Landmark Reform Opens Up Mexico's Energy Sector

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On 23 December 2013, the Mexico energy reform bill formally became the law following approval by Mexico's Congress and ratification by a majority of Mexico's state legislatures. This amends Articles 25, 27 and 28 of the Constitution and includes 21 transitory provisions that direct and further develop the reforms.

The reform could significantly increase oil and natural gas productions, as well as generate economic growth for Mexico, by potentially attracting up to $20 billion worth of foreign investments annually.

For the full implementation of the reform to occur, the Mexican Congress will have to pass additional secondary laws within 120 calendar days of the final enactment of the reform. This will detail, inter alia, the terms, conditions, royalty structures and tax rates applicable.

Key Aspects

  1. Conversion to State Productive Companies:

    Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE) are decreed to become State Productive Companies (SPCs) within two years. This will make them for-profit companies that will compete with both domestic and foreign private companies.

  2. End of a 75-year state monopoly:

    While property in Mexico's hydrocarbon reserves will remain vested in the nation, the upstream oil and gas sector (exploration and production) will now be open to private investment and competition. Therefore, private parties can be awarded contracts or licenses either directly by the government or jointly with PEMEX in accordance with the new contractual framework. PEMEX will however retain preference in choosing its preferred projects (in a "Round Zero").

    Midstream and downstream activities (processing to retail) will also be open to private parties, subject to permit grants.

  3. New contractual framework:

    This will govern upstream oil and gas activities, with the guiding principle being to maximise the nation's revenues. The framework includes the following:

    • licenses,
    • production-sharing contracts,
    • profit-sharing contracts and
    • pure service contracts.
  4. Booking of reserves is now permitted:

    Oil and gas companies will now be permitted to report for accounting and financial purposes their grants or contracts and their expected benefits, to reflect the volume of reserves they have the right to produce and market.

  5. Creation of the Mexico Oil Fund:

    This sovereign natural resources fund will administer, distribute and invest the country's oil revenues other than taxes derived from such grants and contracts.

  6. Electric power generation:

    The electric power industry will now permit private investment in all other activities than planning and control of the national electric power system and transmission and distribution of electric power. The Centro Nacional de Control de Energía will be created to operate the electric power wholesale market and distribution network.

  7. Priority land use:

    The exploration and production of hydrocarbons and the transmission and distribution of electric power are declared of social interest and public order and will be prioritized over other land use purposes.

Conclusion

Although opponents to the new legislation contend that these changes will damage the national interests of Mexico and hand over the oil industry to foreign capitalists, from a macro perspective, the reform is likely to be beneficial to all parties. The Mexico government has taken a significant step in the right direction to fulfil the country's potential, but the full extent of this will be revealed only after the passing of the secondary legislation.

Topics:  Energy, Energy Reform, Mexico, Oil & Gas

Published In: 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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