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Domestic market overview

Production

What is the extent of oil and gas production in your jurisdiction?

Pursuant to information provided by the Energy Information System, from January 2016 to October 2016 Mexico reached:

  • Total oil production per month:
    • January - 2,258.882 million barrels per day (Mbd);  
    • February – 2,214.464 Mbd;
    • March – 2,216.760 Mbd;
    • April – 2,176.585 Mbd;
    • May – 2,174.478 Mbd;
    • June – 2,177.960 Mbd;
    • July – 2,157.352 Mbd;
    • August – 2,143.615 Mbd;
    • September – 2,113.387 Mbd;
    • October – 2,103.135 Mbd ;
  • Total natural gas production per month:
    • January – 6,162.116 million cubic feet per day (MMpcd);
    • February – 6,121.813 MMpcd;
    • March – 6,029.537 MMpcd;
    • April – 5,920.577 MMpcd;
    • May – 5,841.315 MMpcd;
    • June – 5,880.530 MMpcd;
    • July – 5,785.028 MMpcd;
    • August – 5,685.559 MMpcd;
    • September – 5,618.993 MMpcd; and
    • October – 5,582.643 MMpcd;
  • Total liquefied petroleum gas production per month:
    • January – 168.120 Mbd;
    • February – 163.068 Mbd;
    • March – 158.386 Mbd;
    • April – 163.500 Mbd;
    • May – 158.250 Mbd;
    • June – 167.202 Mbd;
    • July – 160.975 Mbd;
    • August – 159.253 Mbd;
    • September – 155.526 Mbd; and
    • October – 146.483 Mbd.

Consumption

How does domestic energy consumption break down with respect to oil and gas, as well as imports and exports?

In 2015 the total national consumption of energy in Mexico reached 8,528.867 petajoules (PJ).

The total energy imported in 2015 reached 2,904.285 PJ, 223.230 PJ was primary energy and 2,681.054 PJ secondary energy.

The total energy exported in 2015 reached 3,104.885 PJ, 2,634.239 PJ was primary energy and 470.647 PJ secondary energy. 

Trends

What are the current trends and future prospects for oil and gas supply and demand in your jurisdiction, and what policies has the government adopted to address these?

Following the December 20 2013 energy reform, Mexico’s National Hydrocarbons Commission (CNH) conducted seven tender processes, three of which have concluded and four are ongoing. In the three concluded processes, five production-sharing agreements were awarded for the exploration and extraction of hydrocarbons in shallow waters and 25 licences were granted for the extraction of hydrocarbons. The four ongoing processes consist of a deep-water tender, a Pemex farm-out, a shallow-water tender and an onshore tender. These tenders follow an extensive and fast-track legislation process that began with:

  • the amendment of the Constitution in December 2013;
  • the passing of the secondary legislation by Congress on August 11 2014;
  • the issuance by the Ministry of Energy of the secondary legislation’s regulatory laws on October 31 2014; and
  • the first publication by the commission of the administrative rules to carry out exploration and production contract bids on November 28 2014. 

The ministry has also published a five-year plan for the oil and gas industry, which includes the following:

  • This five-year plan includes strategic information for the areas to be bid upon and is divided into six main sections which describe the elements that support it:
    • The first section provides a brief introduction to the energy reform, Round Zero and Round One as background information related to the creation of the plan.
    • The second section describes the plan’s legal framework, mainly referring to the Hydrocarbons Law, its regulation and Articles 25, 27 and 28 of the Constitution.
    • The third section sets forth how the plan complies with the national goals for the National Development Plan and PROSENER (energy sectorial programme) through the execution of specific actions in the energy sector.
    • The fourth section provides an overview of Mexico’s hydrocarbon resources.
    • The fifth and main section provides a description of the plan based on the commission’s technical proposal and the analysis performed by the ministry for its elaboration. This document is based mainly on the fifth section.
    • The sixth and final section describes the plan’s evaluation, revision and modification process. 
  • In addition to the six sections, the document includes five exhibits which mainly set forth information on the reserves and 3P (proven plus probable plus possible) remaining volume per fields and states, areas to be bid for the extraction of hydrocarbons, for the exploration of conventional and non-conventional hydrocarbons and maps of the areas to be bid with seismic and infrastructure information.

Regulatory overview

Regulation

What are the primary laws and regulations governing the oil and gas industry in your jurisdiction?

On December 12 2013 the Permanent Commission of the Mexican Congress approved amendments to Articles 25, 27 and 28 of the Constitution, which were subsequently approved by a majority of Mexico’s state legislatures and signed into law by the executive. On December 20 2013 these amendments were published as the Energy Reform Decree in the Federal Official Gazette and took effect on December 21 2013. The decree includes transitional articles that set forth the general framework for the secondary legislation or implementing laws.

Some of the key laws and regulations that make up the principal legal framework regulating oil and gas activities include:

  • the Constitution;
  • the Hydrocarbons Law and its regulations;
  • the Hydrocarbons Revenues Law and its regulations;
  • the Coordinated Energy Regulators Law;
  • the Petróleos Mexicanos (PEMEX) Law;
  • the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector Law;
  • the Mexican Oil Fund Law;
  • the National Hydrocarbons Commission Law; and
  • the General Provisions and Guidelines issued by the Ministry of Energy, the National Hydrocarbons Commission, the Energy Regulatory Commission and the National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector.

What government bodies are charged with regulating the oil and gas industry and what are the extent of their powers?

The Ministry of Energy, on behalf of the executive power, conducts the national energy policy. Its objective is to guarantee the competitive, sufficient, high-quality, economically viable and environmentally sustainable supply of fuel needed for the development of the nation. Pemex oversees its own oil activities, which are subject to review by different government agencies. For everything related to liquefied petroleum gas, the Energy Regulatory Commission is the regulating authority.

As a result of the 2008 energy reform, the National Hydrocarbons Commission was created as an independent agency which is part of the Ministry of Energy in charge of regulating and supervising the exploration and production of hydrocarbons, as well as all hydrocarbon storage, transportation and processing activities.

As a result of the Energy Reform Decree, the Ministry of Energy, the National Hydrocarbons Commission and the Energy Regulatory Commission have been granted additional technical and administrative authority over the energy sector generally: 

  • The Ministry of Energy, with the National Hydrocarbons Commission’s technical assistance, has the authority to grant assignments, select the areas that will be subject to public tenders, establish the technical guidelines for the tender process, as well as for the contracts themselves, and issue permits for oil refining and natural gas processing. 
  • The National Hydrocarbons Commission is responsible for conducting the public tender process and executing the corresponding contracts, as well as supervising oil and gas production activities. 
  • The Energy Regulatory Commission regulates and grants permits for the storage, transportation and distribution through pipelines of oil, gas, petroleum products and petrochemicals. It also regulates third-party access to transportation pipelines, as well as to the storage of hydrocarbons and their derivatives, and regulates the first hand sale of these products. 

The National Hydrocarbons Commission and the Energy Regulatory Commission have been vested with their own legal status and technical and administrative autonomy. In addition, the Ministry of Finance and Public Credit, as well as other government entities, have been entrusted with establishing the economic terms for contracts assigned pursuant to the public tender process.

The National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector has been created to regulate and supervise activities and facilities related to the hydrocarbons industry, with respect to industrial safety and environmental protection. This new entity will operate as an administrative body of the Ministry of the Environment and Natural Resources and will, among other things, supervise the decommissioning and abandonment of facilities. Companies participating in the hydrocarbons sector will be subject to regulations intended to reduce greenhouse gas emissions and help ensure that energy and natural resources are used efficiently.

The National Control Centre of Natural Gas was created as the independent operator and manager of the National Transportation and Storage Integrated System of Natural Gas and will be in charge of its management and operation.

In addition, the Ministry of Agrarian, Territorial and Urban Development is in charge of monitoring the surface occupation and use processes. The Ministry of Economy is in charge of determining national content goals, establishing the methodology for the calculation of national content percentages and verifying their compliance in energy projects.

Exploration and production

Rights

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.

Joint ventures

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.

Third parties

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.

Fracking

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. 

Transport and storage

Legal framework

What is the general legal framework governing the transportation and storage of oil and gas resources in your jurisdiction?

As a result of the Energy Reform Decree, transportation and storage of crude oil and products are now governed by the Hydrocarbons Law and its regulations, and are subject to permits issued by the Energy Regulatory Commission.

Parties interested in obtaining permits must file an application before the Ministry of Energy or commission, as applicable, which will contain:

  • the name and address of the applicant;
  • the activity that it wishes to pursue;
  • the technical specifications of the project;
  • the document that states the applicant’s commitment to have the guarantees and insurance required by the competent authority, as applicable; and
  • other information established in the corresponding regulation.

Transportation

How is cross-border transportation of oil and gas resources regulated?

The Hydrocarbons Law regulates the export and import of oil and gas, and provides that such activities will be subject to a permit granted by the Ministry of Energy.

In December 2014 the secretary of energy and the ministry issued the classification and codification rules for hydrocarbons and petroleum products whose import or export is subject to a prior permit issued by the ministry.

Are there specific provisions governing marine and ground transportation of oil and gas resources?

Yes, various general provisions, guidelines and official Mexican standards have been issued by the Energy Regulatory Commission, the Ministry of Energy and the the National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector to regulate the transportation of oil and gas resources. These provisions were published in the Federal Official Gazette.

Construction and infrastructure

How are the construction and operation of pipelines, storage facilities and related infrastructure regulated?

The construction and operation of pipelines, storage facilities and related infrastructure are regulated by the various general provisions, guidelines and the official Mexican standards that have been issued by the Energy Regulatory Commission, the Ministry of Energy and the National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector. These provisions were published in the Federal Official Gazette.

What rules govern third-party access to pipelines and related infrastructure?

The Energy Regulatory Commission has issued general provisions that regulate a permit holder’s obligation to open access. Permit holders providing services to third parties for transportation and distribution through pipelines, as well as storage of hydrocarbons, petroleum products and petrochemicals, are obliged to provide open access to their facilities and services.

Trading and distribution

Regulation

How are oil and gas resources traded in your jurisdiction and what (if any) regulations and procedures apply to oil and gas sales, distribution and marketing activities, both nationally and internationally?

The Hydrocarbons Law and its regulations govern trading, distribution and marketing activities. In order for a person to carry out any of the foregoing activities a permit must be requested before the Energy Regulatory Commission (CRE).

The terms and conditions of a trading permit will include the following obligations:

  • to engage in contracts only with permit holders for transportation, storage, distribution and retail sale to the public services, which may be required for the performance of activities;
  • to comply with the safety supply provisions that may be established by the Ministry of Energy;
  • to submit the information required by the commission for statistical and monitoring purposes of the energy sector; and
  • to abide to the guidelines applicable to the permit holders of regulated activities, regarding their relationship with persons that are part of their same corporate group or consortium.

Is oil and gas pricing regulated in your jurisdiction?

Yes, the Secretariat of Finance and Public Credit determines oil prices and the commission is in charge of the methodology for determining the maximum prices of natural gas for first hand sale.

In January 2017, pursuant to the Energy Reform Decree, gasoline prices will be released by the government and will be determined by market conditions. 

Occupational health and safety and labour issues

Health and safety

What health and safety regulations and procedures apply to oil and gas operations (upstream, midstream and downstream)?

The health and safety regulations applicable to oil and gas are:

  • the Federal Labour Law;
  • the General Health Law;
  • the General Law  for Ecologic Balance and Environmental Protection;
  • the Federal Law on Environmental Responsibility;
  • the Hydrocarbons Law; and
  • the Hazardous Management and Prevention General Law.

In addition, the National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector is in charge of the authorisation and registration of management systems for industrial safety, operational safety and environmental protection in activities of the hydrocarbons sector.

Labour law

Are there any labour law provisions with specific relevance to the oil and gas industry (eg, with regard to use of native and foreign personnel)?

All labour relationships are governed by the Federal Labour Law, which provides that all working establishments must ensure that at least 90% of their workforce is Mexican. Regarding technical and professional personnel, all workers must be Mexican except where they do not offer a particular work-related speciality, in which case foreign workers can be employed as long as they do not exceed 10% of that speciality. This provision does not apply to officers, directors or managers.

There is also no anti-discrimination provision in the Federal Labour Law that provides that there will be no distinctions between workers for reasons of race, sex, religion, age, political views or social status. Complaints may be filed before the Conciliation and Arbitration Board, which will resolve a dispute between employer and worker and assign a settlement.

What is the state of collective bargaining/organised labour in your jurisdiction’s oil and gas industry?

Most workers are part of their own union, and the oil industry is no exception. Oil industry workers are members of the Petroleum Workers’ Union and must adhere to its rules and regulations, as well as being governed by the collective bargaining agreement negotiated by the union on behalf of all workers.

Environmental protection

Authorisation

What preliminary environmental authorisations are required before commencing oil and gas-related activities?

The main environmental authorisations required for commencing oil and gas-related activities are:

  • the environmental impact appraisal;
  • the sole environmental licence;
  • authorisation from the Federal Ministry of the Environment and Natural Resources for the operation of petroleum industry activities that issue or may issue gases, liquids or solids into the atmosphere; and
  • authorisation and registration of a management system for industrial safety, operational safety and environmental protection.

Requirements

What environmental protection requirements apply to the operation of oil and gas facilities?

The National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector will issue the official Mexican standards that will regulate the environmental protection requirements for the operation of oil and gas facilities.

Consequences

What are the consequences of failure to adhere to the relevant environmental regulations and to what extent can operators be held liable for environmental damage?

Violations of the General Law for Ecological Balance and Environmental Protection are punishable with:

  • a fine equivalent to 30,000 to 35,000 days of minimum wage;
  • a temporary or definitive closure;
  • an administrative arrest of up to 36 hours;
  • the confiscation of instruments and products; or
  • the suspension or revocation of licences, permits and authorisations.

Operators awarded hydrocarbon exploration and extraction agreements have a transition stage for startup in order to carry out assessments to allow for the establishment of an environmental baseline before beginning the petroleum activities, which allows for the identification of pre-existing damages. Operators are liable for all environmental damages, except those pre-existing damages previously approved by the National Hydrocarbons Commission and the National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector.

Taxes and royalties

Taxes

What taxes (direct and indirect) and/or royalties apply to oil and gas activities in your jurisdiction (including upstream, midstream and downstream activities)?

The contractors and assignees that operate exploration and production contracts are required to pay taxes for the activity of exploration and extraction of hydrocarbons in the contract area and assignment area respectively, as defined in the corresponding contract or assignment.

The taxes for the activity of exploration and extraction of hydrocarbons apply to each square kilometre included in the contract area or assignment area and are calculated monthly at the following values:

  • during the exploration phase at Ps1,533.15; and
  • during the extraction phase at Ps6,132.60.

The exploration phase includes from the execution of the contract or assignment to the start of the extraction phase, which includes the start of the activities destined for the commercial production of hydrocarbons up to the contract or assignment’s duration.

For the calculation of the tax, in cases where the contract area or assignment area is located in a fraction of a square kilometre, the hundredth will be considered.

Tax values are updated annually on January 1.

No taxes are payable for the activity of exploration and extraction of hydrocarbons in cases where the taxpayer justifies it for causes not attributable to it. The taxpayer is unable to perform activities of exploration and extraction of hydrocarbons in the contract area or assignment area, as applicable.

Imports and exports

What taxes and duties apply to oil and gas imports and exports?

The Law on General Import and Export Taxes regulates which oil and gas-related products are subject to import or export taxes.

The Law on the Special Tax related to Production and Services regulates which oil and gas-related products are subject to this tax.

Decommissioning

Regulation

How is the decommissioning of oil and gas facilities regulated?

The decommissioning of oil and gas facilities is mainly regulated by the Hydrocarbons Law and its regulation, the Hydrocarbon Exploration and Extraction Agreements, the National Agency of Industrial Safety and Environmental Protection of the Hydrocarbons Sector Law and the official Mexican standards issued by the Federal Ministry of the Environment and Natural Resources and the National Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector. 

Dispute resolution

Disputes

How are oil and gas disputes typically resolved in your jurisdiction?

The new production sharing agreements and licences that have been published by the National Hydrocarbons Commission for the various contract areas bid or to be bid upon in the various tender processes provide the following mechanisms for dispute resolution:

  • conciliation – does not apply to administrative rescission;
  • arbitration – conciliation is required before starting an arbitration procedure. This mechanism may be applied to administrative rescission only for the determination of the existence of damages and, as applicable, their quantification; and
  • judicial proceedings – applies to any dispute between the parties of an agreement arising or related to events of administrative rescission.

Anti-corruption measures

Dishonest practices

What regulations and procedures are in place to combat bribery, fraud, collusion and other dishonest practices in the oil and gas sector in your jurisdiction?

On July 18 2016 the General Law on the National Anti-corruption System was published. The system is a forum for coordination between the authorities of all governmental levels for the prevention, detection and punishment of administrative offences, control of corruption and public resources.

The system is composed of a National Audit System Committee, Members of the Coordinating Committee, local systems and the Public Participation Committee.

The National Anti-corruption System:

  • coordinates social actors and authorities at different governmental levels to prevent, investigate and punish corruption;
  • has several mechanisms designed to prevent acts of corruption, including ethical codes, action protocols and self-regulatory mechanisms; and
  • establishes various instruments that enable clear, effective accountability – for example, the National Digital Platform, which comprises a system for asset development and declaration of interests, the National System of Sanctioned Public Servants and the Directory of Public Servants Involved in Public Procurement.

With the new Anti-corruption System Law, the General Law of Administrative Responsibilities was created. This law provides the penalties applicable to public servants for major or minor administrative offences.