United States: México Projects Part II: Off To The Races!

On December 12, 2013, Mexico's Federal Congress passed historic Constitutional reforms opening both the oil and gas and electricity sectors to private investment. Within 96 hours, the required 16 state legislatures affirmatively supported the amendment. The decree was published December 20, 2013 and became effective on December 21, 2013. As a follow-on to our client alert "México Projects: Get Ready, Get Set . . .," this alert summarizes the key changes in the decree.

The energy reform is an historic accomplishment of the Mexican government. Following a 75-year monopoly by Petróleos Mexicanos (PEMEX) in the oil and gas sector, and the effective monopoly of Comisión Federal de Electricidad (CFE) in the electricity sector, the reforms terminate such constitutionally mandated arrangements in favor of open, transparent and competitive (and regulated) markets.

Though the greater step in the process has been accomplished, more is to come by way of secondary legislation and regulations, as contemplated by the [energy reform bill].

Comprehensive Constitutional Reform

The oil and gas sector reforms are significantly enhanced from the original August 12, 2013 proposal of President Enrique Peña Nieto, which was limited to paving the way for profit-sharing contracts as the vehicle for channeling private investment into the oil and gas sector. The [energy reform bill] draws a clear picture of a revamped energy sector in Mexico. The enhancements to the President's original proposal are not fully reflective of the July 31, 2013 proposal of Partido Acción Nacional (PAN), the main opposition party, but do prove to be a much more favorable consolidation of the President's and the PAN's proposals than initially expected. Clearly, political capital was expended by the two main political parties to draft a compromise that is overall a significant improvement to the two separate versions originally proposed by the President and the PAN.

Substantively, oil and gas (even though the new, revised text in the Constitution upholds and reinforces what has long been close to the heart of Mexico—sovereignty, ownership over hydrocarbon resources), and electricity, will become fully and vertically privatized industries. In addition to the revisions to the Constitution, the transitional articles of the decree set forth a detailed course of action and timeline to ensure proper implementation of the revised Constitutional provisions.

Principal Reforms in Oil & Gas

Ownership and Booking of Reserves. Under the Constitution, private enterprise will not have direct ownership of subsoil hydrocarbon resources. However, pursuant to Transitional Article Five, private enterprises may record and report oil and gas reserves for accounting and financial purposes with respect to the assignation or associated contract evidencing the same, as long as such assignation or contract sets forth that title to all subsoil hydrocarbon resources resides with the nation. The ability to recognize the reserves in financial statements alone is significant and addresses one of the major concerns international oil companies and other constituencies had observed with respect to the President's proposal.

Contracts. Transitional Article Four contemplates various forms of contract for exploration and production activities, while Transitional Article Five sets forth the forms of payment for such contractual forms. The list of contracts is not exhaustive and leaves open the door for additional types of contracting mechanisms to be determined in secondary legislation. The forms expressly contemplated are: (i) service contracts, (ii) production sharing contracts, (iii) profit sharing contracts and (iv) licenses. Secondary legislation will determine the appropriate type of contract for specific activities and/or circumstances on the basis of maximizing revenues to attain the greatest long-term development benefits; however, the mere existence of these contractual options (and others to come) establishes a clear framework within which private enterprise will become actively-involved participants in the oil and gas sector in Mexico. Importantly, the Constitution now provides that the exploration and production of oil and gas is of social interest and a matter of public order. Given this status, such activities will have priority over other activities conducted above or under ground, such as mining.

Governmental Authorities and Regulators. The oil and gas industry in Mexico will fall within the purview of the Ministry of the Economy (Secretaría de Economía), the National Hydrocarbon Commission (Comisión Nacional de Hidrocarburos), the Energy Regulatory Commission (Comisión Reguladora de Energía), the Ministry of Finance (Secretaría de Hacienda y Crédito Público) and the newly-created National Natural Gas Control Center (Centro Nacional de Control del Gas Natural).

The National Hydrocarbon Commission (CNH) will continue to provide technical advice to the other authorities, inventory hydrocarbon assets and, most importantly, administer the assignation and contracting of exploration and production activities and regulation of the exploration and production industry, among others.

The Energy Regulatory Commission (CRE) will, in addition to functions currently performed by CRE, include the regulation and granting of permits relating to storage, transportation and pipeline distribution of petroleum-based products, and the regulation of third-party open-access rights to pipeline and storage facilities and first-hand sales.

Ownership and administration of the national pipeline system will be vested in the newly created National Natural Gas Control Center (CENAGAS) pursuant to Transitional Article Sixteen. Regulations governing the creation, existence and functions of CENAGAS are required to be issued no later than 12 months after publication of the Constitutional reforms. Pipeline assets and storage facilities currently owned and operated by PEMEX will be transferred CENAGAS.

Pemex. The new constitutional provisions envision a privatized industry in which PEMEX becomes an "empresa productiva" (a productive enterprise) of the state, standing side-by-side with private enterprise. Additionally, PEMEX is authorized to co-invest with private investors in the extraction and production of oil and gas. In a first phase of implementation of the changes envisaged by the reforms, PEMEX will be entitled to the direct assignation of oil and gas resources, whether presently in production or already identified (though not in production). The Transitional Articles describe the process to be followed by PEMEX for the identification and assignation of such assets.

Mexico Oil Fund for Stabilization and Development. A public trust will be created under the administration of the Central Bank of Mexico (Banco de México) for the purposes of receiving, administering and applying revenues from oil and gas assignations and contracts.

Electricity

The Constitutional reforms relating to electricity change the landscape of the sector, by expanding upon prior attempts to privatize the electricity sector and opening the sector to private investment. Unrestricted private investment in the generation of electricity will now be allowed, while the CRE will be charged with setting wheeling tariffs and interconnection fees. CFE will also become an "empresa productiva" (a productive enterprise) of the state, standing side-by-side with private enterprise, and continuing to operate as a generator.

The national electric grid will be owned, operated and maintained by the newly created state-owned Centro Nacional de Control de Energía (National Electricity Control Center). The grid operator will receive ownership of all transmission assets and related facilities from CFE, with regulations governing the creation, existence and functions of CENACE to be issued after publication of the Constitutional reforms. CENACE will also be charged with the management of the wholesale market and open access to transmission facilities in Mexico. The Constitution also provides, similar to oil and gas related activities, that transmission and distribution of electricity is of social interest and a matter of public order and, therefore, such activities take priority over other activities conducted above or under ground.

Timelines for Implementation

The Transitional Articles of the Constitutional reforms set forth the timeline for the implementation of all actions required to effectuate the provisions of such reforms. The timeline is more aggressive than had been suggested in the PAN proposal (originally, 365 days from publication to implement the changes).

Under the Transitional Articles, the following is required to occur:

1. On or prior to March 21, 2014, Pemex will provide the Ministry of Energy with a list of oil fields and assets Pemex would continue to exploit following the opening of the sector;

2. On or prior to April 19, 2014, legislation and regulations (or changes to existing legislation and regulations) will be promulgated:

a. in order to more fully effectuate the provisions of the Constitutional reforms, including fleshing out the types of contracts and the requirements thereof;

b. relating to the regulation of "empresas productivas del Estado" (State productive enterprises);

c. in respect of the enhanced functions and power of certain agencies and governmental authorities, including the Ministry of Energy, the Ministry of Finance, the National Hydrocarbon Commission and the Energy Regulatory Commission;

d. to regulate the types of contracts to be employed in connection with the transmission and distribution of electricity;

e. (i) to ensure that the National Hydrocarbon Commission and the Energy Regulatory Commission become coordinated regulatory agencies and (ii) with respect to the offices of the commissioners in such agencies, and the attributes thereof;

f. with respect to corrupt practices;

g. with respect to the discovery, exploration and exploitation of geothermal resources; and

h. to create the National Agency for Industrial Safety and Environmental Protection as it relates to the Petroleum Industry;

3. During 2014, the Mexico Oil Fund for Stabilization and Development shall be created;

4. During 2015, the Mexico Oil Fund for Stabilization and Development shall commence operations;

5. On or prior to December 21, 2014:

a. Congress shall enact legislative and regulatory changes establishing the guidelines for environmental protection, as they relate to the oil and gas and electricity sectors; and

b. The President shall incorporate a transition strategy into the National Program for the Sustainable Exploitation of Energy (Programa Nacional para el Aprovechamiento Sustentable de la Energía);

6. Within 12 months of the Constitutional Article 27 Regulatory Law coming into force, the decree creating CENAGAS shall be promulgated;

7. Within 12 months of the regulatory laws in respect of the electricity sector coming into force, the decree creating CENACE shall be promulgated; and

8. On or prior to December 21, 2015, both CFE and PEMEX will fully transition into "empresas productivas del Estado".

Final Comments

The Constitutional reforms approved by Mexico are historic. The deep-rooted conviction that ownership of petroleum is fundamental to Mexico's sovereignty has given way to a new regime which preserves title to subsoil hydrocarbons, but allows private investment in the much needed infrastructure and technology to more efficiently, effectively, competitively and transparently develop the oil and gas sector in Mexico. Likewise, the electricity sector, which had slowly been allowed to allow for private investment, will be restructured to reflect other competitive electricity markets, such as in Chile.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions