United States: Mexico's New Regulatory Framework for Oil and Gas

Last Updated: September 23 2014
Article by Alberto de la Parra, Mauricio Llamas and José Estandía

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:

  1. Hydrocarbons
    a.  Law of Hydrocarbons* (laws marked with an asterisk are new)
    b.  Foreign Investment Law
    c.  Mining Law
    d.  Public Private Associations Law
  2. Electricity
    a.  Law of the Electricity Industry
  3. Geothermal
    a.  Law of the Geothermal Industry*
    b.  Law of National Waters
  4. 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*
  5. 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
  6. 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
  7. Tax
    a.  Income Law on Hydrocarbons*
    b.  Federal Rights Law
    c.  Tax Coordination Law
  8. Law of the Mexican Oil Fund for Stabilization and Development
    a.  Law of the Mexican Oil Fund for Stabilization and Development*
  9. 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.

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
Alberto de la Parra
Mauricio Llamas
 
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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