Mexico’s Energy Reform Amendments

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[co-author: Chris Treanor]

Background

On December 12, 2013, Mexico’s lower chamber of Congress approved the country’s largest energy reform legislation in more than 75 years.  The proposal ends Mexico’s state-owned monopoly of the oil and gas industry.  Beginning in 1938, Mexicans have recognized Oil Expropriation Day, the day set aside to commemorate the nationalization of the oil industry.  Since that time, the Mexican government, through the Petroleos Mexicanos (“Pemex”), has controlled all oil exploration and production as well as all retail gas stations throughout the country.

Opponents of the historic energy reforms primarily consisted of the leftist group the Party of the Democratic Revolution (PRD).  During more than nine hours of debate on the floor of the Senate on December 11, opponents noted that approximately one-third of Mexico’s federal budget is funded through oil and gas revenue.  All profits from Pemex went directly to the federal treasury.  They also argued that the nation’s resources belonged to all Mexican people and could not be sold to private companies outside of Mexico.

The reform’s greatest proponent was President Enrique Pena Nieto, who took power just over a year ago on a platform of growing the Mexican economy, through a plan that included reforming the nation’s energy industry.  The President’s ruling party, the Institutional Revolutionary Party (PRI), was joined by the conservative party the National Action Party (PAN).  In a surprise move, the ruling alliance reportedly took advantage of procedural maneuvers to avoid sending the bill to committee in the lower chamber and quickly moved for final passage after 40 minutes of debate.

Supporters of the President’s proposed reforms argued that foreign investments were necessary to meet growing demand and to grow the nation’s economy.  In addition, Mexico’s oil production has declined by 25 percent from its peak in 2004 and accounts for just over 2.5 million barrels of oil per day.  The country’s remaining oil reserves are considered vast, but lay primarily in deep waters of the Gulf of Mexico and beneath shale deposits.  Pemex has not developed the technologies necessary to extract these resources without help from foreign companies.

Summary of Reforms

The 295-page reform bill passed by both houses of Mexico’s Congress included constitutional amendments and statutory changes that went far beyond where most observers anticipated.  An earlier proposal from President Pena Nieto would have allowed private companies to enter into profit-sharing contracts with Pemex, receiving cash payments without transferring ownership rights to the resources.  In the current reform, however, private companies will be permitted to contract with the Mexican government independently of Pemex and enjoy some degree of ownership once the oil and gas come out of the well.  The Mexican government will continue to own all resources that remain in the ground, but foreign companies will be allowed to pay royalties and taxes to the government in exchange for ownership rights once the oil breaches the surface.

In addition to opening the Gulf of Mexico and other areas of the country to private exploration and development, the energy reforms include the opening of midstream and downstream markets.  For the first time in decades, refining, transportation, storage, and distribution of oil and refined products would be open to the private sector. Although not final, these permits are expected to operate through the federal Energy Regulatory Commission (CRE). 

In addition to overhauls of the oil and gas industry, the legislation drastically changes the country’s power generation policies.  The reforms create an independent system operator (CENACE) with the goal of incentivizing private investment in power generation.  The bill also modifies Mexico’s electric tariffs, particularly for the industrial sector.

Outlook 

Following approval from both chambers of Mexico’s Congress, the energy reforms are expected to be signed by President Pena Nieto as early as February 2014.  Before the law can be enacted, however, the amendments must be ratified by a majority of Mexico’s 31 states.  But a majority of the state legislatures are controlled by President Pena Nieto’s ruling party or its allies.

In addition, several more rounds of legislation will be needed to effectuate the proposed reforms.  From the wholesale change to Pemex, from a public operator whose profits went directly to the federal treasury to a globally competitive for-profit entity, to the development of an entire regulatory regime, many details are left to be ironed out.  Additional legislation is expected to come before Congress in the spring of 2014.  Until then, many questions will remain about the degree and manner in which foreign companies will be a part of the future of Mexico’s oil and gas industries.

 

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

Published In: General Business 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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