Mexican Senate and House of Representatives Approve Constitutional Energy Sector Reform

by Holland & Knight LLP

  • A constitutional reform approved by Mexico's Senate and House of Representatives will transform the country's energy sector, pending expected approval by the majority of state congresses.
  • The reforms involve the exploration and exploitation of oil and gas, and the generation of electric power, and would bring about an end to the Mexican State's energy monopoly.

A constitutional reform was approved yesterday by the Mexican Senate and today by the Mexican House of Representatives modifying articles 25, 27 and 28 of the Mexican Constitution. It will transform the country's regime involving the exploration and exploitation of oil and gas, as well as the generation of electric power. The reform must now be accepted by the majority of the state congresses to become law.

An End to State Monopoly?

The reform and its temporary provisions have set the standard by which the secondary laws of the energy sector will be modified, with the aim of ending the monopoly of the Mexican State in the hydrocarbon field and in the generation and commercialization of electricity.

The current state monopoly is controlled by two state-owned companies, PEMEX (Petroleos Mexicanos) and CFE (Comisión Federal de Electricidad). Under the reform, CFE will be limited to the control of the national electric grid, as well as the supply of the public service of transmission and distribution of electricity. PEMEX will not hold a monopoly in exploring, exploiting and refining oil, gas and hydrocarbons, since both domestic and foreign private investment would be allowed in these areas.

Key Provisions

Within 120 days of the law taking effect, the Mexican Congress will issue all the secondary laws. Key features are as follows:

  • A contractual regime for the participation of private investment on the upstream sector will be established for: (1) services, (2) revenue and production share agreements, and (3) licenses. In each case, the Ministry of Energy will determine the best model to be used in order to maximize profitability for Mexico.
  • The compensation structures approved for these contractual models will: (1) be in cash-for-services contracts, (2) include a percentage of the revenue or production obtained, (3) include the transmission of hydrocarbons once they have been extracted from the underground (license regime), and (4) combine such compensation structure models.
  • The private investors that enter into an agreement with either the Mexican government or PEMEX will be allowed to report for accounting and financial purposes the awarding of the contracts, and will be able to record the benefits of the projects as forecasted.  
  • The Ministry of Energy will be in charge of granting authorizations for industrial oil-related activities, such as crude oil refinery and gas processing.
  • The reform will establish a special regime for the awarding of permits for the storage, transportation and distribution of crude oil and its derivatives by pipelines, as regards basic chain petrochemicals such as ethane, propane, butane and white gasoline (naftas).
  • The reform will establish a legal system for the participation of private investment in the generation and commercialization of electricity by any source except nuclear energy. In addition, a new regulatory entity will be created for providing non-discriminatory access to power-generating companies within the transmission industrial process.

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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