Mexico has recently seen a new Energy reform which sets out very significant changes to transform Mexico into a competitive and worthy of investment country. We find out more by speaking to Jesús Rodríguez Dávalos from law firm Rodríguez Dávalos Abogados, specialized in the energy sector.

Could You Give Us A Brief Overview Of Mexico´s Constitutional Energy Reform?

Previous to the Reform, Mexico´s stagnant energy sector was losing competitiveness and investment opportunities due to a stiff legal framework that hampered the sector´s growth.

After this major political agreement was reached, core and fundamental aspects were discussed and agreed upon for a change, and so, a truly significant reform was implemented and the decree was issued on December 2013. It amended articles 25, 27 and 28 of Mexican Constitution and 21 transitory provisions that set forth the legal framework for secondary legislation. Pursuant to this decree and after a long time of debate and discussion by Mexican Congress, ,on August 12, 2014, key legislative and regulatory developments (nine new bills and amendments to many other laws) were finally enacted and became effective as implementing laws of the energy reform.

The said energy reform sets out very significant changes to transform Mexico into a competitive and worthy of investment country. In this regard, the constitutional amendment aims to attract the private sector (domestic or foreign) to participate and compete in the upstream, midstream and downstream activities. Although the Mexican State still holds the hydrocarbons property (liquid, solid or gaseous in the subsoil) and continues to be in charge of the "strategic activities"(such as the exploration and exploitation of oil and other hydrocarbons, radioactive minerals, nuclear energy production; planning and controlling the National Electric System and the public service of transmission and distribution of electricity), the law also states that the State will foster and protect economic activities carried out by the private sector and that it will provide the adequate conditions to include the privates in the national development.

In order to do so, the Nation is entitled to perform oil and other hydrocarbons exploration and exploitation activities through allocations to the so-called "productive state-owned companies" (abbreviated to EPE in Spanish) or through contracts granted by competitive bid rounds (joint ventures or joint operating agreements) or with private companies.

Could You Point Out The Most Relevant Aspects Of The Energy Reform?

Many aspects are being introduced but it is noteworthy the opening for private investment in the upstream activities, in which a flexible contractual regime is being implemented. This regime is based on international contractual models that have proved to be the most adequate for the host country and for the contractors. These models include the following:

  1. Service contracts. Where the contractor is entitled to cash payments for rendered services,
  2. Shared profit agreements. In which the contractor is entitled to receive a percentage of the profit,
  3. Shared production agreements. Where the contractor is entitled to receive a percentage of the production taking into account that the risk investment will be taken up by the contractor,
  4. License agreements. In which the contractor is entitled to hydrocarbons through the onerous transmission once these have been extracted from underground, and finally,
  5. Any combination from the above. The law calls for a minimum national content percentage requirement to promote the supply chain. The "national treatment rule" is applicable as well in accordance with the international treaties and commercial agreements signed by Mexico.

Since there has to be a balance between the best interest of the Nation and an adequate investment environment, several regulatory bodies were strengthened in the reform, while other bodies were created. These aim for the transparency and legality of every contract or assignment, for every bidding process, and for all the regulated activities. Therefore it is provided that external audits are carried out, as well as disclosure of considerations and contract clauses, among other measures. The reform guarantees the transparency principle in bidding processes and contract awards within the oil and gas industry, and also establishes external audits regarding accounting and the recovery of costs incurred related to the contract.

How are the regulatory bodies strengthened?

As a main objective, these agencies are vested with more attributions than those in the past. The National Hydrocarbons Commission (abbreviated to CNH in Spanish) will provide technical assistance to the Energy Ministry (SENER in Spanish) when determining assignments, migration of assignments to contracts, conduct competitive bid rounds as well as the supervision and regulation of upstream contracts, evaluation of exploration and development plans.

For midstream and downstream activities, the Energy Regulatory Commission (abbreviated to CRE in Spanish) will provide services as the issuance and administration of permits, authorizations, and contracts related to oil, gas (storage, transportation and distribution by pipelines), petroleum products and petrochemicals. It will also provide technical assistance to SENER, conduct tender processes, and enact regulation among other attributions.

Respectively, the Senate, previous proposal by the President, will appoint CNH and CRE commissioners and furthermore, two new commissioners will be appointed to each Commission (this marks an increase from 5 to 7 Commissioners).

What are the main characteristics of the newly created bodies?

  • The National Hydrocarbon Agency for Industrial Safety and Environmental Protection has been created to regulate and supervise activities related with industrial safety and environmental protection in hydrocarbon sector. Companies will be required to comply not only with industrial safety but also for an efficient use of energy and natural resources.
  • The Mexican Oil Fund for Stabilization and Development has been created to receive, administer and distribute income that derives from E&P activities being carried out by assignments and contracts. It is a public trust whose trustee is the Mexican Central Bank. The purpose of this Fund is to procure public finances stability; invest on long term savings, in science and technology, as well as renewable energies; create new investment vehicles specialized in oil projects; among others.
  • And finally, twelve months after the enactment of the Hydrocarbon Law (secondary legislation), the National Center for Natural Gas Control (CENEGAS) shall be established to own and operate Pemex´s gas transmission pipeline and storage facilities and its contracts. It will also be an independent operator of the National System for the Integrated Transportation and Storage of National Gas.

After the long awaited approval of the Energy Reform in Mexico, which do you think will be the main challenges to be faced?

The energy reform is comprehensive and it calls for the end of the 75-year monopoly held in the oil and gas industry by Pemex, and the power generation monopoly held by the CFE. This implies opening Mexico´s potential capacity with new players and new rules.

This reform allows private investment in the entire value chain of Mexico´s resources and very importantly, opens this possibility in the upstream activities. The way in which the guidelines for bidding rounds are designed, the economic and tax conditions set in contracts and the transparency of the rules and institutions will all be crucial for the ultimate objective of bringing investment in the energy sector. It addresses, at many levels, the change in structures, practices and general policies.

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