On 30 April, the President of Mexico, Enrique Pena Nieto, through the Secretariat of Energy and the Secretariat of the Treasury and Public Funding, delivered to Congress a proposal for secondary legislation to complete the energy reform started on 20 December 2013
The proposed initiatives are composed of 21 documents, of which 12 are laws containing amendments and a further 9 containing new laws, all with the aim of implementing the Constitutional Reform of 20 December. Details of those initiatives are included below.
The initiatives have been divided into two sections: (I) those related to tax, which were referred to the Mexican House of Deputies and (II) the remaining initiatives, which were sent to the Mexican Senate for deliberation.
1. The proposed secondary legislation contains the following key new elements
It proposes the inclusion of the following legislative changes in the energy sector:
- Reaffirmation of the constitutional principle that all subsoil hydrocarbons are owned by the Mexican nation.
- The extraction, transformation and logistics of hydrocarbons and electricity are opened to the private sector, except for the public sale of petrol and fuels, which will be liberalised gradually.
- Pemex and CFE will no longer be decentralised public entities and will become productive companies owned by the Mexican state; as such, they will have an obligation to disclose information on the same terms as companies listed on the stock exchange.
- The National Agency for Security and Environmental Protection –Agencia Nacional de Seguridad de Protección al Medio Ambiente– is created, which will be responsible for implementing measures to prevent catastrophes and accidents.
- Regulators powers have been strengthened.
- In relation to contracts:
- They are awarded by public tender, the contracts will be awarded to whoever offers the state the best economic terms.
- The terms are established by the Secretariat of Energy; the Treasury is responsible for the applicable tax regime; the Mexican Hydrocarbons Commission – Comisión Nacional de Hidrocarburos – will award and administer the contracts. The Mexican Oil Fund – Fondo Mexicano del Petróleo – will make payments and will handle and administer oil income, except for tax income.
- Pemex will have a participation of 20% in projects involving cross-border deposits.
- A minimum guaranteed payment is established for projects, independently of the rate of return, which will have to be paid to the state.
- Each contract contains a progressive adjustment mechanism, and the payment due to the Mexican state will change automatically if the oil fields are more productive than initially estimated.
- Companies must pay Income Tax chargeable on utilities.
- Companies and the government must publish payments and income.
- Contracts may be rescinded when exploration plans are breached, false information is disclosed, payments are not made, damage is caused to people or to the environment, or due to failure to heed decisions or orders delivered by the courts.
- Emphasis is made to transparency and accountability in the contracts awarded.
- In relation to tax:
- Changes to the tax regime applicable to Pemex and CFE: the tax regime applicable to Pemex will be changed so that they can record all expenses incurred when carrying out hydrocarbon exploration and extraction work, thus increasing current margin by a factor of between three and four.
- An attempt is made to create a competitive tax regime to encourage investment and growth.
- The tax structure will be the same for private companies as it is for Pemex.
2. Next Steps
Once Congress has received the proposed secondary legislation, it should be handed over to the respective commissions for analysis and discussion.
The proposals will be analysed and discussed at a series of extraordinary meetings that could last until late June or even September, and will conclude with the issuing of a legal opinion.
The legislative process will then continue until the proposals have been approved and signed into law. We will not know until then the definitive wording of the secondary legislation that has been passed.
Appendix: Legislative proposal
With the aim of consolidating the new legal regime applicable to the energy sector, the following package of reforms was sent to Mexican Congress to complete secondary legislation in the sector:
Click here to view table.