Mexican Energy Reform: New Investment Opportunities Ahead

January 9, 2014

Since his inauguration in December 2012, Mexico’s President Enrique Peña Nieto has moved to liberalize and strengthen his country’s economy, with an emphasis on telecommunications, tax and financial reforms.  His most recent efforts take aim at liberalizing the Mexican oil and gas sector and the iconic national petroleum company, Petróleos Mexicanos (“Pemex”).  On December 20, 2013, amendments to articles 25, 27 and 28 of the Mexican Constitution (Constitución Política de los Estados Unidos Mexicanos) were published in the Federal Register (Diario Oficial de la Federación), setting forth the basis for a more comprehensive reform of laws and regulations in the hydrocarbons and electricity sectors.[1]

The constitutional amendments were proposed by President Peña Nieto with the purpose of: (i) attracting private investment, (ii) modernizing and strengthening Pemex and the Federal Electricity Commission (“CFE”), (iii) increasing oil and gas production, and (iv) ending Pemex’ 75-year monopoly.[2]

After lengthy debates in the senate and the chamber of deputies, the constitutional reform was approved mainly by members of the Institutional Revolutionary Party (PRI) and the National Action Party (PAN), despite strong opposition by members of the Party of the Democratic Revolution (PRD); in the end, the reform was endorsed by the majority of state local legislatures as required by the constitution.

Below is a summary of the most relevant aspects of the constitutional reform:

• Pemex and CFE shall become for-profit state companies (empresas productivas del estado) within a period of two years after the effectiveness of the reform (December 2013).  While the term “for-profit state company” was not defined, subsequent legislation is expected to regulate these entities according to the guidelines set forth in the reform, including a new labor regime, corporate governance best international practices, financial autonomy and a regulated procurement regime.  As part of the reform, Pemex’ board of directors will be composed of five members from the federal government, including the head of the Ministry of Energy (Secretaría de Energía) (“SENER”) and five independent members.
• No concessions will be granted for the transmission and distribution of electricity or with respect to oil and hydrocarbons within the subsoil.  However, the state may grant “asignaciones” to for-profit state companies or contracts to private entities pursuant to terms to be defined in subsequent legislation.
• Before April 20, 2014, Congress shall amend the legal framework to regulate the type of contracts that may be granted to private entities for oil and hydrocarbon exploration and exploitation.  These agreements may take the form of: (i) service contracts, (ii) profit sharing agreements, (iii) production sharing agreements, or (iv) license agreements.  The amended law shall include the type of consideration that may be granted as part of such agreements, such as cash, a percentage of the profit or production, the sale of the extracted hydrocarbons or a combination thereof.  Using the terms “asignaciones” and “licenses” may have been an attempt to avoid referring to “concessions”, which were nationalized by President Lázaro Cárdenas in 1938.
• Contract assignees may “report for accounting and financial purposes” the respective contract and its expected benefits provided that they acknowledge in the contract that the oil and hydrocarbons within the subsoil are property of the nation.
• SENER, with the technical assistance of the new National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos) (“CNH”) shall be the entity responsible of awarding “asignaciones” to Pemex or contracts to private entities.
• No later than March 21, 2014, Pemex shall submit to the consideration of SENER those areas in exploration and fields in exploitation that Pemex is able to operate through “asignaciones”, and prove that it has the “technical, financial and execution capabilities necessary to explore and extract the hydrocarbons in an efficient and competitive manner”.  To that effect, Pemex shall submit three-year exploration plans (extendable for two years) of the assignable area and development plans of areas currently in exploitation, including a description of the works and investments to be made.
• Pemex may also propose to SENER the transfer of the “asignaciones” to private entities.  In such event, the CNH will bid and award such contracts to such entities.  SENER shall issue the technical and contractual guidelines for these contracts.
• The Energy Regulatory Commission (Comisión Reguladora de Energía) will grant permits for the storage, transport and distribution of oil and gas through pipelines, as well as permits for the generation of electricity.  Subsequent legislation shall also contemplate private contracting for the financing, installation, maintenance, management, operation and expansion of the necessary infrastructure for the public service of transmission and distribution of electricity.
• The National Centre of Natural Gas Control (Centro Nacional de Control del Gas Natural) and the National Centre of Energy Control (Centro Nacional de Control de Energía) shall be created within 12 months after the effectiveness of the reform for the (i) operation of the national transport and storage pipeline system, and (ii) control of the national electricity system, respectively.
• The Mexican Oil Fund for Stabilization and Development (Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo) is created as a trust to receive, manage and distribute the government income generated by contracts for the exploration and exploitation of hydrocarbons.
• By April 20, 2014, Congress shall issue a new law to regulate the exploration and exploitation of geothermic resources for the use of subsoil energy for electricity generation, and issue anti-corruption and transparency provisions and measures in the energy sector and related procurement.

The constitutional amendments described in this update are designed to set the foundations of a new legal regime promoting new investment opportunities in the Mexican energy sector.  The reaction by the Mexican and international business community to date has been positive.  The substance of additional legislation and regulations to be promulgated, however, will be critical for the reforms to be effective.

 

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors:

Jose W. Fernandez – New York (+1 212-351-2376, [email protected])
Santiago Medina – New York (+1 212-351-2354, [email protected])

Please also feel free to contact the co-chairs of the firm’s Latin America Practice:

Kevin W. Kelley – New York (+1 212-351-4022, [email protected])
Lisa A. Alfaro – São Paulo (+55 (11) 3521-7160, [email protected])

© 2014 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.