The Mexican hydrocarbons industry is undergoing several regulatory changes which were triggered by the 2013 Mexican energy reforms – mainly as a result of the Mexican National Industrial Safety and Environmental Protection Agency's creation in 2014.(1) The regulatory changes include the new insurance guidelines (the General Administrative Provisions that Establish the Guidelines for the Minimum Insurance Requirements Applicable to those who Engage in the Exploration and Extraction of Hydrocarbons, Treatment and Refining of Oil, and Processing of Natural Gas). The guidelines were published in the Federal Official Gazette and took effect on June 23 2016.
A primary goal of the guidelines is to establish insurance requirements for the hydrocarbons industry to ensure environmental accountability. The guidelines hope to achieve this goal by requiring insurance policies to cover:
- well control – for exploration and extraction projects and activities;
- civil liability and environmental damage – for exploration and extraction projects and activities; and
- civil liability and environmental damage – for projects and activities involving oil and natural gas treatment, refining and processing.
The insurance policies must cover the costs and expenses associated with:
- emergency responses;
- contamination control;
- environmental damage and impact mitigation;
- the characterisation of contaminated sites;
- the remediation of contaminated sites; and
- environmental restoration or compensation.
The guidelines provide specific coverage requirements depending on the type of industry activity conducted, considering variables such as:
- the physical site of the hydrocarbon-related activities;
- hydrocarbon production volume; and
- the types of equipment used.
These varying degrees of requirements should be a step forward in effectively controlling and responding to environmental damage resulting from natural and anthropogenic causes.
Further, the guidelines set out two options to calculate the amount of civil liability and environmental damage coverage on a per event annual aggregate basis.
One option corresponds to the minimum per annual aggregate amounts as directly established in the guidelines, which may vary from $25 million to $1 billion, depending on the type of activity to be developed and the associated risks. For example, the amounts are greater for floating, storage and offloading activities than for surface exploration activities, as these pose a greater risk to the environment.
The second option is based on a probable maximum loss analysis.
According to the guidelines, only companies that are part the hydrocarbons industry (ie, regulated parties) and have been authorised to conduct a specific project in the sector (as outlined in the applicable legal provisions) are required to integrate their relevant insurance policies in line with the guidelines and register them with the National Industrial Safety and Environmental Protection Agency. Further, regulated parties must either integrate their contractors and subcontractors under their own insurance policies or require them to have corresponding insurance policies that contain the necessary coverage in case of any liability that may arise for damages caused during the execution of works, services or specific activities.
Under the guidelines, regulated parties are liable for any damages or loss caused by their contractors, subcontractors, suppliers or service providers during the execution of works or activities (without prejudice to any right of recourse which the regulated party may have against relevant third-party contractors or subcontractors).
Nonetheless, specific rules regarding accountability for environmental damage and its remediation must be observed in accordance with the Environmental Liability Law,(2) which includes – without limitation – relevant provisions concerning:
- joint liability between certain parties and their contractors; and
- liability regarding environmental damage where the responsible person or entity failed to comply with its statutory duty of care based on an agreement or as part of its regular operations and policies (these may be well known and commonly applied by parties participating in the sector).
In view of the specific scenarios covered by the Environmental Liability Law, it is advisable for any party conducting a project in the hydrocarbons industry (as outlined in the applicable provisions) to have sufficient insurance coverage that may cover civil and environmental liability matters (even though the guidelines require only regulated parties to register their policies with the ASEA).
If environmental damage occurs and an insurance policy does not cover the resulting compensation or remediation costs, the responsible party must remediate at its own cost and execute the corresponding remedial works in connection with applicable environmental provisions, including the Environmental Liability Law.
For further information on this topic please contact Juan Francisco Torres Landa, Mario Jorge Yanez, Brenda Rogel Salgado or Jeanett Trad Nacif at Hogan Lovells BSTL, SC by telephone (+52 55 5091 0000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Hogan Lovells BSTL, SC website can be accessed at www.hoganlovells.com.
(1) For further information please see "New guidelines minimise risk hydrocarbons industry poses to environment".
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