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Analysis

Mexican Oil Fund for Stabilization and Development

Mon, 09/01/2014 - 16:07

The National Development Plan 2013-2018 states that satisfying the country’s energy demand is one of the administration’s main targets. The changes to the 14th and 15th Transitory Articles of the Mexican Constitution, as part of the Energy Reform, include the creation of a new public trust fund for the oil and gas industry during 2014, with the aim of bringing it into effect in 2015. This trust fund, called the Mexican Oil Fund for Stabilization and Development, will be dedicated to strengthening the country’s long-term financial prospects through the administration of oil revenues and will have the Central Bank as a trustee. Its objectives also include fostering transparency in subjects related to oil income, as well as facilitating the follow- up, organization, and administration of revenues coming from oil operations to enhance savings margins. At the same time, this fund guarantees funding for infrastructure development for the Mexican oil and gas industry.

The Mexican Oil Fund for Stabilization and Development is set to receive all revenue from royalties, duties, and fees that arise from assignments and contracts. This excludes all the revenue coming from taxes. The fund will also make all payments due in said assignments and contracts for the exploration and/or production of hydrocarbons, and will thus serve as an auditing mechanism for measuring the financial success of the projects that it is financing. The resources will be transferred to the Fund for Stabilization of Oil Income and for Stabilization of the Federal Entities’ Income and to the Fund for Hydrocarbon Extraction, as well as to the Research Funds for Hydrocarbons and Energy Sustainability and the Fund for Oil Taxation. Furthermore, resources equivalent to 4.7% of the GDP will be transferred to SHCP as part of the federal income.

All additional resources will be allocated to a long-term savings account to be invested in financial assets. Whenever this account reaches the equivalent to 3% of GDP, the exceeding cash flow may be assigned to increasing the balance of long- term savings with a limit of 40%; the pension system with a maximum limit of 10% of exceeding cash flows; funding projects regarding science, technology, innovation, and renewable energy, with a limit set at 10% of the exceeding cash flow; oil and infrastructure investment projects, with a maximum limit of 30% of the increase in year-on-year investment; or scholarships for training, improved connectivity, and regional industrial development, with limits of up to 10% of cash flow. The Energy Reform also foresees that should the savings account reach levels exceeding 10% of GDP, the resources it yields will be transferred to SHCP to form part of the federal income. In the event of a significant reduction in public revenue, combined with a drop in GDP, resources may be transferred from the fund to SHCP, although this depends on the approval of a two- thirds majority of Congress. The Fund will also channel and administrate the oil revenues that correspond to the Mexican government, in order to have enough transparency and to monitor their destination and use. All revenues and the application of resources that go through this fund are subject to transparency laws.