Mexico: Historic Energy Reform

On December 20, 2013, Mexico enacted an amendment to Articles 25, 27 and 28 of the Mexican Constitution to implement a historic energy reform. The Mexican Government seeks to transform and modernize the energy sector in Mexico.

Mexico’s energy reform is comprehensive with potentially far-reaching effects in both the oil & gas and the electric power industries in the country. The energy reform is expected to contribute to the long-term development of Mexico by opening the energy and hydrocarbon sectors to both foreign and local private investors. 

The impact of energy sector reform should be immediate and significant. It offers foreign investors the opportunity to participate in exploration and production in a variety of indirect ways and to engage directly in midstream and downstream operations. This will make Mexico the second largest market open to foreign investment in the energy sector, behind Brazil. 

The midstream market alone, which includes transportation, storage, wholesale marketing and distribution of crude and refined petroleum products, has been estimated at over US$52 billion annually. It also brings competition to the state-owned oil company, Petróleos Mexicanos (PEMEX), and electricity provider, Comisión Federal de Electricidad (CFE). The entire energy sector, with very limited exceptions, has been closed to foreign participation or domestic competition since 1938A

• Oil and Hydrocarbon resources in the subsoil will remain property of the Nation;
• Private companies will still be precluded from owning oil and gas reserves, but will be able to participate in exploration and production activities through licenses, production-sharing contracts, profit-sharing and service agreements, among others. Private ownership will now be permitted in the midstream and downstream sectors;
• PEMEX will be transformed into a “productive state enterprise”¹ within the next two years. It will no longer be required to have labor union representation on its board and will be afforded an initial priority to select the fields in which it wishes to conduct or continue its exploration and production activities (known as “round zero”);
• The Mexican Federal Government will remain in charge of administering hydrocarbons and electric power;
• Significantly expanded authority is granted to the Ministry of Energy and the National Commission of Hydrocarbons for conducting the bidding processes and overseeing exploration and production contracts with private parties. Similarly, the Regulatory Energy Commission will have enhanced authority to manage and regulate the granting of permits for the exploitation of hydrocarbon resources;
• A new National Center for the Control of Natural Gas is created to administer the pipeline and storage network in the country;  
• The Central Bank of Mexico will act as trustee of a Mexican Oil Fund aimed at administering and distributing non-tax revenues derived from oil contracts;
• The National Industrial Safety and Environmental Protection Agency is created to regulate occupational and industrial safety and environmental matters in the energy sector; 
• Private companies will be able to participate in power generation for public use in a future national electricity wholesale market to be independently administered by the National Energy Control Center; and
• The Federal Electricity Commission, Mexico’s national power company, will also be transformed into a “productive state enterprise” and will remain with exclusive authority for the transmission and distribution of power, as well as for the planning and control of the national electricity system.  

The true reach of this ambitious energy reform will be ultimately defined by the implementing legislation, which should be enacted within 120 days of the adoption of the constitutional amendment. The new operational framework is expected to come into being by 2015. 

The implementing legislation is expected to include:

• Rules governing the exploration and production activities of public sector companies;
• Rules governing contracts, licenses and other rights of private sector participants with respect to oil & gas reserves, including exploration and production and the bidding processes;
• Rules governing coexisting exploration, production and mining activities by more than one participant; 
• Rules governing the reporting of reserves associated with oil and gas contracts with private participants;
• Rules governing any national content requirements under oil and gas contracts with private participants;
• Rules governing midstream and downstream activities by private participants;
• Rules governing productive state companies, including financing, budgeting, governance and transparency concerns, and the transformation of PEMEX and the Federal Electricity Commission into productive state companies;
• Rules regarding the authority and independence of the various government agencies participating in the energy sector;
• Rules governing the power generation by private participants, the national electricity wholesale market, and access to it;
• Rules governing arrangements with private companies in the power sector, including contractual arrangements related to the transmission and distribution of power;
• New environmental and safety standards specific to the energy sector; 
• Rules concerning the climate change and the advancement of clean energy; and
• Rules governing the management, transparency and purposes of the Mexican Oil Fund.

We will report on further developments in the energy sector in Mexico as they occur. Please contact Juan Manuel Trujillo, Thomas Mellor or Bruce Wolfson for any further information.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: