María Jimena Londoño, former corporate and finance lawyer at Pacific Energy Exploration & Production Corporation, speaks with Michael Washburn about the impact of low oil prices on Colombia’s economy and legal market, where the government could be doing more to help, and a potential end to the war with FARC
Can we begin by discussing your role in Latin America’s energy and infrastructure sectors?
I started working for a law firm that used to advise Glencore on oil and gas issues. They had done work for the Colombia state refinery. I worked for the law firm Parra Rodríguez and Cavalier, now called Parra Rodríguez Abogados. Right after that, I started working for Avianca, one of the largest airlines in Latin America. Basically I worked in corporate affairs and worked in conjunction with the team that carried out airline financings.
What I do for my current employer, Pacific Energy Exploration & Production Corporation, is similar. It is a different business but I still work in corporate finance. I work very closely with the finance team, providing legal support in bond issuances, exchanges, project finance, and in the negotiation and administration of credit agreements.
Does the oil and gas downturn make itself felt in other sectors?
I would not be as involved with that particular sector right now because of my current focus, but I can tell you that the airline industry has been just as affected by the current situation as oil and gas companies.
For instance, Avianca’s income from travelers has been seriously affected. Falling oil prices have caused the dollar to drop 40% or more. This has affected the ability of tourists to go abroad, and so it has had quite an impact on the revenue of the airlines.
Oil and gas companies have been hurt by the fall in prices internationally. They are affected by what happens in China as well as production in the US and the failure of OPEC countries to reach agreement on whether to decrease production or not. Those are issues affecting the Colombian economy generally.
Obviously, with oil and gas being some of the most exported commodities in the country, the fall in prices has had quite an effect on currency. Manufacturing companies are not fully supplied by internal production, this implies importing raw materials or intermediate products. With the current price of the dollar, this makes margins on sales smaller or non-existent. In fact, the current price of the US dollar has even made access to basic products more expensive for individual consumers, generating material inflation in the prices of groceries. It has been quite a complex year for the Colombian economy.
Are there any factors which offset these negative trends?
Yes. The G4 concessions, which are infrastructure concessions, have been given a green light. It is expected that they will be financed at least partly with sale of ISAGEN, a mixed economy company (mostly state owned) dedicated to the generation of energy and other energy related solutions. There is great interest on the part of foreign and national banks to finance these projects. They are generally trying to be more sophisticated in the way that they manage the relations between government entities, and private participants are going to invest in these deals to make them attractive for financings. Obviously that is generating a great influx of currency which might help stabilise the country for the forthcoming year.
People also have expectations with regard to peace negotiations. Nobody can quantify the impact that signing peace agreements with the rebels will bring about in the economy, but obviously we are all very optimistic. It is a well-known fact that such rebel groups have participated in the drug business, of course, but the largest rebel group, FARC, is very close to reaching peace agreement with this government. They are asking for additional benefits, including some that might ne non-negotiable at this stage. But people just mostly believe that the government is very close to signing peace agreement with FARC, subject to popular approval.
As a positive for oil and gas companies, as a way of adjusting to the volatile price scenarios for commodities, synergies and cost reductions have been implemented. In the long run, this makes the oil and gas sector more resilient and efficient. Not only independent oil and gas companies, the government was also relying heavily on revenue from oil and gas companies.
The oil and gas situation has made country more conscious of the fact it has to diversify, which is important. There is a need to attract foreign capital for investment and being less dependent on one commodity is always good for an economy. Nevertheless, from my perspective, there is a need to strengthen government support for oil and gas companies in order to ensure they endure.
Are there any terms in the proposed peace agreement with FARC that might impede its signing?
It is hard to tell because particulars of the actual peace agreement have not yet been made public. Only people within government who are negotiating are privy to the contents of the agreement; all the public has access to are general statements in the media. There are positions that our congress guaranteed in order to enter into the peace agreement. It seems one of the biggest challenges, once it is made public, will be for the government and FARC to find compromise.
After so many years of polarisation, it is going to be hard for society to accept the agreement, and all that it implies, and to make compromises. It is hard even to begin to predict how it is going to work. It has been years in the making, and having all the stakeholders involved, having them accept that they are going to have to give something up to make this work, will be a challenge.
What are the implications of these developments for Colombia’s legal industry?
We will be in the spotlight for at least the next three to four years because law firms are focusing on the advantages that these developments could bring, seeking to enhance their teams to be able to be up to the challenge of working hand-in-hand with foreign counsel.
Deals such as G4 concessions require more sophistication. The situation has become of great interest to law firms and to banks. It is expected that there will be big international deals in which we will see local banks and global banks working together. Strong project finance teams will be around these deals.
In the oil and gas sector, companies are shrinking but are trying to make the best of their struggle to find synergies to get through the crisis, in order to maintain clients in this sector through the current scenarios law firms have made sacrifices, including taking cuts in their fees.
Do you think that regulations in Colombia are aligned with the current realities?
Actually, as a general comment, I think that the government has been very involved in trying to help companies adapt to these challenges. Colombia’s national regulatory agency for oil and gas has made a great effort to try to decrease pressure on oil and gas companies and exploration and production companies. They have tried to make it easier for the companies to comply with existing regulatory requirements, partly by easing up the terms of investment.
Basically, what they have been doing is, first of all ensuring that, without changing the regulations, companies go through a procedure which allows them to cancel out letters of credit once they have performed their minimum work programme obligations.
Although this is a positive development, it has not been enough because really nobody expected the situation to persist as much as it has. At the very best, this is a mid-term scenario, not a short-term scenario. It would imply a compromise from government authorities. Obviously these companies are revenue generators for the states, as they collect taxes from them. Additional support will be most highly valued at this difficult time. Any of these companies, especially venture companies, depend on flexibility in the regulations to be issued in order to survive. Not all the companies will have the financial muscle.
What would help companies at this juncture?
Right now there is very little flexibility to abandon or postpone commitments for the time the volatile price scenario continues. Even permitting companies to suspend commitments would be very helpful. This would even help Ecopetrol, a state-owned company, make it through the difficult times. This would be significant for the economy.
Let’s talk about the role of lawyers in this environment. What do companies and banks look for when it comes to choosing outside counsel?
What companies and banks are seeking is external counsel that are involved, available, and sophisticated enough to handle international financings that often have a heavy common law component.
The deals are taking place under a civil law system, so implementation involves some level of sophistication. Obviously, lawyers need to be willing and able to get to know the deals, because project finance is a very committed area of practice, it involves not only knowing finance but the particular deal it is being applied to. The client needs a business-savvy lawyer, willing to learn.
You cannot always be an expert in oil and gas, road concessions, and airline financing, but you can make an effort to understand the deal. An in-house team which used to be a very local team at banks, will now have to have some sort of knowledge of common law, and they will also look for this in their external counsel.
Knowledge of business and regulation are necessary to be involved in a deal that involves common law, common law concepts as applied to collateral located in a civil law jurisdiction. That implies that the larger law firms will have an advantage.
Do you see a role for smaller law firms?
There is always going to be a role for boutique law firms but in order to survive, they have to adapt and work as part of a team which will always involve a large law firm. If you take large investment banks, they are always going to support having the legal opinions and general back-up of large law firms.
For common law or a very particular oil and gas issue, it will end up involving a boutique firm, because that boutique has lawyers who know that business so well that you can rely on them. Expertise from the small boutique law firm will have to be part of a package. But it will also involve a larger law firm to make the client feel comfortable.
Do you agree that it is sometimes the boutique law firms that have the most knowledgeable lawyers for a particular issue?
Yes, there is always that one lawyer, especially with regard to oil and gas regulatory issues. Colombia is becoming a very sophisticated jurisdiction. Most companies are familiar with Brazil – it has a tradition of larger deals. Unlike Brazil, we do not have the large deal tradition. Many deals get done in Brazil which do not involve foreign law firms, because they do have that expertise. In Colombia, we do have to bring in the New York firms, or European firms as well as the local.
Would you describe Colombia as heavily regulated?
Colombia is very heavily regulated, but sometimes deals do not go as fast as they could. There is a question mark on what the regulations state and what the deal-makers actually want. We face the challenge of making laws more flexible, more business-oriented than countries that do not have a specific regulatory framework for everything. This poses a challenge.
In the legal profession, we have the same restrictions as Brazil. In order to practice law in Colombia, in theory you have to be a Colombian lawyer, but the industry ends up creating its own rules. We have New York law firms coming here and making alliances with local firms.
When it comes to structuring a deal, you have a local tranche, you have the collateral, it is in Colombia. However, the structures of deals has recently involved a very marked influence of common law. You have a New York law firm, or several, and then you have local firms and expert local counsel from boutique firms for specific regulatory issues that come up.
The challenge becomes coordinating all these teams, which is usually the job of in-house counsel, to integrate on one deal. Trying to walk them through being aligned with the business interests of the country; trying to unite these extremely brilliant, qualified people to reach a common ground.