Risk And Reform: Observing Effective Controls In Mexico's Rapidly Transforming Energy Sector

Stock SectorJune 11, 20185min5

View from the deck of the tower of La Muralla IV exploration oil rig, operated by Mexican company ‘Grupo R’ and working for Mexico’s state-owned oil company PEMEX. (OMAR TORRES/AFP/Getty Images)

By Armando Ortega

MEXICO CITY—For decades, the most relevant compliance legislation for international companies operating in Mexico was the US Foreign Corrupt Practices Act. Now, as a result of major national economic and legal reforms enacted during President Peña Nieto’s administration from 2012-2018, Mexico’s compliance environment has undergone a transformation. As foreign investment pours into Mexico’s recently opened oil and gas sector, legal entities are now criminally liable for any offenses or irregularities committed in their name, making the case for a robust compliance strategy that includes due diligence investigations into possible business partners.

A changing landscape: Mexico’s Energy Reform

Mexico enacted a historic reform program in December of 2013 that opened its oil and gas sector to foreign investment following 75 years of government ownership. Mexico’s energy reform plan was part of a broader, cross-sector effort by President Enrique Peña Nieto to boost the Mexican economy. Since its implementation, there have been three bidding rounds—the latest of which closed in March 2018—that have raised a total of $161.3 billion for investments that will take place until 2025[1]. Fourteen percent of total investment is for public-private partnership projects between domestic and international companies and the Mexican state-owned oil company, Petróleos Mexicanos (Pemex)[2]. With these investments, Pemex expects to significantly increase Mexico’s current production of 2 million barrels per day to a hypothetical 3.4 million barrels per day.

There is significant international interest in the process, with 34 companies securing bids. The US, with nine companies, and the UK, with four, lead the pack. Royal Dutch Shell, Qatar Petroleum, British Petroleum and Chevron are just a few of the major multinationals that have a stake in Mexico as a result of the energy reform.

Although significant opportunities are opening up in the sector, it is key that international investors understand the complexities involved with the energy reforms, as they are occurring amid a rapidly changing regulatory environment and era of overall reform resulting from the Peña Nieto years, and as part of a broader shift in sentiment among the Latin American public in the fight against corruption.

The National Anticorruption System and the new compliance environment

In what can be best understood as a citizens’ effort, a set of new legislative and constitutional reforms have been introduced in Mexico since May 2014, culminating in the establishment of the National Anticorruption System (SNA) in July 2016. The SNA is defined as a coordinating body between various institutions, including the Superior Audit of the Federation and the Federal Court of Administrative Justice, among others, to create mechanisms of collaboration and coordination to effectively prosecute corrupt practices.

The SNA is still in its early stages; a Specialized Prosecutor’s Office in Combating Corruption has yet to be properly established, and the Mexican Congress has yet to elect the Anticorruption Prosecutor. However, despite the lack of distinct progress, parts of the legal reforms introduced to create the SNA already have far-reaching implications.

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