Useful pages on the regulator website
- Official website of the CNH: http://www.gob.mx/cnh
- Access to agreements, guidelines and modifications to regulations: https://www.gob.mx/cnh/articulos/regulacion-emitida-por-la-cnh-83399
- Information relating to hydrocarbon exploration and extraction contracts awarded between 2014 and 2018: https://rondasmexico.gob.mx/
- Hydrocarbons statistics and other information relating to hydrocarbons and gas throughout Mexico: https://hidrocarburos.gob.mx/#inicio
The National Hydrocarbons Commission (CNH) is composed of seven commissioners:
- Rogelio Hernández Cazares (President): Holds an economics degree and a master’s degree in strategic prospecting. He was a director of PEMEX from December 2018 to September 2019.
- Alma America Porres Luna: Holds a geophysical engineering degree and a master’s in applied geophysics. She is a former employee of the Mexican Petroleum Institute as a geological and petrophysical expert in hydrocarbons, and a former director of exploration and production.
- Nestor Martínez Romero: Holds a degree and a master’s degree in oil engineering. He has more than 38 years of experience in technical, operative, regulatory and administrative areas, ensuring proper exploitation of oilfields to maximise the economic value.
- Héctor Moreira Rodríguez: Holds a chemical science and engineering degree. He has more than 13 years of experience gained in different positions within the energy industry. He was formerly Undersecretary of Strategic Planning and Technological Development at the Energy Ministry from 2003 to 2004.
Currently, three commissioner posts are vacant, awaiting designation by the Mexican Senate. Therefore, the CNH has been carrying out its activities with four commissioners.
The National Hydrocarbons Commission (CNH) is the key regulatory entity regarding hydrocarbons matters. It was originally incorporated in 2008 as an entity to regulate and supervise activities relating to the exploration and extraction of hydrocarbons.
In December 2013, amendments to articles 25, 27 and 28 of the Mexican Constitution were published in the Federal Official Gazette. These amendments strengthened the CNH and granted more powers to carry out its regulatory and supervision activities, including, among others, to:
- provide technical services to the Energy Ministry on hydrocarbons matters;
- collect geological and operative information;
- authorise superficial exploration;
- organise tenders to award exploration and extraction of hydrocarbons contracts in onshore and offshore fields throughout Mexico;
- supervise contracts awarded to private companies; and
- supervise and authorise development plans filed by awarded companies for the blocks and fields awarded to them.
Many additional powers were granted to CNH, which are included in the Hydrocarbons Law and its Regulations.
The following is the key legislative framework applicable to the CNH:
- articles 25, 27 and 28 of the Federal Constitution (Constitución Política de los Estados Unidos Mexicanos);
- Hydrocarbons Law (Ley de Hidrocarburos) and its Regulations (Reglamento de la Ley de Hidrocarburos), published in the Federal Official Gazette on 11 August 2014 and 31 October 2014;
- Hydrocarbons Revenue Law (Ley de Ingresos Sobre Hidrocarburos), published in the Federal Official Gazette on 11 August 2014; and
- regulations issued by the CNH for upstream activities.
The above-mentioned legislation sets out:
- the main rules allowing private individuals and companies to participate in and carry out exploration and production activities in Mexico;
- the types of contractual arrangements that the Mexican government, through the CNH, can use for exploration and extraction contracts;
- rules regarding midstream and downstream activities; and
- the tax regime for the different types of exploration and extraction contractual plans.
In addition to the above-mentioned key legislation, the CNH governs its acts and day-to-day operations pursuant to the provisions set out in the Energy Coordinated Regulatory Entities (Ley de los Organos Reguladores Coordinados en Materia Energética).
Additional key legislation may be applicable to the CNH and hydrocarbon activities as required case by case, such as environmental laws and regulations that are exclusively applicable to oil activities, or legislation and regulations applicable to downstream activities such as transportation, storage and sale of oil products.
The CNH is also entitled to issue regulations for specific matters that must also be observed by regulated companies, such as the drilling of wells and non-associated natural gas recovery.
Reporting and disclosure obligations
Most of the obligations for companies to report and disclose to the CNH are included in the exploration and extraction of hydrocarbons contracts relating to specific contractual areas awarded during tender procedures.
Notwithstanding the above, the following must be disclosed to the CNH:
- changes or modifications to a contractual operator;
- drilling reports; and
- procedures relating to programming, storage and measuring hydrocarbons at the measurement points.
Furthermore, all exploration plans and evaluation programmes must be submitted to the CNH for approval. Finally, companies must provide the CNH with information and data relating to hydrocarbon activities, such as technical and scientific data obtained from the upstream activities made in each well.
Monetary sanctions and recent behaviour
All actions that could result in the imposition of sanctions by the CNH are included in the Hydrocarbons Law, including those relating to monetary sanctioning.
Monetary sanctioning by the CNH only applies to specific cases, as provided in the Hydrocarbons Law, such as:
- failing to deliver information obtained from superficial exploration;
- failing to observe terms and conditions imposed in the superficial exploration authorisations;
- drilling of wells without the corresponding authorisation;
- execution of exploration or development plans without prior approval; and
- assignment of rights and obligations from exploration and extraction of hydrocarbons contracts without prior authorisation.
It is important to note that, prior to imposing any monetary sanction, the CNH is required to follow the procedure as set out in the Federal Law of Administrative Procedure (Ley Federal de Procedimiento Administrativo), which includes a set of compulsory provisions that, from time to time, may delay the final resolution imposing the sanction.
Some of the actions taken by the CNH in 2019 that were publicly released were the imposition of monetary sanctions on the state-owned oil productive company known as PEMEX for apparently carrying out actions and activities in contravention of the extraction plan approved by the CNH for an oilfield known as Xanab. In March 2020, CNH imposed monetary sanctions on two foreign oil companies for failing to comply with their minimum work programmes.
Imposition of monetary sanctions may, in any case, be challenged by means of a constitutional appeal known as amparo indirecto as per the provisions set out in the National Hydrocarbons Law.
Non-monetary sanctioning powers and behaviour
Rather than non-monetary sanctioning powers, the CNH has certain rights included as part of contracts for exploration and extraction of hydrocarbons awarded during tender procedures as required by the CNH and agreed between the awarded companies and the CNH.
These rights relate mainly to the following actions, which the CNH may adopt following a breach of contractual obligations:
The CNH may rescind the exploration or extraction of hydrocarbons contract whenever there is a breach to the contract or if the contractor falls within any of the assumptions usually described in the referred contracts. The reasons for the government to rescind a contract include:
- failing to comply with the minimum work programme without a justified cause;
- assigning all or part of the operation or rights under the contract without prior written authorisation;
- failing to comply with a judicial resolution; or
- failing to pay the remunerations set in the contract for the state.
The non-economic sanctioning powers that may be exercised in respect of the hydrocarbons industry are held by other authorities that interact with the CNH (referred to below). The available sanctions differ depending on the activity that is being carried out and the authority that supervises that activity (eg, storage, transportation, sale of oil products or industrial and environmental safety supervision activities).
Non-monetary sanctions relating to a breach of a permit, licence or authorisation, or of specific laws and regulations in matters relating to the hydrocarbons industry (ie, environmental legislation) are included in different laws and will vary depending on the breach and the activity usually carried out by the permit holder. These sanctions may include, but are not limited to:
- imposition of fines;
- shutdown of certain facilities; and
- cancellation of a permit to carry out certain activities.
Recent and upcoming developments
Since December 2018, when the new government was elected, the energy policy has been shifting and even though private investments in oil and gas activities are still allowed, the government has been pushing to strengthen the status of the state-owned production company, PEMEX.
With this new policy, the federal government intends to develop new projects with the aim of increasing PEMEX’s participation in exploration and extraction activities up to the production of 2.4 million barrels of crude oil in the coming years.
However, in recent weeks a bill of amendments to the hydrocarbons law submitted by the Mexican President to Congress was approved. Under this bill, more control is given to the Mexican state and the Energy Ministry in connection with permits, licences or authorisations required to carry out oil and gas activities, as well as regarding activities carried out by private companies in Mexico. Effectiveness and effects of some amended provisions of the Hydrocarbons Law have been and continue suspended for the moment due to a court suspension that was issued by a federal judge.
An additional bill of amendments was recently approved also by Mexican Congress related to the asymmetrical regulation imposed on PEMEX in 2013, whose effects have also been suspended by a Mexican federal court.
As evidenced before, the judicial power has played a key role in preventing the federal government from imposing restrictions and conditions to private companies to continue carrying out their activities, as well as for PEMEX to continue strengthening as a sole player in Mexico regarding oil activities.
At the time of writing, contracts for exploration and extraction of hydrocarbons awarded prior to 2019 have been recognised by the federal government. Approximately 111 contracts (mainly production-sharing contracts and licence agreements) are under way with private companies that have been carrying out exploration and extraction activities in onshore and offshore fields.
Notwithstanding the above, as at January 2019, the CNH has not called for any additional tender procedures and, therefore, has not awarded any new exploration and extraction contracts. Furthermore, no new partners have been selected for PEMEX to explore and exploit jointly certain oil fields that were awarded to PEMEX in the Round Zero (farm-out tenders).
The federal government has announced a number of projects with the aim of increasing PEMEX’s participation in oil activities. For example, it is constructing a new oil refinery plant in the municipality of Dos Bocas, in the state of Tabasco. This refinery is expected to have capacity for processing 340,000 barrels of oil daily (which would include approximately 170,000 barrels of gasoline and 120,000 barrels of diesel) and will refine crude oil of 22°API. Additionally, it will have 17 processing plants and 93 storage spheres.
The main aims of this project are to reduce imports of gasoline and diesel and enable Mexico to be a self-sufficient producer and consumer of such products, while also increasing the oil production capacity of PEMEX.
It is hoped that the project will create up to 135,000 jobs. It is currently being developed in an area covering approximately 566 hectares, within a strategic region where oil extracted from Tabasco shores and the region known as sonda de Campeche may easily be transferred to the new refinery for the refining process.
Additionally, the federal government has announced programmes relating to both the National Hydrocarbons Plan and the National Refining Plan, which, as mentioned previously, seek to increase state participation in such activities, through PEMEX, rather than promoting private investment in projects included in the above-mentioned plans.
The main challenges currently faced by the CNH include the following:
- supervising and regulating all activities relating to upstream activities carried out by either PEMEX or private companies that have been awarded contracts for exploration and extraction of hydrocarbons, setting aside any political interest that the government or any other political party could have in such matters;
- organising and calling for additional tender procedures to attract more private investment in upstream activities and particularly to explore and exploit Mexican reserves either in offshore or onshore fields. In this regard, a significant challenge for the CNH is calling for tenders to explore and exploit fields located in deep and ultra-deep waters in the Mexican Gulf, since Mexico has most of its oil reservoirs in such fields; and
- reassuring private investors in Mexico already carrying out exploration and extraction of hydrocarbons activities that specific regulations governing upstream activities will not be modified at the discretion of the regulators or the government, thus providing legal certainty in connection with the rules applicable to these activities.
- That CNH Commissioners are independent individuals that are not aligned with any particular political interest and that their decisions should be impartial for the benefit of the country.
The context of these challenges derives from the fact that since the new federal government took office in late 2018, tender procedures for awarding exploration and extraction of hydrocarbons contracts, as well as tender procedures to select a partner for PEMEX to exploit certain oil fields awarded to the company during Round Zero, were suspended even though the CNH had already called for some additional rounds.
The CNH has made some efforts to overcome these challenges, for instance, by approving many upstream activities requested by private companies holding exploration and extraction of hydrocarbons contracts; for example, in April 2020, the CNH approved some drilling activities in deep waters.
Further, the CNH has not modified any regulations already issued or those already in place relating to hydrocarbons matters. This is a good sign for the oil industry, which is currently facing difficulties resulting from new legislation and rules trying to be imposed by the federal government.
Notwithstanding the above, the CNH has not given clear messages or signs in connection with the importance of recalling and organising tender procedures to attract investments in upstream activities.
Interacting with the regulator
The CNH is a regulatory entity for upstream activities. Its creation was controversial because the 2013 constitutional energy reform was approved despite it being rejected by left-wing political parties. A special statute, the Law of Coordinated Regulatory Bodies in Energy Matters (Ley de los Órganos Reguladores Coordinados en Materia Energética), governs the CNH’s activities and the way in which private companies and PEMEX interact with CNH commissioners and public officials.
Pursuant to the above-mentioned Law, there are certain key points that must be considered in any interactions with CNH, including the following:
- Commissioners may not take part or participate in any matters in which they may have direct or indirect interest.
- Commissioners may only be involved in matters of their competence only by means of meetings at which at least two commissioners must be present. All meetings must take place in CNH offices.
- Following the conclusion of any meeting, minutes will be prepared in which the following data should be included: (i) the date and time of the meeting; (ii) the names of all participating individuals; and (iii) the matters and topics dealt with. All minutes must be published on the official CNH website.
- All meetings must be recorded and stored electronically.
In addition to these general conditions that apply to interactions with the regulator, the CNH has also a code of conduct, in which there are more specific provisions regarding meetings with regulated companies, as well as considerations enabling commissioners to participate in public events, forums, among other things.
Breaches of some of the above-mentioned rules could result in the imposition of sanctions under the Federal Law of Public Servants Administrative Liabilities (Ley Federal de Responsabilidades Administrativas de los Servidores Públicos).
To request a meeting with CNH commissioners, petitioners usually submit a written motion to the Secretary of the CNH stating their wish to have such a meeting and the topics to be put before the commissioners.
Although the CNH has interacted with national and international companies and individuals, language can be sometimes an issue. In many cases, foreign companies and individuals either have a legal representative based in México who helps them to interact with the CNH or they hire translators to assist at meetings and other interactions with CNH commissioners and public officials.
Additionally, when companies participate in tender procedures called by the CNH, interaction with the regulator may be subject to specific rules included in bidding guidelines applicable to the specific tender. For instance, when a tender procedure is taking place, all interactions with the CNH are carried out electronically (such as an intention to participate, registration, filing of certain documents and requests for appointments to file bidding documents). Meetings with the tender organisers are rare (perhaps just once or twice during the procedure), but are held for specific purposes, such as physical submission of the tender documents to be able to participate and pre-qualify in the tender procedure.
Notes for foreign investors
There are no restrictions on foreign companies participating in tender procedures called by the CNH, provided they observe and comply with participation requirements included in the corresponding bidding guidelines to pre-qualify. These requirements may vary from case to case, depending on the tender procedure to be called (eg, for awarding licensing contracts or production-sharing contracts or if a tender is for an onshore or offshore field).
Notwithstanding the foregoing, if a foreign company is awarded with an exploration and extraction contract, a Mexican company must be incorporated, as it will be the legal entity that signs the contract with the CNH. For these purposes, foreign entities must observe the provisions included in the Corporations Law (Ley General de Sociedades Mercantiles), which sets out the requirements to incorporate a Mexican entity. Additionally, the Mexican entity to be incorporated must observe requirements provided in the Hydrocarbons Law in connection with the corporate purpose of the entity, including the fact that the entity must have within its remit activities relating to the exploration and extraction of hydrocarbons.
The duly signed contract will include provisions and prohibitions relating to the assignment and transfer of shares or participations, including prior authorisations required from the CNH to assign or transfer those participations.
Other regulators it works closely with
The domestic regulators that most commonly interact with the CNH are the following.
Secretaria de Energia
Energy Ministry (Mexico)
The Energy Ministry (SENER) oversees Mexican energy policy and issues directives on oil and gas matters, among other things.
Regarding oil and gas activities, SENER selects contractual areas for which the CNH will bid and the model contract to be used in each tender and for each contractual area.
Further, SENER issues the permits for treating and refining oil, processing natural gas, and exporting and importing hydrocarbons and oil products.
Comisión Reguladora de Energía
The Energy Regulatory Commission (CRE) issues regulations and permits for:
- transportation and storage of hydrocarbons and oil products;
- transportation by pipelines and storage of petrochemicals;
- distribution of natural gas and oil products;
- regasification, liquefaction, compression and decompression of natural gas;
- trade and public sale of natural gas and oil products; and
- distribution of petrol and aircraft fuel.
None of the activities referred to above may be carried out without prior authorisation and the necessary permit from the CRE.
Agencia de Seguridad Energía y Ambiente
Environmental, Energy and Safety Agency (Mexico)
The Environmental, Energy and Safety Agency (ASEA) is a regulatory entity controlled by the Environmental Ministry. Its main purpose is protecting people, the environment and hydrocarbon industrial facilities, including activities relating to the disassembling and abandonment of facilities.
The ASEA’s control and supervision include activities relating to oil and gas, natural gas, oil products and petrochemicals.
Fondo Mexicano del Petróleo
Mexican Petroleum Fund
The Mexican Petroleum Fund is responsible for obtaining, managing, investing and supplying revenues from allocations, as well as hydrocarbon exploration and extraction contracts, net of taxes.
The Fund is a government trust created by the Internal Finance Ministry (Secretaría de Hacienda y Crédito Público), as trustor, and the Central Bank of Mexico (Banco de México or BANXICO), as trustee, and is managed by three government representatives and four independent members.
One of the main purposes of the Fund is to pay the compensation obtained from exploration and extraction activities to private companies and investors, according to the model contract and the terms and conditions set therein.