The PEMEX Law Explained

Wed, 01/25/2012 - 12:50

As part of the country’s Energy Reform, a number of structural changes were made at Pemex that required the passing of a set of new laws, grouped under the title of the Pemex Law, which was passed in 2009. The aim of these reforms was to provide a new legal framework for Pemex that would allow it to move from being a company weighed down by bureaucracy and a dependence on state instruments to a national oil company with a new flexibility and agility.

The Pemex Law introduced four main legal and structural changes to the company. The first was the creation of a special public administration regime, separating Pemex from the other state-owned entities that operate in Mexico and giving the company the autonomy to adopt its own operating regulations, on the condition that existing constitutional principles are not broken. However, wherever Pemex does not directly specify changes to its own regulation, the old regulations will apply to the company.

The second change made by the Pemex Law relates to Pemex’s corporate governance. The structure of the board was changed, and now comprises 15 members. Serving under the Energy Minister, who remains Chairman of the Board, five of these board members will be representatives of the Mexican state, appointed by the President. Another five representatives will be appointed by the Pemex labour union, and the final four board members will be professional directors appointed by the President and ratified by the Senate. The aim of this board restructuring is to create a decision-making body that is less constrained by politics in its strategic choices, and to encourage the company to make decisions on a more technical level. The board will also have more authority over the management of the company. For example, it is now free to decide the allocation of its annual budget, and will be responsible for all operational decisions.

The Pemex Law also granted the company more operational autonomy, moving away from the historic influence the Mexican Treasury has had in the decisionmaking process. Pemex will now have the authority to obtain financing from external sources such as capital markets, as long as no rights to hydrocarbons are granted to the company’s creditors. Pemex will also be barred from obtaining financing that relies on the full faith and credit of the Mexican government.

Finally, the Pemex Law gave full backing to the NOC to draw up new contracts for the procurement of goods and services. This gives more flexibility for Pemex to introduce much-needed JVs and strategic alliances into its operations, but still bars third-party control of Mexico’s hydrocarbon reserves. Any change on this level will require a constitutional or legal reform to allow Pemex to oer better incentives for companies to work on projects considered high-risk.