HOUSTON—Working at energy sites in some parts of Mexico could mean coming face-to-face with locals wanting to see the economic benefits of projects in their communities sooner rather than later.

Companies could face land challenges from indigenous groups, farmers and other landowners, said panelists speaking during an event on the social impact of Mexico’s energy reform at Rice University’s Baker Institute for Public Policy on June 7.

These challenges could mean coping with the threat of violence or damage to property if demands aren’t met, some said. For some energy companies, it could also mean packing a ton of patience while wading through permitting processes that can drag on for months or even years.

Or it could mean little or none of the above.

“Despite the rather negative messages we have been hearing today…Mexico was a great experience personally,” said Beninga Cortés Leiss, former general director for Chevron’s Energía de México. “However, it was also a lot of hard work. …It requires the right approach,” she added, acknowledging Mexico is a complex country that has the geology but is at the beginning of a new era.

So far, Mexico has awarded more than 100 contracts to foreign and local companies since the country’s energy sector opened in 2013 to foreign investors eager to discover oil and gas offshore and onshore. But success depends on having strong engagement.

“You really need to spend the time to understand: What are the drivers? What are the values? What are the needs of the people you are going to affect or have an impact on with your project?” Leiss said.

How effective Mexican regulators are at managing concerns and properly informing all stakeholders will impact the pace of Mexico’s energy reformation journey, according to the group of energy experts who gathered June 7 to discuss the issue.

Risky Business?

Tony Payan, director of the Baker Institute’s Mexico Center, said 54 of the 110 projects at risk in Mexico today due to social conflicts are energy-related. Just more than 30 of the 54 came after the reform.

“Everybody has to benefit, and when communities do not see a benefit—at least not a direct benefit—they may then resist a project,” Payan said.

The discussion took place as Mexico approaches the five-year anniversary of Congress passing historic constitutional energy reforms in hopes of increasing production, improving the economy and adding jobs. But the future is uncertain, with the July 1 presidential election weeks away. Candidate Andrés Manuel López Obrador still appears to be the frontrunner.

“I think it’s comforting that Mr. López Obrador has become more pragmatic in this election. I don’t think he is the radical Rambo that he appeared to be 12 years ago,” Payan said.

Payan described Obrador’s nationalism as more inward-looking, focused on the conditions of the poor, with populist overtones. “I don’t see him as radically anti-America, radically anti-foreign company, radically anti-foreign investment. I think he’s going to be willing to work with them.”

Also factoring into companies’ decisions on whether to do business in Mexico is organized crime—which Payan called a type of social conflict. It has already altered the perception of Mexico.

He also pointed out how conflicts could arise concerning use of natural resources such as land and water—pitting the need for drinking water, for instance, against those needed for business purposes. Payan used as an example shale oil and gas development in some of Mexico’s most water-scarce regions.

“Should the water go to shale projects or the communities?” Payan asked. Sometimes setting priorities involves dialogue, but at other times people in the community will decide how the water may be used and the oil and gas may have to just stay in the ground, he said.

It’s one of the reasons why Lourdes Melgar, a nonresident fellow for the Baker Institute, is no longer deputy secretary for Mexico’s hydrocarbons department.

“I am against shale and that’s part of the reason why I left the department of energy in Mexico because I think we should not be doing these types of projects where we have conflicting interests,” Melgar said. “But the law is clear. Water cannot be used for any projects, including for shale, if it’s going to put at risk drinking water. … That’s why there’s a consultation with communities. If you try to impose the project, the project is not going to be developed.”

Framework Established

Earlier Melgar recalled an instance where the public blocked construction of transmission lines by state-owned companies, which she said felt were being held hostage by communities that had received payments but wanted more. The Mexican government established a legal framework in the energy reform that specifically addresses this type of social conflicts, she said, cautioning that implementation takes time and problems won’t be solved overnight.

Indigenous people, as well as other stakeholders, must be consulted on projects. Mexico’s law also stipulates the state must administer a social impact study and companies must conduct social impact evaluations. “This is an obligation because we need to have sort of an X-ray of an area, especially if we’re going to put up an area for bid for oil and gas to know what the conditions are” such as presence of indigenous populations, type of land and issues related to organized crime, infrastructure and other conditions to inform the potential investor, Melgar said.

“You have to look at the positive and negative aspects of the project and you have to communicate it to the community where you’re going to develop the project. [Companies] have to negotiate with the community what the benefits are going to be for the community,” she said.

Melgar said commercial rates must be paid for land and payments must be made for the destruction of property or assets such as agriculture. “We established an entire institutional framework to support people in terms of negotiations,” giving them access to lawyers among other support.

In addition, once an oil or gas field starts production a payment from the company’s profit (0.5% to 2% for oil and 0.5 to 3% for gas) goes to the landowner or owner of the rights to the land, she said.

“The problem we have in implementation is we have different players,” and not everyone—including local authorities—knows the new paradigm, Melgar said, adding some companies prefer it the old way.

More Work Ahead

Prior to Mexico’s energy reform, performing social impact assessments were not required for energy projects, said Jose Maria Lujambio, partner with Cacheaux, Cavazos and Newton. But now they must be conducted before oil and gas companies are allowed to get permits to begin work, he said.

Earlier this month, Mexico’s energy ministry released details on what is expected of those involved in social impact assessments. The details establish procedures for government analysis of the evaluations, formats companies have to use to fill in information to prepare their evaluations and other required information.

Such information, Lujambio pointed out, wasn’t available to companies in the early days following the reform. That likely played a role in delays. He noted one energy company filed its social impact evaluation in July 2016 and the resolution was notified June 6. It should’ve taken only 90 days.

“There are many cases that have been suffering delays,” Lujambio said. “The main problem is a lack of resources.”

Transparency and having the ability to follow-the-money, knowing who gets paid and when, are also areas that still needs work, according to Melgar. Like Lujambio she agreed the government needs funds and staff to better implement the framework. “Five people can’t take care of all of these things for an entire country,” she said.

These challenges aren’t unique to Mexico, though. The oil and gas industry has faced similar obstacles such as Dakota Access Pipeline protests or places where Arctic drilling is proposed.

“We have to rethink how we create conditions so the communities are willing to accept projects. Otherwise, there will be no more projects,” Melgar said.

Velda Addison can be reached at vaddison@hartenregy.com.