Nicolas Borda
Partner
Greenberg Traurig
/
Insight

Reform Objectives and Scope

Mon, 09/01/2014 - 15:06

As a consequence of the Energy Reform, Mexico’s GDP is expected to grow an additional 1% by 2018 and reach a 2% annual increase by 2025. The Energy Reform’s targets include fostering economic development and attracting investment, increasing natural gas production from 5.7bcf/d to 8bcf/d by 2018 and to 10bcf/d by 2025, and increasing oil production from 2.5 million b/d to 3 million b/d by 2018 and to 3.5 million b/d by 2025. The structural changes also intend to achieve a reserve replacement rate above 100%. This means increasing production while discovering an amount of reserves higher than the current output. The Energy Reform is expected to create 500,000 additional jobs by 2018 and 2.5 million additional jobs by 2025. The social security system will be strengthened to drastically reduce poverty and improve health services, with additional fiscal revenues going toward to the development of marginal communities. The economic outcomes of the Energy Reform will promote quality education, training in specialized technical areas, and advanced technological development pursuant to the new geological challenges. Infrastructure is set to sprout up across the country, including airports, highways, and pipelines.

THE HYDROCARBONS LAW

The Hydrocarbons Law changes the fourth paragraph of Article 25, the seventh paragraph of Article 27, and the fourth paragraph of Article 28 of the Constitution, on matters regarding hydrocarbons. It abrogates the Regulatory Law of Article 27 of Mexico’s Federal Constitution Regarding Oil. The law seeks to regulate the hydrocarbons industry on Mexican territory, as well as trans-boundary fields. It confirms the direct and inalienable title of the Nation upon all hydrocarbons found within the subsoil of Mexican territory, without any statute of limitations. It sets forth that the nation must carry out the exploration and production of hydrocarbons, and that the state, through SENER, shall modify and grant to PEMEX or to other productive enterprises of the state federal leases to carry out such activities. Additionally, the federal executive branch, through CNH, may enter into agreements to carry out such E&P activities with PEMEX, productive enterprises of the state, and/or private companies. The Hydrocarbons Law enables PEMEX and productive enterprises of the state to enter into alliances or associations to participate in bids for E&P contracts, and to form public-private partnerships for different E&P activities. The Hydrocarbons Law also considers that E&P contracts shall be granted by public bids, mentioning the basic guidelines that ought to be followed in such contracting procedures. Furthermore, it states that PEMEX or the relevant productive enterprises of the state, must have a participation of up to 30% in several specific cases. The law mentions that except in the case of administrative rescission, parties may agree on alternative dispute resolution mechanism covenants based on the Mexican Code of Commerce and International Treaties, applying Mexican federal laws.

The Hydrocarbons Law sets forth a mandatory participation of at least 20% for PEMEX or other productive enterprises of the state in such contractual areas where the possibility exists of finding trans-boundary oil fields. Moreover, the new legislation establishes that E&P activities ought to consider a minimum percentage for local content, which shall progressively increase as of 2015 until reaching a rate of at least 25% by 2025. The law also states that the remaining activities of the value chain must cease to be part of PEMEX’s core, allowing for the participation of private companies. By means of permits granted by SENER the following activities may be executed: treating and refining oil, processing natural gas, exporting and importing hydrocarbons such as LPG, oil-based products and petrochemicals, as well as transportation and storage activities unrelated to LPG and the distribution and sale of LPG to the public. Transporting, storing, distributing, compressing, decompressing, liquefying, regasification, and the sale of hydrocarbons, oil-related products, and petrochemicals, as well as transporting LPG through pipelines and related storage, may be executed by means of permits granted by CRE. Trading activities related to hydrocarbons, LPG, oil-based products, and petrochemicals should not require permits. The traders shall be registered before CRE and submit the information required by this organism. Permits for retailing gasoline and diesel may also be granted by CRE as of January 1, 2017. As of that same date, PEMEX and affiliate companies cannot condition the supply of gasoline and diesel on the termination of the franchise agreements.

THE FOREIGN INVESTMENT LAW

The current Foreign Investment Law establishes that several activities of strategic focus, such as hydrocarbons and basic petrochemicals, are exclusively reserved to the state. Pursuant to the Energy Reform, it is established that the state only reserves its right to carry out hydrocarbon E&P activities in accordance with the Constitution. This authorizes private companies to carry out E&P activities by means of the contract schemes set forth in the Energy Reform. The restrictions related to basic petrochemicals and the constraints imposed on the participation of foreign companies in that segment are eliminated. Similarly, the need to obtain certain authorizations regarding services for the hydrocarbons industry, including maritime activities such as coastal navigation within said sector, construction of pipelines for the transport of oil and oil-based products, the drilling of oil wells, the retail of gasoline, and the distribution of LP gas are also eliminated.