Methodology for Measuring National Content in Mexican Hydrocarbon Sector

HIGHLIGHTS:

• Enacted on Oct. 31, 2014, the regulations related to constitutional energy reform in Mexico complement the new legal framework of the country's hydrocarbon and electrical industry.
• The methodology that defines the national content required in all the activities related to the Mexican energy sector has set the rules that must be followed by the potential participants.

The "Methodology for measuring national content in Allocations and Contracts for Exploration and Extraction of Hydrocarbons, as well as for the Permits in the Hydrocarbons Industry" was published on Nov. 13, 2014,in Diario Oficial de la Federación, the Mexican Official Federal Gazette (akin to the Federal Register in the United States). This methodology is part of the legal framework of the constitutional energy reform approved in December 2013. Since initial approval of the reform, secondary laws were published in August 2014, and now new regulations have been made public.

This methodology is applicable to the three legal schemes in the national oil industry: allocations, contracts for exploration, and extraction and permits. It was developed to comply with the provisions of hydrocarbons law regarding the amount of local content to be achieved in the development of exploration and extraction of hydrocarbons in Mexico – at least 25 percent in 2015 and a goal to reach 35 percent by 2025.

To establish this methodology, the Ministry of Economics used fundamental concepts of exploration and extraction activities, such as the contracted goods and services, considering their origin; the national manpower and skilled labor; training of the national workforce; investment in local and regional physical infrastructure; and transfer of technology.

Twenty-five decrees were published on Oct. 31, 2014, containing amendments and additions to existing regulations. Below is a brief study divided by sector:

1. Hydrocarbons sector:

• The Regulation of the Hydrocarbons Law was published with the purpose of establishing the procedures for implementing the provisions of hydrocarbons law. Among others, these include the exploration and extraction of hydrocarbon, the migration process (from allocations to exploration and extraction contracts), bidding procedures, previous consultations, social impact assessments, and studies of surface use and occupation.
• Regulation of the activities referred to by the third title of the Hydrocarbons Law aims at regulating the activities of treatment and refinement of petroleum, processing of natural gas, import and export of hydrocarbons and petroleum related products; transport, storage, distribution, compression, decompression, liquefying, regasification, commercialization and sale of hydrocarbons, petrochemicals and petroleum-related products to the public; and management of integrated systems.
• The Regulation of the Revenue Law on Hydrocarbons was issued to establish the participation of the Ministry of Finance and Public Credit in determining economic conditions relating to tax matters on the bidding process for contracts of exploration and extraction.
• The Regulation of Petróleos Mexicanos defines the new organization of the productive state enterprise and specifies the powers of the board of directors.
• The Internal Regulations of the National Agency of Industrial Safety and Environment Protection in the Hydrocarbons Sector establishes the framework for action of this agency of the Ministry of Environment and Natural Resources. The ministry is responsible for industrial safety, operational safety and environmental protection in the hydrocarbons sector, including the activities of upstream, midstream and downstream in Mexico.
• The Regulation of the General Law on Sustainable Forest Development was amended to establish the procedure modifying the land use on forest land, for carrying out activities in the hydrocarbon sector.
• Regulation of the General Environmental Protection Law on Environmental Impact Assessment was modified to remove the direct functions of the administrative units of the Secretariat of Environment and Natural Resources regarding activities in the hydrocarbon sector to be made directly by the National Agency of Industrial Safety and Environmental Protection, especially with respect to environmental impact assessment.
• Regulations of the General Environmental Protection Law on the Prevention and Control of Air Pollution was reformed to establish that the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector will be the body in charge of regulation of atmospheric emissions concerning activities relating to the hydrocarbon sector.
• Amendments and additions were made to the Regulations of the General Law for the Prevention and Management of Waste to establish that the National Agency for Industrial Safety and Environmental Protection of the Oil Sector will be responsible to inspect, monitor and, where appropriate, penalize activities taking place in the sector regarding the handling of hazardous waste.
• Various provisions of the Regulations of the General Environmental Protection Law with respect to Land Use Realignment were amended to establish that all activities related to the land use realignment to the hydrocarbon sector will pertain to the federal level. Concretely, this means that it is not allowed in this industry to enter into agreements with states or municipalities and that their regional programs can not regulate the activities of the hydrocarbon industry.
• The Regulation of the General Environmental Protection Law with respect to Registration of Emissions and Pollutants Transfer was amended to establish that the activities regulated by this legislation, when related to the hydrocarbon sector, falls within the responsibilities of the National Agency of Industrial Safety and Environmental Protection in the Hydrocarbons Sector.
• The Regulations of the General Environmental Protection Law with respect to Self-regulation and Environmental Audits was reformed to establish that its application in the case of activities within the hydrocarbon sector corresponds to the National Agency of Industrial Safety and Environmental Protection in the Hydrocarbons Sector.
• Internal Regulations of the Ministry of Environment and Natural Resources was amended to consider the National Agency of Industrial Safety and Environmental Protection in the Hydrocarbons Sector within the administrative bodies of the secretariat and to establish the general faculties needed for the performance of its functions in regards to the framework of the energy reform.
• Amendments to the Internal Regulations of the Ministry of Economy were made to create the Unit of National Content and Development of Productive Chains and Investment in the Energy Sector, with the main objective to establish the goal of reaching local content as laid out in the terms of the provisions by the Hydrocarbons Law.

2. Electricity sector:

• Regulation of the Law of Geothermal Energy aims to establish the requirements, procedures and other acts that allow the implementation of activities concerning the exploration and exploitation of geothermal resources foreseen under the Geothermal Energy Act, for the use of the subsurface thermal energy within the limits of the national territory.
• The Regulation of the Law of the Federal Electricity Commission polices the internal organization of the commission in relation to the new legal structure of this productive state enterprise.
• Publication of the Guidelines establishing criteria for granting Clean Energy Certificates and requirements for acquisition intends to establish the criteria and requirements for the issuance of certificates by the Energy Regulatory Commission. These clean energy certificates are contemplated in the Electricity Industry Act and intended for clean generators and suppliers. In this regard, the commission has yet to determine the means and procedure for granting certificates.

3. Amendments/additions applicable for both sectors:

• The Regulation of the Public Private Partnerships Law was amended to establish the prohibition of productive state enterprises to enter into public-private partnerships to participate in the exploration and extraction of hydrocarbons.
• The Regulation of the Federal Budget and Treasury Accountability Law was amended to establish various provisions relating to the budget of Petróleos Mexicanos, highlighting the management of its deficit – which should be zero – as well as the allocation of resources to the Mexican Petroleum Fund.
• Amendments were made to the Internal Regulations of the Ministry of Finance and Public Credit to create the administrative units responsible for implementing the energy reform in the scope of the Secretariat of Finance and Public Credit.
• Amendments to the Internal Regulations of the Ministry of Agricultural, Territorial and Urban Development – the land use unit for projects in energy and physical investment of the Miners Funds – was created and will be responsible to propose actions that would facilitate the resolution of conflicts between assignees, contractors, generators, transporters and distributors of energy and the owners of the land; monitor and track the record of notifications to initiate negotiations to submit to the secretariat assignees, contractors, generators, transporters and distributors of energy-related products to reach an agreement with the owners of the land to be used for carrying out the exploration and extraction of hydrocarbons; transport by pipeline of hydrocarbons, petroleum or petrochemicals as well as surface exploration and generation, transmission and distribution of electrical power.

Finally, for the proper implementation of the energy reform in the electricity sector, the issuance of the following is still lacking:

• basis of the electricity market
• operative provisions of the market
• application forms for permits for generation and others established by the Electricity Industry Act

In the case of the hydrocarbon industry, it is important to carefully follow the bidding process because the applicable legal framework has not formally established some determining factors, such as the choice of the contractual scheme through which private companies may participate.

Holland & Knight can assist in providing guidance on Mexican energy reform and related policies. Please reach out to the firm's Energy Team or contact the author directly.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.