Fiscal Regimen of Licensing, Shared Production Contracts

The past five years have been marked by the suspension of bidding rounds and farmouts and numerous personnel changes at the head of PEMEX and regulatory agencies. However, rather than rip up private contracts as feared, the government instead re-stated its commitment to honor those contracts after a period of review. A closer look into the fiscal regimen of the two contracts through which operators function in Mexico is necessary to understand the fiscal importance of operators in the industry.

Private production and exploration have yielded significant results for the development of the industry. At the same time, these companies can represent an important part of income to public finances regarding hydrocarbon management. In Mexico, the legal framework allows operators to carry out exploration and extraction activities under four contractual modalities: License, Shared Production, Profit Sharing and Services contracts, explains Elizabeth Castro, Head, National Hydrocarbon Information Center (CNIH).

Operators normally work under either a License or Shared Production contract, both of which are subject to the concept of Contractual Hydrocarbon Value (VCH), defined as the volume of each type of hydrocarbon (oil, gas, and condensates) produced, multiplied by its corresponding Contractual Price (stipulated in each contract). Companies can then calculate the project’s profit by subtracting the Project Costs (investment and operating expenses) from the CHV.

Profit comes from exploration and extraction activities and is distributed between the State and the Operator. The State receives income from compensatory payments and taxes. The Operator receives the remainder after making these payments to the State and covering the project’s costs.

Therefore, conceptually, the Fiscal Regime is the mechanism that defines the distribution of oil profits between the State and the Operator, meaning the way in which the State collects income derived from hydrocarbon exploration and extraction activities.

According to Castro, players in the hydrocarbon industry can reach out to the National Hydrocarbon Commission (CNH) for specific guidance regarding the fiscal regime. Audits are a mechanism through which operators can receive this guidance. Currently, in Mexico, there are 108 assigned contracts from which 76 are under a License and 31 under a Shared Production regime.

Castro emphasizes that it is critical that the State generates efficient and effective fiscal models for collection in the hydrocarbon sector. As the Mexican oil and gas industry opened to private players, the Energy Reform made clear the ownership of the nation’s resources as this holds a heavy political weight in Mexico’s context. 

As of 2023, the government has benefited state-owned companies like PEMEX and CFE, despite concerns about public finances and energy market management. This situation coincides with a turbulent political landscape in Mexico, particularly in the lead-up to the 2024 elections.

CNH has previously urged SENER to analyze the possibility of reactivating oil tenders in the country. In its technical evaluation for the updated 2023 Five-Year Exploration and Production Plan, CNH revealed that there is 23% of the territory that currently lacks activity but holds characterized and available remaining reserves for development. Moreover, during the 12th extraordinary session of the governing body, CNH pushed to increase this potential an additional 5%, represented by unconventional resources ready for extraction.

In 2022, more than 20 blocks were abandoned, although CNH stated that this is a normal process as operators decide to focus on the most promising projects.