Under Mexican law, as a general rule, coastal trade in Mexican waters is reserved to Mexican shipowners with Mexican vessels or naval artifacts. Although this rule may be justified as a matter of reciprocity with neighboring countries, the truth is that it poses a major problem for PEMEX, the Mexican national oil company. PEMEX requires the services of hundreds of vessels and naval artifacts on a daily basis in the Gulf of Mexico and Mexican flagged/owned vessels and naval artifacts alone cannot cope with that demand. Therefore, in this article we will try and explain the available exceptions to that rule with regards to vessels, offshore installations and those offshore craft that may or may not be deemed as vessels, such as semi-submersible rigs, accommodation barges, drillships and floating production, storage and offloading units (FPSOs).
2. Navigation considerations
The Navigation and Maritime Trade Law (Ley de Navegación y Comercio Marítimos, "NMTL", which entered into force in 2006) provides that if there are no Mexican-flagged vessels available, foreign-flagged vessels and naval artifacts may engage in cabotage trade in Mexico under temporary navigation permits (permisos temporales de navegación, "cabotage permits") granted by the Ministry of Communications and Transportation (SCT). Cabotage is defined as the navigation between two ports or spots within the Mexican maritime zones.
However, such type of permits does not grant much certainty to their holders in the long run, as they are granted for 3-month periods and can be only renewed 7 times (a maximum total of 2 years). If a similar Mexican vessel or naval artifact becomes available right before a foreign flagged/owned vessel/artifact is to renew its temporary navigation permit, that permit shall not be renewed.
Once the maximum number of renewals has been reached, the relevant vessel or naval artifact must be flagged Mexican in order to continue operating in Mexican waters. Only Mexican individuals and companies may flag and register vessels and naval artifacts in Mexico, and this is provided they are owned by them or in their legal possession under a financial lease agreement (a charterparty or lease agreement would not be sufficient). Foreign companies and individuals may incorporate a Mexican shipping company, but that company would be subject to the foreign investment restrictions explained below.
Due to the aforementioned reasons, owners of naval artifacts would normally opt for applying for a stay authorization instead of a cabotage permit. Stay authorizations may be renewed an unlimited number of times and their holders are not subject to foreign investment restrictions (except for drilling services). We will explain below who may apply for the so-called "stay authorizations" (autorizaciones de permanencia).
Applicants should also bear in mind the priority ranking for the granting of cabotage permits. Mexican shipowners with foreign vessels/naval artifacts under a bareboat charter (in this case the whole crew must be Mexican) rank first, followed by Mexican shipowners with foreign vessels/naval artifacts under any other type of charter agreement (in this case priority is given to the vessel having a higher number of Mexican crewmembers), while foreign shipowners with foreign vessels/naval artifacts rank last.
Following an amparo (constitutional review) proceeding initiated by PEMEX, the Supreme Court decided in 2008 that the procedure laid down in the Navigation and Maritime Trade Law by which foreign companies may request and obtain cabotage permits does not contravene the Mexican Constitution.
In their constitutional review petition PEMEX argued that giving preference to Mexican shipowners with chartered foreign vessels contravened constitutional principles, such as equality, legal certainty, freedom of employment and commerce, and best value for money in public procurement procedures. Yet, the Supreme Court found that the fact that Mexican shipping companies are preferred over foreign ones does not create a monopoly, does not favor certain companies and does not have negative repercussions on the general public or a social class, but, on the opposite, it promotes national maritime activities, protects the national shipbuilding industry and, consequently, benefits the Mexican economy.
It must be noted that the aforementioned 2-year obligation to flag does not apply to "highly specialized" (de extraordinaria especialización) vessels/naval artifacts. For such craft, the NMTL does not set forth a limit on the number of times they may be renewed.
The Supreme Court held in 2012 that the categorization of a vessel or a naval artifact as highly specialized shall have a 2-year minimum duration. Such categorization may be requested at any time (vg. when the first cabotage permit is requested or when the seventh renewal is requested).
The NMTL provides that vessels and/or naval artifacts will be considered as highly specialized "for their technology and services provided, crew requiring a particularly specialized training",orif they"are highly specialized or not likely to be replaced by conventional technology such as those used in the exploration, drilling and early production of hydrocarbons, [...]". So far the matter of whether a vessel or naval artifact is highly specialized is determined on a case by case basis.
According the draft Regulations to the NMTL (under revision since 2007), the following criteria would likely be used in the future to determine if a vessel is highly specialized:
(i) her state of technology in the international market;
(ii) the availability of her technology in the international market; and,
(iii) construction and equipment reports in respect of vessels and naval artifacts that may be considered as extraordinary.
Some vessels enabled with a level II dynamic positioning (DP2) systems have been regarded as highly specialized vessels for the purposes of temporary navigation permits. However, this is not necessarily a factor to be taken into account to categorize a given vessel as highly specialized.
Lastly, another exception to the cabotage rule is the operation and management in Mexican maritime zones of dredges, as well as tourism, sport and leisure vessels, which may be carried out by foreign shipowners or operators with foreign vessels or naval artifacts (provided there is reciprocity with the relevant country).
b. Stay authorizations
According to article 9 of the NMTL, vessels and naval artifacts are subject to an identical regulatory regime. Despite that, important differences may actually apply from a civil liability, tax, navigation or a foreign investment standpoint. For the purposes of this article, we will only focus on the latter two.
Most importantly, foreign naval artifacts, such as fixed offshore installations, may operate in Mexican waters under stay authorizations as opposed to cabotage permits. Stay authorizations are also granted by the Ministry of Communications and Transportation for 90-day periods, but the NMTL does not provide a limit to the amount of times they may be renewed, and this is regardless of whether the naval artifact is deemed as highly specialized or not. As we will explain further below, the holders of stay authorizations are not subject to the foreign investment restrictions applicable to cabotage permit holders (except for drilling services).
Stay authorizations are granted under the Regulations to the already repealed Navigation Law (replaced by the NMTL), as no regulations have yet been enacted for the NMTL (even though they were supposed to have been published and in force since late 2006).
Cabotage permits may be granted to vessels or naval artifacts. Stay authorizations may only be granted to naval artifacts. "Vessels" are defined as "any construction designed to navigate over or under waterways", whereas "naval artifacts" are defined as "any other floating or fixed structure which, even if not meant to navigate, is susceptible of being moved over water by its own means or by a vessel, or built on water, to fulfill its operational purposes". Both definitions are contained in the NMTL.
The maritime authorities have not yet issued detailed criteria regarding which craft may be deemed as vessels and which may be deemed as naval artifacts. As new variations of offshore installations and ships are deployed at a rapid pace, issuing those criteria becomes more difficult task each day.
For very clear reasons, ships, dredges and barges have obtained cabotage permits, whereas fixed oil platforms have obtained stay authorizations. However, there are a number of craft that are similar to vessels in their construction and shape but that are actually designed to perform specialized operations in connection with the exploitation of natural resources while attached to a facility on an ongoing basis (vg. drillships and FPSOs). Likewise, there are offshore craft that do not resemble vessels but that are capable of navigating on their own (vg. semi-submersible and jack-up rigs).
Nevertheless, from the aforementioned definitions one may infer that the shape of a craft or its self-propelling ability is not a factor to determine whether it is a vessel or a naval artifact. Conversely, one may imply that the factor to take into account is whether the craft was designated to navigate regularly (vg. transporting cargo or passengers) or to perform operations on a continuous basis in a given location.
In recent years, accommodation platforms, floating drydocks, semi-submersible and jack-up rigs, as well as self-propelled mobile drilling units have obtained stay authorizations. However, some semi-submersible and jack-up rigs have obtained cabotage permits instead.
There are also two precedents regarding FSO and FPSO units. The FSO "TA'KUNTAH" and the FPSO "YUUM KAK NAAB" are both non-self-propelled units and have both obtained stay authorizations.
3. Foreign investment considerations
Ironically, under the current foreign investment regime, Mexican companies with more than 49% foreign participation in their capital stock cannot have vessels engaged in cabotage in Mexican waters, whereas foreign companies (with or without Mexican owners) may obtain cabotage permits.
This is because under the Foreign Investment Law (Ley de Inversión Extranjera, "FIL") foreign investment cannot exceed 49% in any cabotage business in Mexico, but as foreign companies may obtain cabotage navigation permits under the NMTL, and as the NMTL was enacted after the FIL, one may imply that the operation under cabotage permits is an exception to the 49% foreign investment limit under the FIL.
Accordingly, one may construe that, on the one hand, companies formed in Mexico cannot have more than 49% foreign participation in their capital stock, and, on the other hand, foreign companies may establish and register a Mexican branch to operate vessels under cabotage permits.
Foreign shipowners operating in Mexico under a temporary navigation permit should formally establish and register a Mexican branch in accordance with the Foreign Investment Law, as they will be habitually conducting acts of commerce within Mexican territory. However, the opening and registration of a branch is not a prerequisite to obtain a cabotage permit.
A foreign shipowner might also wish to consider opening a Mexican branch in order to create a permanent establishment in Mexico and avoid that later on the Mexican tax authorities deem that a permanent establishment has been triggered for the non-resident company; especially if the company will provide services in Mexican waters for over 6 months.
The 49% limit does not apply to foreign companies holding a stay authorization, as their naval artifacts do not technically navigate but are located in the same place on an ongoing basis. Nonetheless, it should be noted that the operation of naval artifacts for the rendering of drilling services to the oil and gas industry (vg. drilling rigs) is also subject to the 49% limit, but in this case such limit may be exceed if the prior authorization of the Ministry of Economy is obtained.
Another exception under the FIL to the 49% foreign participation limit is that Mexican shipping companies providing port services, such as towage, launching, and line handling, within a Mexican port, are allowed to exceed that limit upon obtaining a favorable resolution from the Ministry of Economy.
In addition, it should be pointed out that "neutral" shares of stock are not to be taken into account when calculating whether foreign investment exceeds 49% of the capital stock of a Mexican company. Neutral shares are a series of shares without voting rights and with limited corporate rights for which issuance the Ministry of Economy's prior authorization is required.
Under Mexican law, as a general rule, cabotage in Mexican waters is reserved to Mexican shipowners with Mexican vessels or naval artifacts.
The most important exception to the latter rule is the operation of foreign-flagged vessels or naval artifacts under cabotage permits, which may be obtained when there are no Mexican-flagged vessels or naval artifacts available.
Mexican shipowners with foreign vessels/naval artifacts under a bareboat charter and Mexican shipowners with foreign vessels/naval artifacts under any other type of charterparty agreement, in that order, are given priority over foreign shipowners with foreign vessels/naval artifacts to obtain cabotage permits.
Cabotage permits are granted for 3-month periods and can be only renewed seven times, for a maximum total of 2 years. Once that total period has elapsed, the relevant vessel or naval artifact must be flagged Mexican in order to continue operating in Mexican waters.
Only Mexican individuals and companies may flag and register vessels and naval artifacts in Mexico. Foreign companies and individuals may incorporate a Mexican shipping company, but that company would be subject to the applicable foreign investment restrictions.
Mexican companies with more than 49% foreign participation (excluding shares without voting rights) in their capital stock cannot have vessels engaged in cabotage in Mexican waters. Conversely, we may construe that foreign companies may establish and register a Mexican branch to operate vessels under cabotage permits.
The aforementioned 2-year obligation to flag does not apply to highly specialized vessels/naval artifacts, which may renew their cabotage permits an unlimited number of times. Further to a Supreme Court ruling, cabotage permits for highly specialized vessels may be renewed for periods of at least 2 years.
To date, ships, dredges, barges as well as semi-submersible and jack-up rigs have obtained cabotage permits.
Another important exception to the Mexican cabotage rule is the one applicable to naval artifacts, which may operate in Mexican waters under stay authorizations as opposed to cabotage permits.
Stay authorizations are granted for 90-day periods, but they may be renewed and unlimited number of times, irrespective of whether the naval artifact is deemed as highly specialized or not. The holders of stay authorizations are not subject to the foreign investment restrictions applicable to cabotage permit holders.
The maritime authorities have not yet issued detailed criteria regarding which craft may be deemed as vessels and which may be deemed as naval artifacts. From their definitions in the Law, one may infer that the shape of a craft or its self-propelling ability is not a factor to determine whether a craft is a vessel or a naval artifact, and that the operational purposes for which a craft is designed has more weight in that determination.
In recent years, accommodation platforms, floating drydocks, semi-submersible and jack-up rigs, self-propelled mobile drilling units, as well as non-self-propelled FSOs and FPSOs units have obtained stay authorizations.
The 49% foreign investment limit does not apply to foreign companies holding a stay authorization, as their naval artifacts do not technically navigate but are located in the same place on an ongoing basis. Nevertheless, it should be noted that the operation of naval artifacts for the rendering of drilling services to the oil and gas industry (vg. drilling rigs) is also subject to the 49% limit, but in this case such limit may be exceed if the prior authorization of the Ministry of Economy is obtained.
This article first appeared in the May 2013 issue of the Newsletter of the Maritime and Transport Law Committee of the Legal Practice Division of the International Bar Association (Vol 9, No 1), and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.
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.