The following is the first chapter in a four-part
Commentary discussing the groundbreaking reforms to
Mexico's oil and gas sector. The Commentary chapters
and their publication dates are as follows:
Part I - Mexico's New Regulatory Framework for Oil and
Gas
Part II - Private Investment in Mexican Natural
Resources—September 25, 2014
Part III - Transportation, Refining, Environmental, and
Tax—October 2, 2014
Part IV - What's Next for Mexico?—October 9,
2014
It is a time of change and a time of opportunity in Mexico. Mexico
has implemented a series of structural changes that are designed to
promote the country's economic growth and stability, through a
series of legal reforms that culminate in the recently enacted
secondary legislation to the Mexican Energy Reform law.
Mexico's Congress had previously approved President Enrique
Peña Nieto's proposed labor, antitrust, tax, education,
electoral process, and telecommunications reforms, and now it has
approved sweeping reforms to Mexico's oil and gas and
electricity sectors.
On April 30, 2014, President Peña Nieto submitted to the
Mexican Congress a package of legislation designed to implement the
historic constitutional energy reform that he had signed the
previous December. Styled the "secondary laws," this new
legislation consists of nine new laws and amendments to 12 existing
laws. After review and discussion, Congress approved the secondary
laws, which were then published into law on August 11, 2014, with
most entering into force on August 12.
The "secondary laws" consist of the following:
-
Hydrocarbons
a. Law of Hydrocarbons* (laws marked with an asterisk are new)
b. Foreign Investment Law
c. Mining Law
d. Public Private Associations Law -
Electricity
a. Law of the Electricity Industry -
Geothermal
a. Law of the Geothermal Industry*
b. Law of National Waters -
National Agency for Industrial Safety and Protection of the
Environment in the Hydrocarbons Sector
a. Law of the National Agency for Industrial Safety and Protection of the Environment in the Hydrocarbons Sector* -
State Productive Corporations
a. Law of Petroleos Mexicanos ("Pemex")*
b. Law of the Federal Electricity Commission ("CFE")*
c. Federal Law for State-Owned Agencies
d. Law of Acquisitions, Leases, and Services of the Public Sector
e. Law of Public Works and Related Services -
Regulatory Agencies and the Organic Law of the Federal Public
Administration
a. Law of the Coordinated Regulatory Agencies for the Energy Industry
b. Organic Law for the Federal Public Administration -
Tax
a. Income Law on Hydrocarbons*
b. Federal Rights Law
c. Tax Coordination Law -
Law of the Mexican Oil Fund for Stabilization and
Development
a. Law of the Mexican Oil Fund for Stabilization and Development* -
Budget
a. Federal Budget and Fiscal Responsibility Law
b. General Law for Public Debt.
The new legal framework for oil and gas in Mexico represents two
major changes for the industry: (i) a complete transformation of
Pemex, which prior to the reforms had enjoyed monopoly status in
the sector, and which will now have more of a commercial profile,
and (ii) the opening of the upstream, midstream, and downstream
sectors to private participation.
Transformation of Pemex
Since 1938, the exploration, extraction, and production of oil and
gas in Mexico, as well as the transportation, storage, and refining
of hydrocarbons and petrochemicals, have been an exclusive monopoly
of the Mexican government, acting through Pemex. In the 1990s,
private entities were allowed to participate in gas transportation,
storage, and distribution, but most private projects were dedicated
to serve either Pemex or the CFE.
The new energy reform legislation creates the concept of
Productive State Corporations ("PSCs"), which are
entities owned by the Mexican federal government that are
business-oriented and focused on maximizing revenue for their
owner. The new legislation has conferred PSC status on Pemex and
the CFE. In a significant departure from the past, Pemex and the
CFE will now have an entrepreneurial nature, will be governed by
commercial laws, and will be subject to corporate governance
similar to a private entity. They will also have disclosure
obligations that are similar to those that apply to publicly traded
companies, even though they will not be listed on any stock
exchange. In addition, Pemex and the CFE will now compete in the
new Mexican energy sector with third parties.
Pemex will now be managed by a board of directors composed of five
government-appointed members—among whom will be the heads of
theSecretaría de Energía (the Mexican
Secretary of Energy) and the Secretaría de Hacienda
y Crédito Público (the Mexican federal tax
authority)—and five independent members. Similarly, Pemex
will be restructured as a holding company with two subsidiaries: a
primary-production subsidiary (responsible for exploration,
production, and processing activities) and an
industrial-transformation subsidiary (responsible for refining and
petrochemicals). This is a change from the four subsidiaries that
Pemex currently owns. Sales of oil and gas will continue to be
through private companies, which may be incorporated outside of
Mexico.
The energy reform package establishes special treatment for PSCs
for budgeting, procurement and financing. PSCs are now subject to
budgetary rules that are autonomous from the Mexican federal
government and distinct from Mexican government agencies, enabling
them to invest a larger percentage of their resources in exploring
for and producing oil, gas, and other resources from new fields, as
well as increasing the productivity of existing fields, with both
short-term and long-term return strategies. Further, any direct or
contingent debt incurred by a PSC will no longer be considered
public debt of the Mexican government.
In practical terms, this new budgetary framework means that Pemex
will be responsible for managing its own debt obligations and
entering into financing arrangements without direct intervention in
day-to-day operations from the Mexican Ministry of Finance and
Public Credit, as was the case in the past. Pemex's only
obligation will be to send a global funding proposal to the
Ministry of Finance and Public Credit once per calendar year, for
incorporation into the global government debt ceiling that is
approved by the Mexican Congress.
A New Regulatory Landscape
The new legislation confirms that all hydrocarbons found beneath
the surface will continue to be owned by the Mexican state, and it
provides that those hydrocarbons will be managed by the National
Hydrocarbons Commission ("CNH"). The CNH will have the
authority to grant licenses (asignaciones) to PSCs,
including (but not limited to) Pemex, for the development
(specifically, exploration and production) of oil and gas
resources. The CNH may also authorize PSCs and Pemex to enter into
service contracts, profit-sharing contracts, or production-sharing
contracts with private entities. In addition, all reserves that had
previously been owned by Pemex have now been transferred to the
CNH. The CNH will also manage the development of geophysical and
geological information in Mexico and will grant operating
licenses.
The energy reform package also establishes the Law of Coordinated
Regulatory Energy Entities, as well as amendments to the Law of the
Federal Public Administration. The Law of the Coordinated
Regulatory Energy Entities will regulate the organic elements of
the CNH and theComisión Reguladora de
Energìa ("CRE," the National Energy
Regulatory Commission of Mexico), while the Hydrocarbons Law, the
Electric Industry Law, and the Geothermal Energy Law will establish
the obligations, powers, and attributes of the CNH and the
CRE.
The Coordinated Regulatory Energy Entities will have technical,
operational, and management autonomy, as well as financial autonomy
derived from the collection of government fees and charges. They
will have a governing body made up of seven commissioners assigned
by the Mexican Senate, each of whom will be selected from
candidates proposed by the president.
Round Zero
Although the CNH will be responsible for administering
Mexico's oil and gas resources, the energy reform legislation
granted to Pemex a preferential right to request licenses to
develop onshore and offshore blocks, provided that Pemex could show
technical and financial feasibility to explore for and produce
hydrocarbons from those blocks. Designated "Round Zero,"
this process concluded on August 13, 2014, when the CNH announced
which blocks had been assigned to Pemex. One sign of the Mexican
government's commitment to a quick opening of the oil and gas
sector is that the announcement was made in mid-August, even though
the official deadline for the CNH's determination was not until
September 17, 2014.
To maximize efficiency and the likelihood of success, Pemex has
several options to develop the blocks that it has been assigned:
(i) independently, and without the involvement of any additional
entity other than subcontractors; (ii) pursuant to a
production-sharing contract or a profit-sharing contract with a
third party; or (iii) pursuant to a partnership or joint
venture.
Now that Round Zero has concluded, Pemex has announced that
initially, it is considering the formation of 10 partnerships for
the development of blocks or groups of blocks that, due to their
technical complexity and intense capital requirements, necessitate
the participation of private operators. These blocks have been
grouped into the following categories: (i) mature onshore and
offshore blocks, (ii) offshore heavy oil blocks, (iii) giant
deepwater reserves, and (iv) recent discoveries. Under the
Hydrocarbons Law, Pemex's partners will be selected through a
public bidding process managed by the CNH (pursuant to technical
guidelines established by the Ministry of Energy), in what has
become known as "Round 0.5."
In those cases where Pemex wishes to partner with third parties,
the license that Pemex received from the CNH will be converted into
a contract between Pemex (or a special purpose company established
by Pemex), the third party partner, and the CNH. If the CNH and the
Ministry of Energy approve the conversion, the Mexican Ministry for
Finance and Public Credit will establish the fiscal terms
(including royalties) that will apply to the contract. Although
Pemex will have some input into the technical, financial, and
experience requirements that will apply to its partner, the public
bidding process itself will be conducted by the CNH. The procedures
that will apply to that bid process are the same as those that will
apply to contracts that do not involve Pemex, as discussed in more
detail in a future installment of
this Commentary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.