Energy Reform: Implications on the Regulations of Offshore Activities

In recent years, Mexico has taken one of the most important steps towards modernizing its energy sector.
Mexico Energy and Natural Resources
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The 2013 Energy Reform

In recent years, Mexico has taken one of the most important steps towards modernizing its energy sector. During late 2013, Mexican Congress approved the enactment of the Energy Reform, with the purpose of introducing greater flexibility to the national energy market.  While conserving the property of hydrocarbons located in the subsoil, Congress opted for a new model focused on a strategic direction of the industry, in lieu of an obsolete economic model based on the State's full control and operation of most energy related activities.[1]

The paradigm change has resulted in the issuance of new regulations, as well as the amendment to others, that have established the terms and conditions for the participation of private entities, either national or foreign, in the hydrocarbons industry.[2]

In addition, Petroleos Mexicanos (Pemex), the State controlled entity that for more than 70 years exclusively performed all activities related to hydrocarbons exploitation, was transformed into a State Productive Entity. Thus, Pemex acquired a new role and purpose: maximizing the State's income, while participating in the energy industry under the same terms and conditions as any other private entity.

The substitution of such economic model and the creation of a new regulatory framework applicable to a greater number of participants, and not only to a State controlled entity, has had a significant impact on several procedures related to the hydrocarbons industry, including the new provisions and regulations to perform offshore activities.

Offshore activities

What is exactly an offshore activity in the hydrocarbons industry?

According to various experts and the definitions contemplated in the law, offshore activities in the hydrocarbons sector are those related to the exploration and extraction (production) of seabed and subsoil resources, including the development of oil wells and natural gas deposits.[3]

In general, offshore activities are related to oil well and gas deposit drilling, installation, closure and dismantling of platforms and complementary facilities, as well as other accessory services related to the transport of hydrocarbons obtained as a result of such endeavor.

These activities are regarded as very critical and risky, as they not only represent billions of dollars in investments, but any failure or accident during their performance could lead to unquantifiable environmental damages, which can go from the total destruction of natural marine habitats to the pollution of seas and beaches.[4]

The steady increase in Mexico's energy demand, the number of participants in its energy market and offshore activities, respectively, has resulted in a proportional increment of the applicable regulations. Considering the foregoing, it is understandable that the Mexican State focused on setting up new standards and norms in order to coordinate all participants, as well as to prevent possible accidents, environmental damages and other undesired consequences.

A new legal framework for the industry

As mentioned above, the economic model and applicable legal framework to hydrocarbons exploitation procedures were modified in substantial terms after the 2013 Energy Reform, entailing great changes on offshore activities regulations.

Prior to the Energy Reform, Pemex, as sole operator in the industry, was subject to tailor-made regulations that were mostly determined in accordance with the needs of such entity.

Not only Pemex had a special legal framework designed to comply exclusively with its necessities, but also a great deal of its procedures were regulated by the company's own rules of operation. Examples of the aforementioned include provisions for Health, Safety and Environmental Protection[5], as well as regulations related to offshore activities issued by Pemex and applicable only to its subsidiaries and contractors.[6]

Although the former regulations were designed to meet Pemex's needs, that is, custom-made rules of operation for a State controlled entity, its subsidiaries and contractors, it was impossible to conceive that these would remain applicable after the Energy Reform and the respective entry of a countless number of new private participants in the industry.  

In light of the foregoing, Congress established new powers and responsibilities to the Ministries of State, and certain technical entities, with authority in the energy sector (e.g., Ministry of Energy, National Hydrocarbons Commission, among others), in order to create a modern legal framework that would coordinate all participants in accordance with the industry's highest international standards.

Thus, regarding technical and industrial safety aspects for activities related to exploration and extraction of hydrocarbons and other offshore operations, current regulations have now granted the following powers and responsibilities to the Ministry of Energy (SENER), the National Hydrocarbons Commission (CNH), and the National Agency for Industrial Safety and Environmental Protection in the Hydrocarbons Industry (ASEA):

  1. Ministry of Energy

The SENER, as head of Mexico's energy policy, has general attributions regarding offshore activities regulation through the selection of contractual areas (potential zones for exploitation of hydrocarbons in Mexican territory) and the establishment of the tender guidelines for awarding hydrocarbons exploration and extraction contracts.

Additionally, the SENER is in charge of designing the exploration and extraction contract models to be awarded by the CNH in favor of the winning bidders.

  1. National Hydrocarbons Commission

The CNH, as competent technical body in the hydrocarbons industry, is responsible for assisting the SENER during the contractual area selection process, as well as organizing and carrying out tenders for awarding hydrocarbons exploration and extraction contracts. Likewise, the CNH is in charge of executing such contracts, as well as monitoring compliance of the winning bidders with their corresponding terms and conditions.

Moreover, such Commission should approve the exploration and extraction plans for each assigned contractual area, including deep and ultra-deep water drilling. For purposes of the foregoing, the CNH has issued several guidelines, technical provisions and resolutions in order to regulate such activities[7]; therefore, all participants, including Pemex, must comply with the new standards set out by such technical entity.

  1. National Agency for Industrial Safety and Environmental Protection in the Hydrocarbons Industry

The ASEA is a decentralized body of the Ministry of Environmental Affairs, responsible for regulating and supervising compliance with technical provisions regarding industrial and operational safety and environmental protection in the hydrocarbons sector, including offshore activities.[8]

In recent months, the ASEA has issued various technical guidelines and provisions in order to regulate the implementation of adequate industrial and operational safety and environmental protection systems related to the industry.[9]

Thus, the ASEA has taken a fundamental role in the implementation of safety measures for offshore activities, integrating the industry's highest standards to the provisions applicable to procedures related with surface inspection and exploration, exploration and extraction of hydrocarbons, replacing the regulations used by Pemex prior to the Energy Reform.[10]

Conclusions

The Energy Reform enacted in December 2013 represented a radical change in the economic and legal frameworks applicable to hydrocarbons related activities. Such transition led to a complete transformation of the Mexican energy industry and a deviation from the paradigm that prevailed for more than 70 years. As a result, Mexico transitioned from a regulation focused only in a State controlled entity to a modern free market scheme.

One of the most notable modifications brought by the Energy Reform is the applicable regulations for offshore activities, that is, those related with the exploration and exploitation of resources in the seabed and subsoil resources, including the development of oil wells and natural gas deposits.

In order to adapt this new model to the industry's highest standards, Congress assigned and distributed new powers and responsibilities among the Ministry of Energy and other technical bodies, such as the CNH and the ASEA, to establish the terms and conditions applicable to operations related to the hydrocarbons industry, including the so mentioned offshore activities.

As of today, such technical bodies have designed and issued, among others, guidelines, administrative provisions and resolutions that combine the experience acquired during the State's regulated monopoly and the industry's highest standards, which establish the terms and conditions of a much more dynamic framework that enables the participation and coordination of a vast number of participants in the energy sector.


[1] "Reforma Energética", Gobierno de la República, web. January 5, 2017, http://cdn.reformaenergetica.gob.mx/explicacion.pdf

[2] "Presentación de las iniciativas de las Leyes Secundarias de la Reforma Constitucional en Materia Energética enviadas al Senado de la República por el Poder Ejecutivo Federal", Comisión de Energía del Senado de la República, web. January 5, 2017, http://www.senado.gob.mx/comisiones/energia/docs/reforma_energetica/presentacion.pdf

[3] "Offshore", EDP Solutions, web. January 5, 2017, http://www.exploration-production-services.de/en/o-offshore.html

[4] Lysimachou, Angeliki, "La Exploración de Hidrocarburos en el Mar", Revista El Ecologista, June, 2014, web. January 5, 2017, http://www.ecologistasenaccion.org/article28107.html

[5] "Seguridad, Salud y Protección Ambiental", Petróleos Mexicanos, web. January 4, 2017, http://www.pemex.com/responsabilidad/sspa/Paginas/seguridad.aspx

[6] Examples of the aforementioned are the System for the Integral Management of Safety, Health and Environmental Protection (Sistema para la Administración Integral de la Seguridad Salud y Protección Ambiental) or "PEMEX-SSPA System", and various Norms of Reference (Normas de Referencia) designed to regulate a wide range of diverse operations, issued by the Pemex's Standardization Committee. 

[7] In order to create a legal framework in accordance with the highest international standards, the CNH has issued new guidelines to determine the technical conditions to perform activities related to surface inspection and exploration, as well as hydrocarbons extraction and exploitation procedures.

For a better reference, the following hyperlink provides access to all new guidelines and provisions issued by the CNH: http://www.gob.mx/cnh/acciones-y-programas/regulacion-emitida-por-la-cnh?idiom=es

[8] "Agencia de Seguridad, Energía y Ambiente", Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidrocarburos, web. January 6, 2017, http://www.asea.gob.mx/cms/wp-content/uploads/2016/04/Presentaci%C3%B3n-General-ASEA.pdf

[9] For a better reference, the following hyperlink provides access to all new guidelines and provisions issued by the ASEA: https://www.gob.mx/asea/acciones-y-programas/leyes-y-normas-del-sector

[10] On a related matter, in the case of oil spills, the Navigation and Maritime Commerce Law (Ley de Navegación y Comercio Marítimos) and the National Oil Spill Contingency Plan (Plan Nacional de Contingencia para Derrames de Hidrocarburos y Sustancias Nocivas Potencialmente Peligrosas en las Zonas Marinas Mexicanas) contemplates a coordinated regulation between private entities, the SEA and the Ministry of the Navy to contain and handle any incident that may arise from the performance of offshore activities.

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.

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