the intention of strengthening Pemex, Mexico’s national oil company. There will be more opportunities for farm outs with Pemex and the execution of services agreements, instead of licenses and production sharing contracts. Currently, there is a lot of uncertainty given changes in the regulatory agencies, the National Hydrocarbons Commission (CNH) and the Energy Regulatory Commission (CRE), but the existing projects continue in operations with extensive exploration and appraisal work under CNH contracts.
Finally, Argentina has called for a public international bid to award exploration permits over thirty-eight offshore blocks. It is the first oil round of such type launched by Argentina in more than 25 years.
Latin America after Lava Jato – Concerns and Considerations
The five panelists uniformly agreed that Lava Jato, also known as the “Car Wash” scandal, redefined the fight against corruption in Latin America, both in scale and extent.
In Brazil, the prosecution acted thoroughly and independently in the Lava Jato case, even at potentially enormous political cost, to unveil a sophisticated mechanism for bribery of local and foreign governmental officials. The investigation resulted in the prosecution of the case in several jurisdictions and the indictment of both high-ranking federal officials and businessmen across the region. Until Lava Jato, Latin America had never seen such a comprehensive and forthright fight against corruption. Nowadays, the new administration of Brazil has the political will to continue with this effort, as the judge that led the Lava Jato case is now the Minister of Justice.
In Mexico, AMLO ran his presidential campaign with the main promise of fighting corruption. However, AMLO does not understand corruption as an institutional problem, but as a personal defect. He has stated numerous times that corruption in Mexico will end simply because he is not a corrupt leader; therefore, he will set the example for the rest of government officials who will stop being corrupt. Unfortunately, this has had an impact on the fight against corruption in Mexico. AMLO did not choose an independent candidate as attorney general, but instead named a political ally; the National Anti-corruption system has been poorly implemented; and there have been no relevant prosecutions for corruption.
The panelists noted that essential aspects of preventing FCPA violations are performing extensive anti-corruption due diligence prior to engaging with local partners and establishing a strong compliance and ethics program in companies that operate in Latin America.
Spotlight on Mexico
The panel noted that AMLO’s administration, only within a couple of months after taking office has set back certain accomplishments of Mexico’s energy reform. Its actions have undermined the independence of the energy sector’s regulators and several bids for the power industry and upstream E&P activities were cancelled. Nevertheless, there are various opportunities that arise from the administration’s new projects, including the construction of a new refinery in Mexico’s southeast region and new oil field services agreements. Also, there is a need for more midstream infrastructure and the applicable legislation establishes obligations for private parties that will result in transactions and projects despite the political uncertainty.
The panelists noted that the intensity of the challenges for companies will depend on whether the investors have an established company in Mexico or whether they are considering entering the country. Due to major changes in the administrative personnel and the reduction in budget of the CFE, new companies are facing longer periods to obtain the relevant permits for their projects, while established companies have not been substantially affected. AMLO cancelled the clean energy bids and the oil E&P rounds, but his administration has not attempted to modify the various contracts awarded under the Energy Reform. The contracts resulting from tenders to sell power to CFE and the 107 E&P contracts executed by oil and gas companies with the CNH have been respected and there have not been any challenges to their legality.
Finally, all panelists concluded that there are many interesting opportunities for investment in power and oil and gas in Mexico. One panelist pointed out that AMLO was just shaking the sector as if it were an apple tree, waiting to see what apples would fall but not affecting the tree itself. That is, AMLO wants a strong CFE and Pemex, and his administration will review the awarded contracts and projects developed after the Energy Reform to confirm their legality and the transparency of their award, but he will not affect future private investments in the sector, awarded contracts, or projects that comply with applicable law.
Update on Venezuela
The final presentation focused on the current situation in Venezuela. There is a humanitarian crisis in Venezuela, which relates to a political crisis. Reelected as president as a result of sham elections in May 2018, Maduro’s mandate ended on January 10, 2019. Under the Venezuelan constitution, the president of the National Assembly should assume the presidency in the absence of an elected president or the usurpation of the presidency. As such, the President of the National Assembly, Juan Guaidó, assumed the role of acting President on January 23, 2019. He has been recognized as acting president by the US and 50 other countries, he has appointed a new board of directors of CITGO, and as part of the plan for the recovery of the nation, has announced the enactment of a new hydrocarbons law. Such law will maintain the State ownership of hydrocarbons reservoirs but will allow for private participation in all oil and gas activities, will establish a competitive fiscal regime, incentives to maximize oil and gas production and the creation of a special independent agency – the Venezuelan Hydrocarbons Agency or AVH - to manage reserves, regulate and supervise the oil and gas sector.
The presentation addressed these issues and potential opportunities for investment in Venezuela in the near future and can be accessed here.