Issuance of the Mexican Secondary Laws in Connection with the Constitutional Energy Reform

HIGHLIGHTS:

• The secondary laws regulating the constitutional reform approved by the Mexican Congress were enacted setting the starting point for the transformation of the country's energy sector.
• The reforms involve the exploration and exploitation of oil and gas, and the generation of electric power, and bring an end to the Mexican State's energy monopoly.

As of Aug. 11, 2014, all the secondary laws pertaining to the Mexican Energy Reform (published Dec. 20, 2013), were published in the Mexican Official Gazette.

The scope of the secondary laws published on Aug. 11, 2014, comprises the enactment and amendment of the following laws, related to the Mexican Energy Sector:

New Laws:

1. Hydrocarbon Law
2. Electricity Industry Law
3. Geothermic Energy Law
4. Pemex Law
5. Federal Energy Commission Law
6. Law for the Regulatory Entities of the Energy Sector
7. Law of the National Agency for the Industrial Safety and Environmental Protection of the Hydrocarbon Sector
8. Hydrocarbon Income Law
9. Mexican Oil Fund for the Stabilization and Development Law

Amended Laws:

1. Foreign Investment Law
2. Mining Law
3. Public Private Partnership Law
4. National Waters Law
5. Federal Law of Public Entities and Organizations
6. Government Procurement, Leasing and Services Law
7. Public Works and Related Services Law
8. Federal Governmental Fees and Charges Law
9. Tax Coordination Law
10. Federal Budget and Treasury Accountability Law
11. General Public Debt Act

By virtue of the constitutional reform, published Dec. 20, 2013, and the creation of the new laws and amendment of the existing laws, the state monopoly over the hydrocarbons and electricity sector are deemed concluded.

The following are among the most important issues addressed in the new and amended laws:

Related to the Hydrocarbons Industry:

• Privately owned companies incorporated according to Mexican Law may participate in exploration and extraction activities through contracts to be subscribed with the National Hydrocarbons Commission (CNH); either directly or indirectly, individually, in a consortium or in an association with Pemex or other state-owned entities.
• Pemex is transformed into a state-owned productive company.
• The contracts for exploration and production will be for a limited time and limited to a specific area ("contractual area"), and will be obtained through a public bid process.
• In terms of the provisions of the Hydrocarbons Law, the Ministry of Energy will set the contractual formats for every contractual area that will be subject to a public bid or direct adjudication proceedings and will also determine the structure under which the contract will be awarded, between services contracts, share production or share profits, or licenses.
• The Ministry of Energy will be able to grant assignations for exploration and extraction to Pemex and other state-owned productive companies, and these companies can ask for the migration of such assignations to exploration and extraction contracts. In these instances, Pemex and/or the applicable state-owned productive company will be able to enter into alliances or associations with private parties that will be selected by a public bid proceeding, with Pemex able to render its opinion with regard to the technical, financial, execution and experience elements of the bidders for the alliance or association.
• The Mexican government maintains the option of administrative termination of the exploration and extraction contracts through the CNH.
• Except for the administrative termination above, the contracts for exploration and extraction may provide for alternative dispute resolution mechanisms ("arbitration"), although the applicable law shall remain to be the federal Mexican laws, the arbitration shall be conducted in Spanish and the resolution must be based on the referred Mexican laws, in which case the resolution will be final and binding for the parties involved.
• The holders of an exploration and extraction contract that intend to carry out activities of recognition and superficial exploration for the research on the possibility of existence of hydrocarbons, as well as the drilling of exploratory wells, wells in deep and ultra-deep waters, and those that use them as a design model will require previous approval of the CNH. The above is pursuant to the regulations issued by the CNH.
• The data obtained from the activities of recognition and superficial exploration will be the property of the Mexican government and it must be furnished to the CNH.
• Individuals and privately owned companies may participate in the activities of refining, processing of natural gas, exportation and importation of hydrocarbons, and oil or gas products, provided that they have obtained the relevant permit for these activities from the Ministry of Energy.
• Likewise, through a permit issued for these purposes by the Energy Regulatory Commission (CRE), individuals and privately owned companies may participate in the activities of transportation, storage, distribution, compression, liquefaction, decompression, regasification, commercialization and retail to the consumer (including sale in service stations, compression stations, carburation stations, among others) of hydrocarbons, oil products and petrochemicals.
• The permit holders that provide services to third parties related to transportation and distribution through pipelines and storage of hydrocarbons, oil products and petrochemicals, will have the obligation of allowing full access to the CRE to its facilities for auditing purposes.
• Within 12 months after the enactment of the Hydrocarbons Law, the National Center for the Control of Natural Gas will be responsible for the administration, management and operation of the National Integrated Transportation and Storage System.
• For the owners of land in which hydrocarbons are extracted for commercial purposes, in addition to the fees paid for the occupation of the land, a consideration based on a percentage of the profits obtained by the extracting party will have to be paid This consideration shall not be lower than 0.5 percent or higher than 3 percent for natural gas not associated (i.e., where there is not oil) and 2 percent for other cases.
• No bidding process will be required for holders of mining concessions, except for when these persons or entities request the execution of a contract for the exploration and extraction of the natural gas contained in the premises of the mine from which they hold a concession and that is produced by the carbon located in the mine.
• The Hydrocarbons Law provides that the prices of gasoline and diesel will continue to be determined by the Mexican government until Dec. 31, 2017.
• The permits for the importation of gasoline and diesel will be granted to any interested party as of Jan. 1, 2017.
• The permits for the public retail of gasoline and diesel (i.e., service stations) will be granted to individuals and privately owned companies as of Jan. 1, 2016, and will be granted by the CRE.

Related to the Electric Industry:

• The main purpose of the Electric Industry Law is to promote the sustainable development and growth of the electric industry and to ensure its continuity, efficient and safe operation to the benefit of the users, as well as to secure the compliance with the obligations of the universal and public utility services, clean energies and the reduction of pollution emissions.
• Private parties may generate electricity provided they obtain a permit from the CRE; which derogates the previous schemes of electricity generation, among which were the self-supply schemes and the independent power producer scheme.
• The Federal Electricity Commission is transformed into a state-owned productive company.
• The National Center for Energy Control (CENACE) will be created within six months from the enactment of the Electric Industry Law, which will be in charge of the operational control of the national electric system, as well as to operate the new wholesale electric market.
• The new wholesale electric market will be regulated through the market basis to be issued by CRE and the market operation guidelines to be issued by CENACE.
• The new wholesale electric market will allow for, among other activities, purchase and sale of electric power; related services; power; all the previously mentioned activities through importation and exportation; certificates of clean energy; and other products, collection rights and collection of penalties required for the efficient operation of the National Electric System.
• The private parties that intend to enter into the wholesale electric market under the generation scheme, commercialization scheme or qualified user scheme, must enter into a market participant agreement with CENACE.
• The qualified users must be registered before CRE, or in its defect be represented by a qualified service provider, to obtain their energy directly from the wholesale electric market.
• The CENACE will be entitled to establish associations or enter into agreements with private parties that provide services auxiliary to the operation of the wholesale electric market, which will be jointly responsible for the provisions of the corresponding services, to the extent of the involvement.

Related to Foreign Investment Regulations:

• The activities regulated under the foreign investment law were modified in order to allow foreign participation in the energy, oil and gas industry as provided for by the constitutional reform.
• The prohibition providing that only Mexicans, and companies with clauses excluding foreign investment from its capital structure, will be the only ones entitled to sell and distribute gasoline and liquefied petroleum gas is abrogated.
• The provision that set forth the requirement of obtaining a favorable opinion from the Foreign Investment Commission for foreign companies to participate in more than 49 percent of activities related to construction of pipelines for the transportation of oil and oil products, and drilling of oil and/or gas wells, is abrogated.

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.