1 OVERVIEW OF NATURAL GAS SECTOR
1.1 A brief outline of Mexico's natural gas sector, including a general description of: natural gas reserves; natural gas production including the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG), liquefaction and export facilities, and/or receiving and re-gasification facilities ("LNG facilities"); natural gas pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales and trading.
Mexico's natural gas sector is becoming very dynamic. The new legal framework calls for new players, more transparency and significant changes that will modernise the industry. In January 2014, Petróleos Mexicanos estimated 16,584.1 million cubic feet of proven natural gas reserves. Additionally, regarding dry gas, the proven reserves place Mexico in the 37th position in the world, below countries such as Russia, Qatar, the USA and China. However, Mexico has been a net importer of natural gas in previous years – 2014 has not been an exception. The approximate average of natural gas imports during the first semester of 2014 is estimated at approximately 1,400 MDCF, while the estimated exports of natural gas are approximately 4.1 MDCF. The steady increase in the demand of natural gas will be addressed by about 18 different projects for the expansion of the natural gas pipeline network. In this sense, among other projects, the Federal Electricity Commission will bid for five new pipelines: two national projects; and three projects in the United States for the construction of over 1000 km of pipeline. Additionally, private companies are currently developing projects involving the construction of over 1000 km of pipeline, which will stretch from the border of the United States to the central and western part of Mexico.
1.2 To what extent are Mexico's energy requirements met using natural gas (including LNG)?
In 2002, Mexico's energy requirements were met by using natural gas for around 29% of the total amount of energy. More than 10 years later, this percentage has increased to 50% overall. However, this increase derives from the reduction of usage of fuel oil and increased usage of natural gas; renewables remain only slightly used.
1.3 To what extent are Mexico's natural gas requirements met through domestic natural gas production?
In accordance with the information provided by the Energy Regulatory Commission ("CRE"), approximately 20% of the overall supply of natural gas in Mexico, for the first quarter of 2014, was imported. Therefore, almost 80% of natural gas requirements are met through domestic production.
1.4 To what extent is Mexico's natural gas production exported (pipeline or LNG)?
As shown in the chart below, Mexico is becoming a net importer of natural gas. Mexico's natural gas domestic production has been reducing since 2010 (grey indicates imports, while black indicates exports).
The Energy Reform aims to increase domestic production of oil and natural gas, which could eventually increase exports of the latter.
2 OVERVIEW OF OIL SECTOR
2.1 Please provide a brief outline of Mexico's oil sector.
In the first quarter of 2014, the total production of oil was around 492,000 barrels per day. This is 2.1% below the average of the first quarter of 2013. The decrease might be related to the 9,725 wells under operation during the first quarter, 2.6% fewer than those in operation in 2013. Nevertheless, as declared in Forbes Magazine, Mexico is considered as one of the 10 largest oil producers in the world; therefore, Mexico has imported only marginal quantities of oil for a long time.
2.2 To what extent are Mexico's energy requirements met using oil?
Regarding the production and consumption of energy, the statistics show a steady decrease in fuel oil use during the last decade of an annual average reduction of approximately 4.5%. Prices are becoming higher and a legal framework favouring cleaner energies was enacted to reduce the use of fossil fuels.
2.3 To what extent are Mexico's oil requirements met through domestic oil production?
Mexico might not be known as an oil importer; however, due to the lack of technology to process and produce oil products, Mexico imported 50% of the gasoline used to satisfy the national demand. Additionally, Mexico implemented a gradual price adjustment policy that started back in 2008 in order to remove the Mexican government's subsidy of gasoline. The subsidy was reduced by 50% in the first quarter of the year when compared to 2013. The foregoing caused gasoline in Mexico to be more expensive than in the United States.
2.4 To what extent is Mexico's oil production exported?
As shown in the chart below, Mexico's crude oil is mainly exported to the United States of America, which acquires around 70% of the total production of such product. This represents around 744,000 barrels per day. The USA is followed by Spain which comprises approximately 13% of the overall exports of crude oil from Mexico.
3 DEVELOPMENT OF OIL AND NATURAL GAS
3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production ("development") of oil and natural gas reserves including: principal legislation; in whom the State's mineral rights to oil and natural gas are vested; Government authority or authorities responsible for the regulation of oil and natural gas development; and current major initiatives or policies of the Government (if any) in relation to oil and natural gas development.
Former to the recent constitutional amendments made in 2013, the legal framework for the exploration and production of oil and natural gas entrusted solely the national oil company, Petróleos Mexicanos ("Pemex"), to develop the hydrocarbon industry's upstream activities through assignments. After a major, game-changing energy reform was approved, a new regulatory scheme was provided. Accordingly, there are two possible legal regimes: (i) if the Ministry of Energy decides to award an assignment, it has to be on the grounds that Pemex operates with the best technical, financial and executive capacity possible. Likewise, the award of an assignment requires the National Hydrocarbons Commission's favourable opinion; and (ii) private participation is allowed in these activities through exploration and extraction agreements, which allow hydrocarbons exploration and extraction, either by Pemex or by private entities. For the development of the second legal regime, open bidding processes will take place. Pemex may participate in association with a private entity already approved by the National Hydrocarbons Commission.
3.2 How are the State's mineral rights to develop oil and natural gas reserves transferred to investors or companies ("participants") (e.g. licence, concession, service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of those rights or interests under domestic law?
The Hydrocarbons Law published in the Official Federal Gazette in August 11, 2014, sets forth that the Ministry of Energy shall establish one of the applicable schemes for each bidding cycle or project. Such schemes consist of flexible contractual arrangements that can be either: services agreements; profit sharing agreements; production sharing agreements; or licences. The considerations for such schemes shall be pursuant to the provisions set forth in the Hydrocarbons Income Law.
3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, scope of rights, expenditure obligations).
The Hydrocarbons Law establishes the requirement of an authorisation for the drilling of wells. This means that assignees (Pemex or its subsidiary productive entities) and contractors (private entities being awarded with a contract for exploration and production) must have the authorisation of the National Hydrocarbons Commission for the drilling of exploratory wells, deep water and ultra deep water wells and wells used for design models. Since the Law was just published, specific regulations on this matter are still pending.
Additionally, possible hydrocarbons existence exploration appraisals require the authorisation of the above-referred Commission. Likewise, there are still no specific regulations on this matter. This authorisation shall not give exploration rights or preemptive rights over assignments or exploration and extraction agreements.
3.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether as a matter of law or policy)?
Mexican Constitution clearly states that liquid, solid or gaseous hydrocarbons are the property of the Mexican Nation as long as they are in the subsoil. In accordance with the Constitutional Amendments, the new secondary laws establish that, to award exploration and production agreements to private entities, the Ministry of Energy may determine the participation of the State through Pemex or other subsidiary productive entities as part of the bidding process, which shall not exceed 30% of the project if it is a financial vehicle of the State for that specific project. With regard to cross-border fields, such participation is compulsory and shall be at least equivalent to 20% of the project and will be subject to the applicable unitisation international treaties. Furthermore, all agreements must state by law that the mineral rights are owned by the State, as long as said hydrocarbons are in the subsoil.
3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, taxes)?
Notwithstanding the specific considerations set forth in the Hydrocarbons Income Law for each scheme, the general value from extraction and production agreements (PSA, Licences, etc.) consider the payment of royalties derived from the application of a formula based on the natural gas contractual value, oil contractual value and condensed contractual value, which shall be calculated as described therein. The Ministry of Finance (SHCP) sets fiscal conditions for contracts. The specific fiscal conditions of each contract will be set on a case-by-case basis taking into account the risks and costs of the project.
3.6 Are there any restrictions on the export of production?
As set forth in the Hydrocarbons Law, there are no restrictions on the export of hydrocarbons if there is compliance with the provisions of the Foreign Trade Law, including the payment of applicable fees and payment of relevant permits. Such permits will usually last one year and will need to be updated once the Customs Office requires it.
3.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from production out of the jurisdiction?
Under current legislation there are no currency exchange or transfer fund restrictions.
3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or interests?
According to the newly enacted Hydrocarbons Law, there shall be some restrictions for the transfer or disposal of the following rights: (i) assignments awarded to Pemex or its subsidiary productive entities may only be transferred to other productive entities of the State with the previous consent of the Ministry of Energy. Additionally they are allowed to hire the services of private entities, if such services will result in profitability and productivity to the project, as long as the payment is in cash; and (ii) the exploration and production agreements that intend to transfer the contractor's corporate governance and management, or the operations control of the contractual area, either partially or entirely, shall be previously approved by the National Hydrocarbons Commission through the execution of associations or alliances. Regarding the control of operations, the National Hydrocarbons Commission shall consider the experience, technical and financial capabilities of the operation.
3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas development?
It is required by law that exploration and production agreements, as well as assignments, shall contain specific provisions of guarantees that contractors or assignees must provide for the development of the upstream activity.
3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or booked for accounting purposes under domestic law?
The Hydrocarbons Law sets forth a historic change in the provision regarding the booking of oil and natural gas reserves, which was formerly prohibited by law. Article 45 states therein that assignees and contractors are entitled to report expected benefits for accounting and financial purposes, as long as it is expressly stated in the agreement that the mineral rights are owned by the Mexican State.
3.11 In addition to those rights/authorisations required to explore and produce oil and natural gas, what other principal Government authorisations are required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained?
Among the package of secondary laws enacted on August 11, 2014, the Law of the National Agency for Industrial Safety and Environmental Protection for the Hydrocarbons Sector was created to regulate and supervise industrial and operative safety, abandonment and decommissioning, and residual waste control with the purpose of protecting people and the environment. Such regulation establishes that the environmental impact authorisation shall be granted by the Agency. This authorisation is one of the most important to develop a project. The Agency may coordinate with other public federal entities for the fulfilment and execution of obligations stated therein.
3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the legislation?
The Law for the National Agency for Industrial Safety and Environmental Protection for the Hydrocarbons Sector makes a wide reference to the abandonment and decommissioning of physical structures used for oil and natural gas development. It sets some provisions for a mandatory administration system (facilities' life cycle program) that must be considered and executed by the contractors. Permit-holders or contractors may have to prove their compliance with such regulations through external auditor reports. Such auditors shall be certificated by the same Agency.
3.13 Is there any legislation or framework relating to gas storage? If so, what are the principle features/requirements of the legislation?
Despite the specific regulation related to gas storage, it is essential to highlight that, as of August 28, 2014, the creation of the National Center of Natural Gas Control (hereinafter referred as "CENAGAS") was decreed with the purpose of generating a competitive natural gas transportation and storage market. This centre will act also as an independent operator of the Integrated National Natural Gas Transportation and Storage System, which is meant to maintain the continuity and safety of the supply of natural gas across the Mexican territory.
4 IMPORT / EXPORT OF NATURAL GAS (INCLUDING LNG)
4.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas (including LNG).
Given the recent amendments to the energy framework, there are no restrictions or limitations regarding the export and import of natural gas. However, an application has to be filed to the Ministry of Energy that is entitled to award the permits for such activities. On the other hand, LPG will be exclusively imported by Pemex by 2015 and then, by 2016, there will be a free import policy.
5 IMPORT / EXPORT OF OIL
5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil products.
Pursuant to the Hydrocarbons Law, to export or import petroleum products, private entities need to file an application to the Ministry of Energy. This Ministry is entitled to award the permits for such activities. Due to the new regulations, the import and export of oil will be held by PMI: a consortium of affiliates of Pemex which is in charge of crude oil trading and its derivative products, provides services and takes care of Pemex's participation abroad. This scheme will continue until 2017, at least.
6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities).
The Mexican Constitution establishes in the recently amended Article 27 that it is the Mexican Nation who holds the ownership over oil and solid, liquid or gaseous hydrocarbons, as long as they remain in the subsoil. Over these hydrocarbons, rights are inalienable and imprescriptible and concessions shall not be granted. Hydrocarbons transportation is to be regulated by the Hydrocarbons Law. In order to develop transportation, a permit is required. Additionally, it is interesting to mention that the enacted law regulates – for the first time – the compression, liquefaction, decompression and regasification of natural gas, all of them as independent activities to be developed. The Energy Regulatory Commission has to give the specific permits. The requirements will be established through the applicable regulation of the Hydrocarbons Law, still pending. Nevertheless, the law already establishes basic requirements a petitioner must have to become a permit-holder. To name a few, a permit holder must be able to provide infrastructure, continuity of service, efficiency and impact on the project's territory delimitation.
6.2 What Governmental authorisations (including any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated infrastructure?
Last August, several secondary laws were enacted as required by the constitutional reform made in 2013. The new Hydrocarbons Law repealed the Regulatory Law for Article 27 of the Constitution for the Petroleum Sector. This new law states that the transportation of natural gas will require the award of a permit to conduct such activity. Additionally, permit-holders will be required to apply for local authorisations, such as: a construction and land use authorisation which shall be granted by municipal authorities; an environmental impact authorisation with a risk study issued by the Ministry of Environmental Protection; and an archaeological impact authorisation issued by the Anthropology and History National Institute. The federal government, state governments and local or municipal governments shall contribute to the exploration and production projects, as well as to the transportation and distribution of pipelines and storage through procedures and coordination that expedites and ensures the issuance of permits and authorisations in the relevant area.
6.3 In general, how does an entity obtain the necessary land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? Do Government authorities have any powers of compulsory acquisition to facilitate land access?
The hydrocarbons industry is of public interest and exclusive federal jurisdiction, and therefore only the federal government may stipulate the applicable standards for land regulation. Various legal easements are set forth in the Hydrocarbons Law to facilitate land access or land use. This law establishes different mechanisms that allow contractors or assignees to negotiate with landowners to reach the best scheme to develop projects. Government authorities can enforce compulsory acquisition to facilitate land access through the establishment of legal easements only if no agreement is reached.
6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised?
It is mainly organised through open access systems. Open seasons are carried out to award the available system's capacity.
6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is cooperation between different transportation systems established and regulated?
The National Transportation Integrated System is the group of transportation or storage systems connected to the National Gas Pipeline System (the central system formerly owned and operated by Pemex) and that, given the new regulations, will be operated and owned by CENAGAS or the National Center of Natural Gas Control. At this time, three private permit-holders form part of it. Given the new regulation, integrated systems of transportation pipelines or storage facilities will be able to be developed with the purpose of allowing a broader extension and more benefits to improve the quality of these services.
6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and associated infrastructure. For example, can the regulator or a new customer wishing to transport oil or natural gas compel or require the operator/owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility expansions) allocated?
Permit-holders who provide transportation and distribution services to third parties through pipelines, as well as the service of hydrocarbons storage, have the obligation to provide open access to their facilities and services, subject to the availability of their systems. A non-discriminatory policy is applicable. If there is no available capacity, permit-holders may execute agreements with third parties in order to expand or extend their systems. Open seasons may also be carried out in order to determine the expansion and/or extension requirements as well as the investment scheme. The users of such system shall pay interconnection costs.
6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) regulated?
Since natural gas transportation, distribution and storage are regulated services, permit-holders of open access systems shall obtain from the Energy Regulatory Commission the approval of the applicable General Terms and Conditions for the corresponding service. Said Commission also determines applicable tariffs. Nevertheless, the parties, subject to a non-discriminatory regime, may agree to different terms and conditions and/or agree to conventional tariffs.
7 GAS TRANSMISSION / DISTRIBUTION
7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas transmission/distribution network.
The natural gas distribution networks are regulated under the natural gas regulations and the Energy Regulatory Commission grants the corresponding permits. Generally, geographic distribution zones are determined by this Commission and are awarded through public tenders. Distribution companies may be entitled to an exclusive right of distribution within a geographic zone for a determined period of time once the distribution permit is granted. The Energy Regulatory Commission shall approve the applicable tariffs for the distribution services.
7.2 What Governmental authorisations (including any applicable environmental authorisations) are required to operate a distribution network?
Once the Energy Regulatory Commission permit is granted, permit-holders must obtain: a construction and land use authorisation granted by the local and municipal authorities, as well as a property or possession title; an environmental impact authorisation with a risk study issued by the Environment Ministry; and an archaeological impact authorisation issued by the Anthropology and History National Institute. Additionally, other authorisations may be required depending on the distribution network path, such as road crossing authorisations and electricity transmission line crossing authorisations, among others.
7.3 How is access to the natural gas distribution network organised?
The natural gas distribution network is divided into geographic zones allotted across the country and assigned by the Energy Regulatory Commission either to exclusive permit-holders, or if it is not a first-time assigned zone, to different permit-holders that may carry out the activity within such geographic zone. Currently, there are 15 geographic zones and approximately 24 granted permits. Subject to the applicable regulations, open access shall be granted to users that require distribution services.
7.4 Can the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers?
Distributors are obliged by law to extend or expand their systems within their geographic zone. Furthermore, natural gas distribution companies shall develop an expansion plan in order to connect new users to their system.
7.5 What fees are charged for accessing the distribution network, and are these fees regulated?
Distribution services are charged to users in accordance with the distribution fees that are approved by the Energy Regulatory Commission for the corresponding permit-holder.
7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network (whether directly or indirectly)?
There are no restrictions or limitations in relation to acquiring an interest in a gas utility or the transfer of assets forming part of the distribution network. However, certain notifications shall be given to the Energy Regulatory Commission and, depending on each case, permit modifications may have to be approved by such Commission.
8 NATURAL GAS TRADING
8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading.
The recently enacted Hydrocarbons Law provides in its Article 28 that the products obtained from the exploration and production agreements might require, in some cases which will be determined by the National Hydrocarbons Commission, the trading services of the private or public entity through public bid rounds. On the other hand, for regulated natural gas and petrochemical trading, the Hydrocarbons Law prescribes that the Energy Regulatory Commission will grant the permit with the special provisions stated in the Hydrocarbons Law to any petitioner that requests it.
8.2 What range of natural gas commodities can be traded? For example, can only "bundled" products (i.e., the natural gas commodity and the distribution thereof) be traded?
Subject to the provisions of the regulations which are still pending to be issued as a result of the approval of the energy reform, natural gas marketing may be carried out by private companies and bundled services may also be provided by distribution companies.
9 LIQUEFIED NATURAL GAS
9.1 Outline broadly the ownership, organisational and regulatory framework in relation to LNG facilities.
Transportation through pipelines and storage of Liquefied Natural Gas ("LNG") is considered a new regulated subject matter under the Mexican regulation. Before the secondary laws of the energy reform were enacted, LNG was not specifically regulated. Therefore, natural gas regulations (which considered as regulated activities the transportation, storage and distribution of natural gas) were applicable to all downstream activities. With the new legal framework, activities related to LNG are regulated and require a permit to be issued by the Energy Regulatory Commission ("CRE"), including activities such as regasification and liquefaction of natural gas; however, the applicable regulations are still pending.
9.2 What Governmental authorisations are required to construct and operate LNG facilities?
Even though the Secondary Laws to the Energy Reform have been enacted, the regulations are still pending to be issued. Therefore, there is no specific regulation enacted at this time. Nevertheless, in accordance with the new legal framework, a permit issued by the Energy Regulatory Commission will be required, in addition to other governmental authorisations such as local construction and land permits, as well as environmental impact authorisations.
9.3 Is there any regulation of the price or terms of service in the LNG sector?
Notwithstanding the fact that the specific regulations for LNG services (such as liquefaction, storage and regasification) have not yet been enacted and natural gas regulations are still applicable at this time, these services will be regulated activities under the jurisdiction of the Energy Regulatory Commission and, therefore, subject to regulated tariffs, as well as terms and conditions for the service.
9.4 Outline any third-party access regime/rights in respect of LNG Facilities.
Similar to the structure seen in the natural gas transportation and storage activities, LNG activities shall guarantee open access to third parties and are required to undergo an open season procedure in order to accommodate interested parties requests. As a result, the terms and conditions of LNG projects need to promote non-discriminatory open access to parties interested in receiving the service. General terms and conditions have to be submitted to the CRE for review and approval.
10 DOWNSTREAM OIL
10.1 Outline broadly the regulatory framework in relation to the downstream oil sector.
As a result of the Energy Reform, basically, Pemex, its subsidiary state-owned productive subsidiaries and the private sector may carry out midstream and downstream activities through a permit scheme in accordance with the applicable legal framework, which is broadly referred to in the Hydrocarbons Law. However, further regulation is still pending which will define the regulatory framework.
10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading.
In accordance with Transitory Article 8 of the Hydrocarbons Law, the National Hydrocarbons Commission may grant directly to Pemex or any of its state-owned productive subsidiaries or any other state-owned productive company ("EPE") a hydrocarbons trade contract. Such contract's terms shall not exceed December 31, 2017. As of January 1, 2018, the State will contract hydrocarbons commercialisation services through public bid processes carried out by the National Hydrocarbons Commission.
11.1 Which Governmental authority or authorities are responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector?
The Federal Economic Competition Commission ("COFECE") is the authority in charge of regulating competition aspects and anti-competitive practices, including the activities of the energy sector. This Commission is an autonomous entity created by a broad constitutional amendment to Article 28 regarding competition in general, which has been in force from June 2013. It is in charge of promoting and guaranteeing the market's free competition and free trade.
11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive?
The Federal Antitrust Law in Mexico regulates different anticompetitive practices such as absolute monopolistic practices, relative monopolistic practices, illicit economic concentrations and any other restriction being imposed on the market. The Federal Economic Competition Commission is entitled to regulate any economic activity performed by any economic agent; therefore, its scope is of general applicability in the country.
11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices?
COFECE is a stronger agency than the previous regulator. It has new powers to eliminate barriers to competition, regulate access to essential inputs and order the divestiture of assets, if the case requires so, to restore competition conditions. It works as a jurisdictional entity for the sanctioning of anticompetitive practices, which consists of different stages, such as: investigation; evidence analysis; service of process; and trial resolution. If the economic agent is considered liable, economic sanctions will be applied through the payment of fines. Higher administrative, criminal and civil penalties can be imposed as a result of the investigation proceedings. COFECE may impose stronger remedies to restore competitiveness.
11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove mergers or other changes in control over businesses in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long does it typically take to obtain a decision approving or disapproving the transaction?
Before the economic competition reform of 2013 entered into force, regulated activities in the industry required a favourable opinion of COFECE to develop the activity once the Energy Regulatory Commission had granted the corresponding permit. After the reform, petitioners who are willing to obtain a permit from the Energy Regulatory Commission must first file a petition before COFECE's General Directorate of Concentrations. Permit-holders who intend to modify the corporate structure of the permit-holding company shall modify their permit before the Energy Regulatory Commission, with the approval of COFECE. Such approval might take up to three months from the filing to the decision-making process. The relevant market and the economic agent's power is taken into account, as is the concentration effects on the market.
12 FOREIGN INVESTMENT AND INTERNATIONAL OBLIGATIONS
12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector (whether development, transportation or associated infrastructure, distribution or other) by foreign companies?
There are no restrictions or limitations for foreign companies due to the recent amendments to the Foreign Investment Law.
12.2 To what extent is regulatory policy in respect of the oil and natural gas sector influenced or affected by international treaties or other multinational arrangements?
Mexico is not constrained in this sense by international treaties, though the foregoing energy reforms are derived from the international experience of developed countries.
13 DISPUTE RESOLUTION
13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), including procedures applying in the context of disputes between the applicable Government authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in relation to the distribution/transmission of natural gas.
The Hydrocarbons Law provides that the extraction and production agreements may consider arbitration for dispute resolution. An exception to this is established for the contract rescission by administrative authorities. It is one of the government's attributions that may be exercised if a rescission event arises. Mexican regulation and international treaties shall be applicable to any of these transactions. However, the applicable choice of law shall be Mexican regulation. The arbitration procedure shall be held in Spanish and the award shall be binding for both parties. Additionally, with regard to private contracts in regulated activities, the regulatory entities, such as the National Hydrocarbons Commission and the Energy Regulatory Commission, might be appointed as arbitrators for dispute resolution.
13.2 Is Mexico a signatory to, and has it duly ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID")?
Mexico is part of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1971 without any reservation whatsoever; however, Mexico is not a member of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.
13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities or State organs (including any immunity)?
It is not as common as it might be in other countries, though it is a practical issue, not a matter of law. The Commerce Code establishes in its Section IV of Title V, the applicable rules for arbitration agreements between the parties. Such Code prescribes that the award must be enforceable through Mexican jurisdiction authorities, regardless of the country in which the award was issued.. Notwithstanding the aforementioned, Mexican judges are entitled by law to review the award and decide whether it complies with Mexican law provisions.
13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation before domestic courts?
There have been international instances in which awards against Pemex, now a State-owned productive entity, have been granted to private foreign companies. Such is the case of Kellogg, Brown & Root who was granted an award of USD$465 million, which was later declared as void by a Mexican Court and, therefore, not enforced. However, Kellogg, Brown & Root is still fighting the validity of such award and has recently sued the Mexican State on the grounds of denial of justice. With the new corporate governance of Pemex, such issues may start to change towards an efficient path.
14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in Mexico.
Private investment as well as participation in Mexico's energy sector was under a restrictive legal framework for more than 75 years. The fundamentals changed in a landmark, historic energy reform. On December 2013, the constitutional energy reform decree was issued. Accordingly, key legislative and regulatory developments took place. Nine new bills and amendments to many other laws were approved and published on August 11, 2014, in the Federal Official Gazette. It is a comprehensive set of laws that call for the modernisation of the sector. The implementation of tertiary legislation is still pending.
Many aspects are being introduced by this legislative package but it is noteworthy that Mexico is ready and open for investment. Private parties will be able to invest in upstream and midstream activities with different types of contractual arrangements that the law allows.
Midstream and downstream hydrocarbon activities are to be regulated by permits issued by the SENER or the CRE. The opening of the retail fuel sector will be done in stages until it is fully opened. Provisions to incentivise competitiveness and open access to midstream activities have been established.
A clear strengthening of the regulatory bodies has been introduced and new bodies have been created. The different regulatory bodies and agencies may impose fines. The law establishes mechanisms that secure transparency and anticorruption practices. A comprehensive scheme has been provided to establish rights of way and other legal easements since hydrocarbon activities are considered public interest activities.
A huge impact can be achieved through this reform. There are many challenges to be faced, but it is a great opportunity and a great historic moment for Mexico to become a major player in the global energy market.
Originally published by Global Legal Group, London.
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