Derived from amendments to Articles 25, 27 and 28 of the Mexican Constitution, approved on 2013, a new environment in the energy industry is arising.
This new environment allows participation of private companies, in hydrocarbons and electricity projects, which, until 2013, where carried out exclusively by State owned Companies, Petroleos Mexicanos ("PEMEX") and Comisión Federal de Electricidad ("CFE").
On August 11, 2014, Mexican Government published in the Official Gazette a package of secondary legislation. On October 31, 2014, regulations were also published. With these laws and regulations, the new energy legal framework and rules to carry out energy activities has been set.
The Mexican Government goal is to attract private companies to invest in Mexico in the energy industry, reduce the cost of fuel and electricity, as well as to maintain or, increase Mexico´s oil production through exploration and extraction contracts.
Individuals and private entities are allowed to engage in activities previously reserved only to the State.
Exploration and Extraction activities are carried out by allocations or agreements with private entities or state government-owned companies, based on the following schemes:
- Services Agreements;
- Share Income Agreements;
- Share Production Agreements;
- License Agreements.
The Energy Ministry ("SENER") and the National Hydrocarbons Commission ("CNH") are the bodies in charge of regulating exploration and extraction of hydrocarbons. Allocations for such activities are managed by CNH through tender procedures, in which different blocks are bided according to the "Five Year-Term Program (2015-2019) for Exploration and Extraction Tenders". Bidding rules, requirements and model agreements for each tender are set by the above-mentioned authorities; while, the minimum bid values, are set by the Finance Ministry.
Round One/Tender one and two
Comprises several International tenders for the awarding of Exploration and Extraction Contracts. The general criteria to define such round was: (i) potential to increase oil and natural gas production in short term; (ii) potential to include new reserves, and (iii) potential to increase prospective resources.
Round One proposes the inclusion of 109 blocks for exploration and 60 extraction fields.
As of October 2015, government has carried out two tenders. In the first tender, two blocks for Exploration of Hydrocarbons in offshore shallow waters were awarded to a private consortium under a production sharing contract model. In this tender 25 bidders prequalified in the process. The minimum percentage set by government regarding State Participation in the Operative Utility was of 25% and 40% depending the block.
For the second tender, three Extraction blocks in offshore shallow waters were awarded to three different bidders under a production sharing contract model. The minimum percentage set by government regarding State Participation in the Operative Utility was between 30.2% and 35.9% depending the block.
Round One/Coming tenders
CNH has called for a third tender, which includes 25 onshore extraction blocks, under a license contract, with an average of 1,817.5 billion barrels of crude oil equivalent ("BBOE").
Additionally, according to the "Five-Year Term for Exploration and Extraction Bids 2015 – 2019", a fourth tender will be announced by CNH before year 2015 ends. This tender will consist of 11 extraction blocks of extra-heavy oil with an average of 16 BBOE and 13 blocks for exploration in deep waters with an average of 654 MMBOE.
New challenges will come. Much has been learned from first and second tenders.
Regarding third tender, there are numerous challenges associated with Exploration and Extraction activities for onshore blocks, especially once the contract is awarded.
Onshore activities may imply impacts to ejido and autochthonous lands, should this be the case, prior engaging in any activity, contractor will have to negotiate a private agreement with landowners, and elaborate social impact studies, which must be approved by authorities, for the occupancy of land.
Communication, tight relations with communities and effective work from authorities will be required to execute inland contracts. The main challenges for these blocks will be, mainly, in connection with the operation.
Regarding fourth tender, Exploration and Extraction in Deep waters imply very high costs and risks for companies (i.e. operations, equipment, insurance, severe safety measures and commercial risks) therefore; SENER and CNH have great challenges, among them:
- Select commercially attractive blocks to awake the interest of companies and encourage participation.
- Study and select the type of contract that best suits these type of blocks.
- Analyze the Bidding Rules to be set, as well as the technical and financial requirements for bidders. More flexibility regarding consortium rules and joint participation has to be provided for Deep waters.
- Minimum bid values have to be accurate according to the best international practices and experiences for these type of blocks. High values may discourage participation due to the high financial investments that must be made for these activities.
The purpose of tenders is to increase oil production in 500 thousand barrels in 2018 and 1 million barrels in 2025.
PEMEX Farm Outs
Hydrocarbons law allows PEMEX to farm out allocations awarded by CNH in Round Zero, to the new model Contracts. In this regard, CNH has begun approving some farm outs required by PEMEX, specifically eight allocations that include offshore shallow waters and onshore fields with light, heavy and extra heavy resources.
Pursuant to the process set by Law, since CNH has issued the above-mentioned approvals, SENER will issue technical guidelines to conduct the bidding process whereby the partner of PEMEX will be selected and with whom PEMEX will exploit the allocations, as well as to determine the type of contract to be used. In turn, the Finance Ministry will issue the economic terms and conditions related to tax issues. After concluding the above, CNH will publish an invitation to bid, which will be carried out, substantially, on the terms used in Round One.
It is expected that bids for the farm outs of PEMEX allocations will be published in the last trimester of 2015.
As part of the Energy Reform, PEMEX and its Contractors may request the migration of the Integral Exploration and Production Contracts (CIEP´s) and Public Financed Work Contracts (COP´s) to the new models for Exploration and Extraction of Hydrocarbons Contracts. This process is identified as Round 0.5.
22 Contracts will be required to migrate into the new models provided in Law. These Contracts will not be subject to a tender procedure. SENER will approve the technical guidelines to execute the Contract and the Finance Ministry, the Fiscal terms.
The legal framework for electric power in Mexico has changed to a liberalized electricity market with complete openness to private investment in generation and commercialization.
Recently, SENER published the guidelines for the electricity market, which aim to define the rules and procedures that will be complied to participate in the market. These Rules will enter into force on December 31, 2015 and regulate four new electricity markets: (i) generation; (ii) potential; (iii) financial transmission rights, and (iv) clean certificates.
Moreover, new projects are emerging with private investment. Tenders are being called by CFE for the development of electric infrastructure in Mexico and United States of America to be executed from 2015 through 2018. Projects include execution of works for generation, transmission and distribution of electricity, as well as construction of pipelines for transporting natural gas.
SENER expects to call for the first electric auction between October and November 2015. The purpose of the auction will be to develop new transmission lines.
Currently, the main purpose for the Government is to reduce the cost of generating electricity by using natural gas instead of fuel oil, this conversion seeks to reduce electricity Price.
E FIBER TRUST
The creation of these Fibers was announced on September 2015, which purpose is to create a structure of investment in energy and infrastructure mature projects. This Trust is similar to the Master Limited Partnership structure used in US.A.
E Fiber Trust can issue securities—certificates—to investors that are registered in the National Securities Registry and listed and traded on the Mexican stock exchange. The Trust can acquire and own shares or equity ownership of qualifying companies devoted exclusively to operating assets related to hydrocarbons, power and infrastructure. Qualifying companies must have at least 90% of their revenues derived from the type of energy and infrastructure activities such as oil storage, transportation, refining; and natural gas distribution activities; petroleum and petrochemicals activities; generation, transmission and distribution of electrical power.
These Fibers aim to attract private investment in government mature projects mostly related to the matters mentioned before.
On September 17, 2015, the tax authorities published the Fourth Set of Amendments to the Annual Tax Regulations proposed by the Ministry of Finance. Such amendments went into effect on October 1, 2015 regarding E Fiber.
The Federal Commission on Regulatory Improvement (COFEMER) is currently reviewing proposed amendments to the securities regulations in connection with the above.
Originally published by Focus Latin America | December 2015
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