For law firm leaders surveying their Latin American business prospects for 2014 and beyond, they need only to scan a map of existing oil rigs in the Gulf of Mexico.

“If you look at the U.S. side, it’s just dotted with oil wells all over,” said Yosbel Ibarra, a Greenberg Traurig shareholder who focuses on cross-border financing in Latin America. “And if you look at the Mexican side, there are a few dozen – very, very few.”
Very quickly, that imbalance is destined to change.

“What everyone is talking about is … the Mexican reforms in the oil industry,” Ibarra said. “We’ve already had clients on the oil infrastructure or energy infrastructure side start thinking about potential deals in Mexico. This is really opening up a whole new important industry.”

For more than 70 years, state-controlled Pemex has held a monopoly on just about everything from oil rig to gas pump. Mexico’s move toward opening its oil industry to foreign private investment is expected to create 2.5 million jobs over ten years in a multitude of industries.

“One of them, of course, is the legal services industry,” said Rodrigo Dominguez Sotomayor, a partner with Morgan Lewis & Bockius in Houston. “These are capital intensive projects which no matter how small your project might look, you end up investing a significant amount of money in order to extract oil.”

An offshore oil drilling rig, for example, runs $450 million, he said. “If you’re going to invest that kind of money, you have to make sure you can comply with the regulatory requirements. You then have to buy the oil rig. Then you have to do your tax planning to see how you’re going to repatriate funds to wherever your headquarters are located. Then you have to start hiring people, hiring engineers.”

Boris Otto, executive partner of Holland & Knight’s Mexico City office, foresees growth in other energy-related areas, including renewables.

“Independent power producer schemes in Mexico are becoming more and more attractive,” he said. “So you see more and more big corporations, manufacturing facilities or big hotel chains, hospitality services, creating and implementing IPP projects to improve the cost line in their energy consumption.”

Regardless of what happens with the Pemex legislation, there’s pent-up demand for construction of gas pipelines. Legal practitioners in the renewables arena, Otto said, need expertise in regulatory work, joint ventures, financing, transactions and more. Gas pipeline projects would involve most of that, plus real estate, easement rights and public-private partnerships.

If the government opens the oil industry to private participation, Otto added, the legal business will “multiply exponentially opening up a whole new and important industry.”

Mexican lawmakers are still hashing out final revisions of the oil industry law. One option would effectively allow direct private investment, with companies obtaining 30-year concessions for production. Another proposal calls for Pemex to retain ownership and share in the profits of what oil companies produce. The likeliest outcome is something somewhere in between.

No matter how it turns out, Dominguez said, the result is that private companies will be “either partnering with or competing with Pemex.”

Fast-Moving Reforms

Mexico is not the only Latin nation contemplating changes.

“Many countries have a shortage of energy in the sense that the economy is growing at a faster pace than the capacity of the country to produce energy,” said Xavier Ruiz, a partner at K&L Gates specializing in cross-border mergers and acquisitions, joint ventures, finance transactions and privatizations. “That’s the case in most of Central American countries and even Chile.”

A key reason for loosening government controls is the expense of production.
“You see a lot of reform in energy policy,” said Francisco Cerezo, head of Foley & Lardner’s Latin America practice group. “In many countries energy costs are high compared to the United States. There are companies that are doing well, but could do better if energy were cheaper.”

Growth is also driving demand for roads, bridges, power plants, dams and other projects throughout the region.

“The biggest projects in Latin America are all infrastructure,” said Jerry Brodsky, Latin America area director at Peckar & Abramson. “That’s what they need. Brazil’s growth is being slowed because of the infrastructure. Significantly. And they know that. That’s why they have such a big push. They can’t manufacture enough steel to keep up with their own infrastructure demands.”

Brodsky ranks the demand according to four different country groups:
First come those with “sustained and robust growth” and stable governments: Colombia, Peru, Chile, Uruguay.

Second are those with managed growth, such as Brazil.

Third are the ones with much less certain outlooks. Mexico, with the form and outcome of its energy reforms, tax reforms, money laundering laws and other policy changes still up in the air, falls in that category.

Finally, he said, are those countries “taking affirmative steps backward” such as Venezuela, Bolivia, Ecuador and Argentina.

A Boom in Disputes

From the legal services perspective, even nations in the last group are generating growth, in the form of litigation brought against the government by corporations and individuals.

“This dispute business has been booming. Venezuela is the gift that keeps on giving for lawyers,” said Luis O’Naghten, chair of Akerman Senterfitt’s international litigation and arbitration practice group in Miami. “Their actions – be it privatizing or expropriating or whatever type of word you want us to use – have given rise to many, many, investor state disputes as well as commercial disputes.”

Elections, of course, could change the political direction and prognosis for several of the countries. Pedro Freyre, chair of Akerman Senterfitt’s international practice group raised doubts about the effectiveness of President Cristina Fernandez de Kirchner. Her “shelf-life,” he said, “is getting shorter.”

In October, the president underwent brain surgery and mid-term elections undermined her political base.

Northbound Capital

Flight capital, with investors trying to move their money out of countries with challenging political or economic situations, still accounts for some of the funds flowing north.

But growth, expansion and political stability also is bringing clients looking not to flee, but to expand into the United States.

“They’re looking to invest in property,” said Joe Zumpano, president and managing shareholder of Zumpano, Patricios & Winker. “They’re looking to put together subsidiaries for their business to engage in trade in our country. They’re looking to hire people. And they’re looking to understand what their tax consequences might be and what the employment law might be.”

That includes a number of family groups that used to fund their efforts with cash and assets on hand, have grown into multinational conglomerates and are looking for other means to finance their expansion.

“Now you have companies beginning to look at capital markets in order to finance themselves – to issue bonds and to even consider private equity and even some financing,” Ruiz said.

The family groups also are increasing the demand for what are, effectively, general counsels for a private family.

“I think is really going to explode over the next few decades,” Zumpano said of the area. “I’ve watched these pop up in the last few years and they are becoming more prevalent – Florida lawyers who actually tend to the matters of a family group or their businesses here in the United States.”

Southern Compliance

Also, he said, investors from the United States looking for opportunities in Latin America are recognizing the need to seek counsel on labor laws where they intend to do business and on anti-corruption regulations.

“The United States legal system governs highly regulated businesses here,” Zumpano said, “but it also governs what your business can do overseas. The perfect example of that is the Foreign Corrupt Practices Act. And there has been an increasing enforcement by the United States on American businesses engaging in business overseas.”

The anticorruption emphasis isn’t coming just from the U.S. Anticorruption regulations are sweeping across the region, and creating some of the biggest changes – and challenges – for businesses, and the law firms that advise them.

In Colombia, for example, the government is under pressure to dispel a perception of a corrupt environment so the nation can attract investment. But newly adopted measures are so stringent, public officials are “afraid of adopting decisions and moving things forward because they are afraid they could be accused of privileging somebody over somebody else or breaking the law or what not,” said Jaime Trujillo, managing partner of Baker & McKenzie’s Bogota office.

“So there is a sort of paralysis that has been generated by this, especially in high-profile projects,” he said.

A survey of 357 international business leaders commissioned by the firm found that “It is what keeps GCs, CFOs and CEOs awake at night.”

Baker & McKenzie is capitalizing on the trend toward increasing regulation.

“That fits rather nicely with the firm’s overall strategy of building a very robust compliance practice,” Trujillo said. “We’ve now established a global compliance group and we have lawyers in each and every jurisdiction where the firm has a presence who has become knowledgeable with what the firm wants to do with respect to compliance and also how that fits in with local compliance issues.”

Other firms, as well, are finding fertile ground for expanding their compliance practices.

Brazil’s recently enacted anticorruption law has forced companies to completely reevaluate their compliance efforts. It not only establishes stiff penalties for violations, but adopts a “strict liability” philosophy that holds companies accountable for employee behavior – even if the action was unintentional.

“You just have to prove the corrupt act or the offense occurred. You don’t have to prove that the person was actually guilty of it,” said corporate partner Paulo Eduardo Penna of Lobo & Ibeas in Sao Paolo. In other words, he continued, “you don’t have to look at intent. You only have to look at if it was done or not.”

Mexico, too, said Carlos Valencia, co-managing partner for DLA Piper in Mexico City, has established a new regulatory framework addressing FCPA.

The rules are another aspect of the regulatory transformation under way in that country, he said, “which we believe will make a huge difference in doing business in Mexico for 2014.”

Among the areas he considers significant are changes in telecom regulations that are opening a sector to foreign investments and, when two television stations are auctioned off next year, new rules that permit non-Mexicans to buy a piece.

“The media market is going to actually be experiencing its first ever new blood injection,” Valencia said. “And foreign investors can participate up to 49 percent.”
The big if, of course, is the global economic slowdown.

“In the larger picture, I think as the world economy recovers you’ll see more cross-border mergers and acquisitions, and more U.S. investment in Latin America,” said Raquel Rodriguez, managing partner of McDonald Hopkins’ Miami office.

You’ll also see more consumer spending, she said, which means continued growth in yet another practice area.

“I think U.S. and international companies that want to sell their products in Latin America are going to continue to protect their intellectual property,” Rodriguez said.
And, barring a global meltdown, Brodsky said, the outlook can only get brighter.
“I expect 2014 to be better than 2013,” he said, “and for 2015 to be better than 2014.””