Mexico: Operating ships in Mexico: tips for foreign investors

The news has been full of the Mexican regulatory reforms in the energy sector, which aim to liberalise the sector and encourage greater foreign investment. As foreign investors, shipowners, operators and oil companies look towards new and exciting opportunities in Mexico, we look at some key questions for parties who are considering the practicalities of registering or operating a ship in Mexico.

Does the registration of a ship in Mexico require the owner to be a Mexican entity?

It is usually the case that the owner of a Mexican flag ship must be a Mexican entity. In addition, the Mexican owner will need to be at least 51 per cent owned by Mexican entities in order to avoid breaching Mexican foreign investment legislation. This ownership requirement will need to be particularly considered where the choice of a ship's flag has implications for a wider transaction structure (such as secured financing arrangements).

It is, however, possible to register a ship in Mexico that is owned by non-Mexican entities, provided that the ship is leased to a Mexican entity under an agreement which qualifies as a finance lease from a Mexican law perspective. The terms of the finance lease would be broadly similar to an ordinary bareboat charter, but must also include, amongst other items, a breakdown of principal instalments and interest payments, an obligation to purchase the ship, and a number of mandatory provisions required by Mexican law.

Must the ship comply with any local crewing requirements?

It is normally the case that officers and crew of a ship registered in Mexico must be Mexican nationals.

Given the anticipated expansion of the offshore service vessel sector in Mexico, following the reforms mentioned above, it will be interesting to see to what extent the Mexican authorities will consider relaxing or altering these requirements, in order to encourage foreign expertise and capacity to be deployed in Mexico.

How long does the registration process take?

Typical ship registration documents will be required and an inspection will have to be arranged by a registry representative. The availability of the registry representative may vary and it is recommended that the inspection is arranged as early as possible to avoid unforeseen delays.

Following the completion of these steps, the process should take anything from two to three business days but this will vary on a case by case basis.

Can a ship have dual registration in Mexico and elsewhere?

No. Mexico must be the only place of registration.

Can a ship operate in Mexico if it is registered under a foreign flag?

As a general rule, only Mexican registered ships can operate in Mexican territorial waters. This is consistent with Mexican policy, which aims to promote the Mexican shipping industry. However, there are, broadly speaking, two exceptions to this rule:

  1. The "unique" exemption

If a foreign registered ship has unique technical characteristics, the Mexican Ministry of Communications and Transportation (Secretaria de Communicaciones y Transportes) (the Ministry) may, at its discretion, issue authorisation for such foreign registered ship to operate in Mexican territorial waters. These authorisations are valid for a 90 day term and can be renewed indefinitely.

This exemption may be of particular interest to the offshore oil and gas sector, as Mexico looks to attract foreign technical expertise and equipment, and Mexican authorities may look to this exemption in the short term so that foreign registered ships can operate in Mexico. We may, however, see a change of attitude in the Mexican authorities, as they look to ensure that the Mexican shipping industry and Mexican shipping companies benefit directly from the regulatory reforms.

  1. The temporary exemption

If there are no Mexican registered ships that have the same technical capacity as a foreign registered ship then the Ministry may issue authorisations granting temporary (90 days) permits for such a foreign registered ship to operate in Mexican territorial waters.

These permits may only be only renewed up to seven times and, if a similar Mexican registered ship becomes available before any renewal, the permit may not be renewed by the Ministry.

If after two years, a foreign registered ship continues to operate in Mexican territorial waters, generally speaking it must be registered in Mexico in order to continue to operate there.

What next for Mexico?

The future certainly appears bright, as foreign investors look to benefit from the revitalised energy sector and share their technical expertise.

In the short term, we may see foreign registered ships encouraged to operate in Mexican territorial waters, as Mexico looks to expand its own shipping sector by encouraging inward investment and foreign capacity and expertise. Down the line, as capacity and technical issues reduce, Mexico may revisit the situation, so that Mexican owners and operators can benefit more widely from the regulatory reforms and market expansion.

Will this then result in stricter registration requirements and local content rules? We will have to wait and see.

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