Mexico: Energy Reform Implementation Laws - Hydrocarbon Law

On April 30, 2014, the Federal Government submitted to Congress a package of nine new laws and twelve energy statutes to be amended ("supplemental laws"), resulting from the recent changes to Mexico's Federal Constitution with respect to the energy reforms.

Regarding the proposal for the Hydrocarbon Law, the most important aspects of the Hydrocarbon Law proposal (the "Law") are described below:

  • It is stated that hydrocarbons in the subsoil belong to the state and the exploration and exploitation of oil and other hydrocarbons are of strategic importance. The state will exercise its right to explore and exploit these resources through assignments granted by the Ministry of the Economy ("SENER" for its acronym in Spanish) to government-owned production companies or by entering into agreements with government-owned companies or private entities.
  • Petroleos Mexicanos (PEMEX) will become a government-owned production company, whose purpose will be the creation of economic value and an increase in national income; it will have its own budget, technical operation and management and its organization, management and corporate structure will be consistent with best international practices.
  • A Round Zero is expected whereby SENER will assign PEMEX exploration areas and production fields; provided that PEMEX has the technical, economic and performance capacities and complies with a performance and development plan.
  • PEMEX may, with SENER' approval, transfer the awarded exploration permits to private entities by entering into agreements. If PEMEX considers it appropriate to associate with private entities, the National Hydrocarbon Commission ("CNH" for its Spanish acronym) will issue an invitation to bid for such purpose, subject to the guidelines issued by SENER and the Treasury Department.
  • The petroleum and other hydrocarbon exploration that are carried out through agreements, will be carried out through service, shared income and production or licensing agreements or a combination of the previous agreements, through bidding carried out by the CNH in which PEMEX may participate, as well as government productive entities and individuals.
  • In contracting areas where it is possible to find boundary fields, PEMEX will participate in at least 20% of project investment.
  • In order to carry out the commercialization of the hydrocarbons that the government obtains as a result of the exploration and extraction agreements, the CNH may hire PEMEX or a public entity, through public bidding.
  • The remaining activities of the value chain such as refining, petrochemicals, as well as the transport, storage and distribution of petroleum, natural gas and anything derived from these will stop being strategic and private entities may be allowed to participate after obtaining the approvals or permits granted by SENER or the Energy Regulatory Commission ("CRE" for its Spanish acronym).
  • The treatment and refining of oil and natural gas will be subject to SENER approval.
  • Transportation, storage, distribution, and sale to the general public of liquefied petroleum gas are subject to permits granted by the CRE.
  • Transportation, storage, distribution, sale to the general public, processing, compression, liquefaction, decompression and regasification of natural gas are subject to permits granted by the CRE.
  • Transportation, storage, distribution, and sale to the general public of petroleum are subject to permits granted by the CRE.
  • Transportation via pipelines and storage linked with petrochemical pipelines will be subject to permits granted by the CRE.
  • The creation of the National Natural Gas Control Center ("CENAGAS" for its Spanish acronym) is expected. This will be in charge of the operation of the National System of Integrated Transportation and Storage Pipelines.
  • The agreements for exploration and extraction of natural gas from coal seams may be directly awarded to holders of mining concessions.

Deadlines.

  • The President will issue the Regulations to the Law within 180 days following the latter's entry into force.
  • Holders of mining concessions will have a term of 90 calendar days following the effective date of the Law to request the CNH to directly award agreements for the exploration and extraction from coal seams located in areas covered by the permit.
  • Starting on the date in which the Law comes into effect, the CNH may award directly to PEMEX, or any of its subsidiaries or affiliates, or any other government production company, an agreement for the commercialization of hydrocarbons.
  • From January 1, 2018, the Government will hire hydrocarbon sale services through public bids carried out by the CNH.
  • Permits granted by SENER or CRE before the effective date of the Law, will continue in effect until the expiration of their terms.
  • Those persons who are engaged in transportation, storage, distribution and sale to the general public of petroleum, natural gas and its derivatives but who do not have a permit granted by the CRE or by the SENER, as the case may be, may continue carrying out such activities, provided that they request and obtain a provisional permit within three months following the effective date of the Law. This permit will be in effect for one year.
  • The President will issue an executive order for the creation of CENEGAS no later than the 12 months following the effective date of the Law.
  • CENEGAS will give allow PEMEX, for up to 12 months after its creation, to continue to operate the transport infrastructure by duct and the storage of natural gas in proper conditions for continuity, efficiency and security.
  • Until the Federal Economic Competition Commission declares the existence of effective competition conditions for the sale of hydrocarbons, liquefied petroleum gas, petroleum or petrochemicals in the relevant markets, the CRE will continue to regulate first hand sales of such products.
  • SENER will establish, in coordination with the CRE and within 12 months following the effective date of the Law, the provisions and methods for the participation in the domestic market for natural gas by any government-owned company and the capacity reserve in transport pipelines and the importing of natural gas by a single seller will not exceed 50% of the market within a five-year period, and 20% after a 10-year period.
  • From the date on which the law enters into force, the SENER and the CRE may grant, within their jurisdiction, permits for the treatment and refining of petroleum, the processing of natural gas, the transport, storage, distribution, compression, liquefaction, decompression, regasification and sale to the public of hydrocarbons, liquefied petroleum gas, petroleum or petrochemicals.

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.

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