Mexico’s landmark constitutional energy reforms, enacted in December 2013, were lauded as the start of a new era for private investment in Mexico. Nearly five months in, how has the government fared in implementing these reforms? Here are the 5 things you need to know.
1. Identification of Sites Is On Schedule. The energy reforms established a March 21, 2014 deadline for Petroleos Mexicanos (“Pemex”) to identify the areas and fields it would like to maintain in its portfolio. Pemex’s selections (which must be approved by the government) indicate it will likely retain all currently producing fields and release nearly two-thirds of prospective resources for private investment. Bid rounds will likely be held during the First Quarter of 2015, with a possible additional round held in the Third Quarter.
2. Conflict Over Approval Authority For Joint Venture and Farm-In Partners. Pemex has identified a number of areas in which it may seek joint venture or farm-in partners, but uncertainty remains over whether Pemex or the National Hydrocarbons Commission will retain final authority to select Pemex’s partners.
3. Necessary Secondary Legislation Has Been Delayed. At least 28 laws must be created or amended in order to eliminate conflicts with the energy reforms. The government set an April 20 deadline to make these necessary changes. However, these amendments have been delayed at least several weeks due to their complexity as well as negotiations over further electoral reforms. Mexico’s current congressional session is ends April 30, meaning a special session may be required to pass these reforms.
4. Tax, Royalty, and National Content Requirements. The secondary legislation will likely include a standard 30% tax (applied to all corporate activity in Mexico) and an as yet undetermined oil and gas production tax. A sliding-scale royalty structure is also likely, which would vary based upon the type of field, oil and gas prices, and the field’s production. A sliding scale system may also be implemented for national content, with 100% national content required for on-shore sites and lesser percentages required for areas in which Mexico has less experience and expertise.
5. Electricity Sector Reforms. Electricity sector reforms are also needed to ensure support the expected development and expansion. Few details have emerged, however, early indications are that the reforms may include a new wholesale power market, retail marketing network, and transmission and distribution companies whose rates will be regulated by mid-2015.