Congressional Approval of Mexico's Energy Reform Legislation

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On August 6, 2014, the Mexican Congress finally approved secondary legislation (the "Legislation") providing for the implementation of the historic constitutional energy reforms in Mexico that were approved on December 20, 2013, and which were described in a prior Duane Morris Alert. The Legislation will be published in the Federal Registry in the next few days. Liberalising Mexico's energy market, the Legislation is aimed at luring billions of dollars in new investments by foreign and private oil and gas companies.

The most significant laws that form part of the Legislation are, among others:

  1. the Hydrocarbons Law (Ley de Hidrocarburos);
  2. the Petróleos Mexicanos Law (Ley de Petróleos Mexicanos);
  3. the Hydrocarbons Revenue Law (Ley de Ingresos sobre Hidrocarburos);
  4. the Foreign Investment Law (Ley de Inversiones Extranjeras);
  5. the Law on the National Security Industrial Agency and the Environmental Protection in the Hydrocarbon Sector (Ley de la Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente del Sector Hidrocarburos);
  6. the Mining Law (Ley Minera);
  7. the Regulatory Bodies Law (Ley de Órganos Reguladores);
  8. the Law of the Mexican Petroleum Fund for Stabilization and Development (Ley del Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo);
  9. the Law on Public-Private Partnerships (Ley de Asociaciones Público Privadas);
  10. the Federal Budget and Fiscal Responsibility Law (Ley Federal de Presupuesto y Responsabilidad Hacendaria); and
  11. the General Law of Public Debt (Ley General de Deuda Pública).

Essentially, the constitutional amendments will now permit both Mexican and non-Mexican investors into the exploration, production and transportation of oil and gas, as well as into the refining and marketing of hydrocarbons, subject to the restrictions that: (i) the federal government will keep the property and control of Petróleos Mexicanos ("PEMEX"), the state-controlled oil company; and (ii) the Mexican Nation will keep: (a) dominion over the subsoil and (b) ownership of petroleum and all solid, liquid and gaseous hydrocarbons. Under the Legislation, through a bidding process, PEMEX will now be able to enter into contracts, joint ventures, alliances and partnerships with the private sector (national or foreign) to perform upstream and downstream activities in such sectors as natural gas, shale gas, oil, refining, transportation storage and distribution of hydrocarbons. The laws forming part of the Legislation to be published will provide for the specific terms and conditions under which the foregoing may be achieved.

In terms of payment and compensation, in connection with "production sharing" contracts and "profit sharing" contracts, generally private contractors would pay an exploration stage fee, royalties and a percentage over the operating profit. In "license contracts," private contractors generally would pay an exploration stage fee, royalties, a signing bonus and a percentage over the operating profit or the contractual value of the hydrocarbons. The specifics of each payment and compensation scheme would vary on a case-by-case basis for each contract, including production payments, net profit arrangements, cost recovery and sliding scales.

PEMEX asked to keep more than 80 percent of its proven and probable oil reserves and the Ministry of Energy has until mid-September to determine which fields the company will keep. After which, PEMEX will move quickly to form joint ventures with major global oil companies while the government auctions its first exploration and production contracts to private companies. Officials anticipate that the Legislation will eventually spur enough economic growth to help curb the government's dependence on taxing PEMEX, which has seen output fall by more than a quarter from a peak in 2004 as heavy taxes cut into its ability to invest. Mexico is among the world's 10-largest oil producers with oil and gas resources that are relatively untouched. The Mexican government wants to increase oil and gas production by 20 percent before 2018. The opportunity for suppliers that have the necessary technology to operate in specialist areas where PEMEX has little experience, such as shale extraction, enhanced oil recovery and extra-heavy oil, are abundant. However, Mexico is restricted by NAFTA in the level of local obligations it can set. The treaty contains stringent rules on anti-discrimination and the level of local obligations that can be enforced.

Another significant development of the new Legislation is likely to be the change in Mexico's financing markets. Development of Mexico's hydrocarbons requires funding. Traditional types of funding used, such as corporate finance transactions, bond issuances and private and equity structured securities, might change. With the new Legislation, Mexico is likely to overpower Brazil's oil industry, where local content requirements are high and laws complex. While lawmakers on the left contend that foreign companies would siphon off Mexico's oil wealth for themselves, Mexico President Peña Nieto's administration and the centre-right National Action Party envision a reversal of Mexico's decade-long slump in oil production at the hands of the state-owned monopoly.

Topics:  Energy, Energy Reform, Mexico

Published In: Constitutional Law Updates, Energy & Utilities Updates, Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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