Mexico

The ‘energy reform’ cannot be seen as being isolated from a wide array of other legal reforms such as educational, tax, political, antitrust, financial, criminal and labour reforms. All of these reforms attempted to create the legal certainty and business opportunities that would attract much-needed foreign investment in the sector, accompanied by natural efficiencies, best practices and technology.

The energy reform recognised the problems Mexico was facing as a result of the lack of proper investment in exploration for resources, which led to a dangerous decline in production, with no restitution of resources, meaning less revenue for the state and public spending. At the same time, Mexico forecast an increase in demand for energy given the demographic composition of its population (which meant an increased need to import refined products). These needs could not be met by a failing national oil company (Pemex).

Constitutional amendments reinforced the historical principle that the Mexican nation is the owner of all solid, liquid and gaseous hydrocarbons existing in the subsoil, and that no concessions will be granted to exploit such resources (See Article 27 of the Mexican Constitution). It also states, under Article 28, that Mexico has the monopoly over hydrocarbon exploration and production activities. However, contrary to undertaking such activities only through Pemex, Article 27 opened the door for the state to grant allocations to state-owned production companies, such as Pemex, or to grant exploration and extraction contracts (exploration and extraction contracts) to private entities.

In essence, the reform practically ends the state monopoly in the sector, opens the door to private investment (and thus new capital and technology), incentivises exploration and development, organises the supply and sets the basis for the development of a mature market under strict environmental rules: principles that protect vulnerable communities, and transparency and open access rules that aim to ensure the same playing field for all participants.

Midstream and downstream activities are also better regulated, creating clearer open market rules, pricing and tariff regulation. A new market and infrastructure operator was created (the National Center for Control of Natural Gas – CENAGAS) to manage the whole natural gas and transport integrated system. Further, the transport, storage and commercialisation of liquids was liberalised, with a phased-out strategy to allow the rebranding, import and retail sales of gasoline.

The reform was implemented in a number of new laws enacted mainly during 2014, most notably through the Hydrocarbons Law (HL) and the Hydrocarbon Income Law (HIL).

To properly regulate the changes introduced by the energy reform, a major restructuring had to be implemented within the regulators. Thus, the reform created a robust regulatory body framework with the proper checks and balances.

The design of the national energy policy was entrusted to the Ministry of Energy, which also determines the timing and determination of bidding areas for the exploration and production of hydrocarbons. The Ministry of Energy further issues treatment, refining and processing of hydrocarbon permits, and permits for the import or export of hydrocarbons and refined products.

The Ministry of Finance was entrusted with the design of the appropriate fiscal terms of exploration and extraction contracts, bidding variables, procurement and accounting standards, and auditing of financial terms and reporting of the contracts.

The Ministry of the Economy was entrusted to design a national content methodology to ensure compliance with general goals, set at a yearly percentage (except in the case of deep water exploration and extraction contracts).

The National Hydrocarbon Commission (CNH) was reinforced to conduct exploration and extraction contract bidding processes, and manage awarded contracts from a technical perspective. The CNH also supervises performance, and approves development plans and work programmes under the contracts.

A new National Agency of Industrial Security and Protection to the Environment was created as part of the Ministry of Environment and Natural Resources, to issue regulations and guidelines on industrial safety and environmental protection regarding hydrocarbons, including the issuance of technical regulation, and its supervision.

The Energy Regulatory Commission was also strengthened as the regulatory body entrusted with issuing midstream and downstream regulation, and responsible for issuing and supervising natural gas transport, storage, distribution, compression, liquefaction and commercialisation permits (among other regulatory authorities with respect to the power sector).

A Mexican Petroleum Fund, managed by Mexico’s central bank, was created, among other things, to receive and manage all income stemming from the sale of hydrocarbons, and paying to the state and contactors the corresponding compensation under the exploration and extraction contracts.

CENAGAS was created to operate the national gas transport system and to maintain and expand the pipeline assets inherited from Pemex. It is entrusted with ensuring open access to the system (not to be confused with the authority of the Energy Regulatory Commission (CRE) to enforce open access).

Upstream activities

Under the HL and HIL, national and international oil companies now have access to exploration and production activities through allocations (in the case of state-owned productive companies) or production-sharing, profit-sharing or licence agreements. Most notably, oil companies will now be able to book reserves, which was the main barrier to fostering investments under prior energy reform efforts (mainly that enacted in 2008). Technically, oil companies cannot book reserves per se, as the reserves are owned by the state. They can, however, report the expected economic benefits under the contracts (taking production as in-kind payment under production-sharing and licence agreements).

Exploration and extraction contracts are awarded through bid processes conducted by the CNH. The HL allows the state to bid for production-sharing contracts, profit-sharing contracts, licences and services contracts.