Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.
Exploration and production
Who holds the rights to oil and gas reserves in your jurisdiction?
Mexico holds title over all oil and gas reserves.
Is there a distinction between surface and subsurface rights?
There is no distinction between surface rights and subsurface mineral rights, since any territory where there is an oil reservoir is deemed federal. The executive power establishes which territories are federal oil reserves through a presidential decree. Only the executive power can authorise the use of federal lands for oil exploration and production.
What rules and procedures govern the grant of rights for exploration and production purposes (eg, through licences, leases, concessions, service contracts, production sharing agreements)?
As of July 2016 the government has granted through tender processes a total of 30 exploration and extraction contracts (five production sharing agreements and 25 licences).
The Energy Reform Decree provides a new legal framework for exploration and extraction activities that permits the granting of the following instruments:
- licences, pursuant to which a licence holder would be entitled to the hydrocarbons once these are extracted from the subsoil;
- production-sharing contracts, pursuant to which a contractor would be entitled to receive a percentage of production;
- profit-sharing contracts, pursuant to which a contractor would be entitled to receive a percentage of the profit from the sale of the extracted hydrocarbons; and
- service contracts, pursuant to which a contractor would receive cash payments for services performed.
General rules applicable to exploration and production agreements are as follows:
- The government may grant exploration and production agreements through the National Hydrocarbons Commission.
- The selection of a contractor will be carried out through a tender process. All contracts must provide that the hydrocarbons found in the subsoil are the property of Mexico.
- Petróleos Mexicanos (Pemex) and the other productive state companies may enter alliances or partnerships to participate in the tender processes of the exploration and production agreements.
- In the guidelines provided by Ministry of Energy for the tender process of the exploration and production agreements, the participation of Pemex, any other productive state company or any specialised financial vehicle of the state may be included in accordance with the provisions set forth in the law.
- The Ministry of Energy determines the type of model for each contract area to be awarded through a tender process in the terms provided in the Hydrocarbons Law.
- The Hydrocarbons Law provides the specific circumstances in which the National Hydrocarbons Commission may rescind an exploration and production agreement.
- The Hydrocarbons Law provides the main clauses that must be included in all exploration and production agreements, which mainly cover definition of contract area, contractor obligations, exploration and production plans, minimum work programmes, contract term, guarantees and insurance, events for the termination or rescission of an agreement, cost recovery and national content.
- The bid guidelines for the specific tenders called by the National Hydrocarbons Commission establish the details regarding the procedure to bid for and award exploration and production agreements.
What criteria are considered in awarding exploration and production rights (eg, are there any restrictions on the participation of foreign investors/companies)?
- In order for a company to be awarded exploration and production rights it must first participate in a tender process and comply with all of the prequalification requirements.
- Companies may participate individually or as part of a non-incorporated consortium; however, companies cannot submit or be part of more than one proposal per contract area.
- The pre-qualification criteria in the guidelines is final (and not subject to further modifications). It includes proving operating experience in similar exploration and production projects (directly or through affiliates), showing financial capacity (as may be modified depending on the contract areas to be awarded) and experience operating under international occupational safety and health standards, among other things.
- Major oil companies cannot partner among themselves in conventional areas, but rather only in deep-water and unconventional oil and gas projects. In addition, bidders with cross-participation of key officials or participation of common shareholders or partners holding control or corporate influence, either directly or indirectly, over other bidders may not participate.
- A combination of state consideration and the amount of investment will be the deciding criteria for awarding contracts. The fiscal terms of the model contract include an exploratory phase fee, royalties and an operational fee in favour of the state. The contractor will receive the remainder of the operating profit and may recover costs subject to the contract type and the cap mechanism included in each agreement.
- Contracts may be executed only with productive state companies and legal entities that:
- are residents in Mexico for tax purposes;
- have as exclusive purpose the exploration and extraction of hydrocarbons; and
- are not registered under the tax consolidation regime referred to in Chapter VI Title II of the Income Tax Law.
Are there any special legal provisions applicable to joint ventures?
There is no specific statute or law that governs or mandates the formation of joint ventures. Joint ventures are subject to the applicable provisions of the Business Corporations Law, the Hydrocarbons Revenues Law, the tax laws and the terms that the parties involved negotiate. It used to be that joint ventures in the oil industry in Mexico were limited to providing services to Pemex, but the new legal regime provides the possibility of using joint ventures for exploration and production contracts similar to other jurisdictions where joint ventures, through joint operating agreements, can engage in production sharing agreements.
Can exploration and production rights be transferred to third parties?
Participating companies must obtain the prior written approval of the National Hydrocarbons Commission in order to sell, assign, transfer, convey or otherwise dispose of all or any part of their rights (including all or any part of their participating interests) or obligations under exploration and production contracts.
Is hydraulic fracturing (‘fracking’) permitted in your jurisdiction?
Yes, there is no specific legislation that prohibits fracking. The Secretariat of Environment and Natural Resources and the National Water Commission have issued the official Mexican standards that directly or indirectly regulate hydraulic fracturing, and specific regulations by ASEA are currently under review.
Click here to view the full article.